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Here’s Why Bitcoin’s Dramatic Rally Just Came to an End

Utah Software Engineer Mints Physical BitcoinsUtah Software Engineer Mints Physical Bitcoins
A pile of cryptocurrency rendered as physical coins.George Frey—Getty Images

A dramatic rally in digital currency bitcoin came to a spectacular end on Thursday with a plunge of up to 20% as China’s yuan rose sharply—further evidence of an intriguing inverse relationship between the pair.

Bitcoin had gained more than 40% in two weeks to hit a three-year high of $1,139.89 on Wednesday, just shy of its all-time record of $1,163 on the Europe-based Bitstamp exchange . But it dived as low as $885.41 on Thursday as the yuan jumped by over 1% in offshore trading and headed for its strongest two-day performance on record.

Chinese exchanges have reported high volumes of trading of the web-based “cryptocurrency” over the past year, during which time the yuan has shed almost 7%, its worst annual performance since 1994, while bitcoin has surged 125%, outperforming all other currencies for a second year in a row.

Bitcoin can used for moving money across the globe quickly and anonymously, and operates outside the control of any central authority. That makes it attractive to those wanting to get around capital controls, such as in China, and also to investors who are worried about a devaluation in their currency.

“Given that the yuan’s weakness over recent months seemed to correlate with bitcoin’s strength more than any other currency, it’s no surprise that bitcoin traders have reacted the way they have to the yuan’s sudden strength today,” said Paul Gordon, co-founder of London-based Quantave, a firm seeking to make it easier for investors to access digital currency exchanges.

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Exchanges in China say they account for more than 90% of global bitcoin trading, which would help explain why a shift in Chinese demand would sharply affect the price.

But many bitcoin experts say Chinese exchanges overstate their volumes in the digital currency, and attribute sharp moves to speculation by, for example, U.S.-based hedge funds.

Some said bitcoin’s fall was a natural reaction to the speed of its previous rise. It is still up more than 50% on three months ago, when it was trading at around $600,

“If something goes up very rapidly…people make a lot of money, and at some point they’re going to want to sell, in order to realize their gains,” said Marco Streng, CEO of bitcoin mining and trading firm Genesis Mining.

By 16:25 GMT, bitcoin had recovered some of its earlier losses to trade down around 13% on the day at $975, still leaving it on course for its worst performance in a year.