Chinese withdrawal limits are affecting the LTC/BTC spread

The recent run up in the spread between LTC/BTC is unfounded and will continue to collapse after making highs in early May of this year.

In early May of this year, it was noted that China would again allow withdrawals of cryptocurrencies from exchanges. As a result, BTC, LTC, ETH, and multiple other crytpocurrencies continued their aggressive rallies which started in late March. The initial runup in early spring can be attributed to news of Japanese banks widely adopting Ripple as a means of bank transactions. Gaining the respect of a country’s banking system gave credibility to the entire blockchain movement.

The rise of LTC and ETH greatly outpaced that of BTC. While it is understandable that rallies in those currencies would tend to be larger than that of BTC because of the lower base price, the magnitude at which they outpaced BTC has been absurd.

I am not sure anyone knows the true value of any of the currencies, but I offer that one can deduce relative value between them. You can think of it similar to the relationship of precious metals.

How do we value the relationship of the currencies as assets?

First we look at the supply side. Not much has changed in regards to how they are mined. You can find multitude articles on the web discussing these things.

Secondly we look at the demand and what is driving it. Obviously the fact that people are talking about it and the rapid movements attract many investors looking for a quick buck. That will bring in outside interest and investment. The other factor I am looking at that I think provides an opportunity is the Chinese portion of the demand side.

Earlier this year, the Chinese annual government report dropped the line “Keeping a stable yuan at a reasonable and balanced level” which had been included in the report for the last 3 years. Cryptocurrencies offer Chinese investors a way to minimize the risk of devaluation of their native currency. Hence increased demand for all cryptos.

What does this mean for the spread between LTC/BTC?

The rally of the LTC/BTC spread raced to new highs days after investors realized the Chinese government would again allow withdrawals of BTC, LTC, and ETH. What brought the spread back down from those lofty highs was the realization that the limits imposed by the government are flat out weird. “The 24-hour withdrawal limit of the International site and OKEX is: 200 BTC, 500 LTC and 1,000 ETH.” “As for the Chinese site, the limit is 20 BTC (10 of which could be withdrawn to external addresses), 400 LTC (200 of which could be withdrawn to external addresses) and 1,000 ETH.”

So to put that in dollar terms as of June 7, it means a Chinese investor can move $28,400 of BTC, $6000 of LTC, and $262,000 of ETH.

If the purpose of purchasing crytpocurrency is to move your assets from one currency to another store of value, then the amount you purchase will be relative to the limits imposed.

My assumption is that unless those limits are changed, the demand side for ETH and BTC is going to be continuously skewed higher than that of LTC. Therefore I am selling any upside moves in the spread between LTC/BTC until it retreats back to the levels it was trading at prior to the Japanese banking announcements that sent all cryptocurrencies on the move up back in March.