With the collapse of China's stock market, there has been much speculation that bitcoin would benefit as investors will flock to the digital currency as a safe haven. The average Chinese investor may not be fabulously wealthy by Western standards, but when combined they represent a significant pool of capital that could have an extraordinary effect on Bitcoin, given the market's total capitalization of around $3.3 billion, notes Martin Tillier. However, when we look at BTC/USD, it declined over the last month from around $280 to around $230.



Tillier points out various factors that caused the bitcoin price to go down rather than going up.



Before the Chinese government started regulating digital currency on December 5th 2013, the bitcoin price saw a big rally. But once the regulation began, it collapsed. Even though it is so far clear that the Chinese government's stance on individuals owning virtual currency is that there is no restriction (at least officially), people are aware how quickly that can change.



Secondly, there is also probably a lack of awareness and understanding of Bitcoin by the average investor. This problem exists even in the West, where free access to the press and the internet is taken for granted. Therefore, a country that restricts and controls news outlets, the level of distrust based on ignorance would be much higher.



Moreover, the angst surrounding the fork in the currency and Bitcoin's problems with its own "flash crash," are also influencing its price. That is especially true when the effect of generalized dollar strength on the currency pair is taken into account.



The fact of the matter is that with the stock market crash, exchange controls have been imposed, and that there must be lot of Chinese investors' cash looking for a home that can guard against any future devaluation of the local currency.



Some investors will opt for gold given that the collapse seems to have stopped for now, but if just a small fraction is used to buy Bitcoin there will be a considerable effect on the market. However, if the government changes its stance on the ownership of digital currency, the rush to the exits will be pretty scary.



He concludes stating, "The fact that they have tried to restrict Bitcoin in the past and essentially failed makes that less likely, though, so for now the most likely beneficiaries over time from China's woes would seem to be gold and Bitcoin."