Chinese New Year (Lunar New Year) has strong influence on cryptocurrency prices, with Bitcoin prices decreasing in the months leading up to the New Year. This article examines the trend and the possible reasons for why it happens. Chinese New Year is celebrated on a different day each year as it is based on the Lunar Calendar. In 2020 it started on Saturday, 25 January and ended on Monday, 27 January. In 2021 the festival will start on Friday, 12 February and end on Tuesday, 15 February. During this time many Chinese Over-the-Counter (OTC) services will be closed – leading to high crypto volatility.
*Data based on Bitcoin Prices on Coinbase. Pre-CNY Highs taken as average candle price up to 4 weeks before the New Year.
This period is a public holiday in China, as many employees travel back to their hometowns to celebrate with their families. With a population of 1.386 billion, this represents the largest short term migration in the world. All factories in China close during this period, with operations frozen for up to 2 weeks as logistics companies and suppliers slowly open up. Chinese New Year is also celebrated in other Asian countries such as Hong Kong, Singapore, and Korea (Korean New Year). With China deploying its national digital currency known as DCEP, further testing and development will take a break during the Chinese New Year. However, it’s important to note that during this time cryptocurrency exchanges will still operate and facilitate trading 24H/day (see Crypto Head).
Chinese New Year Dump?
For a consecutive 4 years, Bitcoin prices would always drop in the weeks leading up to Chinese New Year.
For example, in 2017, prices dropped by 50% from $12,000 to $6000 right before the festival. This pattern has referred to as the “Chinese New Year Dump” by cryptocurrency traders.
In 2019, Bitcoin prices dropped steadily from $4000 to lows of $3350 right before the Chinese New Year. This is shown by the chart below, with the red line marking the date of the festival.
In 2020, prices again dropped before Chinese New Year, even breaking the initial resistance of USD$8.3k. And whilst it did rally up to USD$8.5k on the first day of Chinese New Year, history cannot help but repeat itself, and within the same day plummeted back below USD$8.3k. Prices remained stagnant during the 2nd day of Chinese New Year, and only making a marked recovery and upward trend on the last day of the holidays.
Market Makers on Holiday
It is no secret that market makers and trading bots operate in the Cryptocurrency market – in fact they are responsible for a portion of the market volume. Market makers located in China and other Asian countries will shut down operations for 3-5 days due to the public holidays. Even though market making can be automated by trading bots and algorithms, it still requires humans to watch over the daily operation to make sure the is no malfunction.
During Chinese New Year, market making operations will be limited in capacity. This leads to more volatile and less liquid markets.
Cashing out for the New Year
One of the possible reasons for the dip in Bitcoin prices is that people are “Cashing out” for the holidays. This is especially true in China because during the festival, lucky packets packed with cash are traditionally given out to children and the elderly. These “red packets” are meant to symbolise luck and prosperity, and is the only time giving cash is not taboo in China.
Tradition dictates that married couples should give out red packets to young unmarried children, elderly and service personnel. Company Executives and managers should also give money to their subordinates – with some packets being filled to as much as the employee’s monthly wage.
Due to the huge amount of cash money required, some suspect that this tradition is responsible the increase in Bitcoin Sell orders before Chinese New Year.
Bitcoin Mining is Unaffected
As China is a huge contributor to Bitcoin mining, one might expect that cryptocurrency mining may get affected during the festival. This is not the case, as Bitcoin and Ethereum Hashrates hold steady during this time. This is because mining does not require significant man power to maintain, and hence mines are left operating during the New Year.
Chinese OTC Volume Drops
Bitcoin is traded in China via Over the Counter (OTC) desks. These OTC desks match orders from buyers and sellers and can offer escrow services. Top desks include Genesis Block, Binance OTC and Huobi OTC.