It was only one week ago that the price of the digital currency bitcoin hit a new all-time high of $1,130. Now the price has fallen precipitously, and was hovering around $800 on Thursday afternoon.
The reason is China.
The People’s Bank of China (PBOC) said on Wednesday that it plans regular on-site inspections of the leading Chinese bitcoin exchanges, including BTCChina, Huobi, and OKCoin.
This came after PBOC officers in Beijing visited the offices of Huobi and OKCoin, and PBOC officers in Shanghai visited the offices of BTCC, for checkups that, “focused on whether the firm was operating out of its business scope, whether it was launching unauthorized financing, payment, forex business or other related businesses, whether it was involved in market manipulation, anti-money laundering or (carried) fund security risks,” as Reuters translated the PBOC statement.
The price of bitcoin fell sharply on the news.
Five days earlier, the PBOC issued press releases, in Beijing and Shanghai, that contained a more general warning about bitcoin. The releases recirculated a government statement from back in 2013 stating that the Chinese government does not recognize bitcoin as a currency, and that it carries investment risk.
The price of bitcoin fell 12% in the aftermath, but then recovered. It was climbing back when the PBOC announced its inspections on January 11, sending the price down again, as much as 15% at one point.
The PBOC did not say bitcoin is illegal, or expressly tell Chinese citizens they cannot buy bitcoin.
But clearly, China’s central bank is stepping up its public war on bitcoin. Why?
Bitcoin is frequently thought to be an uncorrelated asset to the broader global market—that is, its trading price is not tied to stocks. (In that way it has been compared to gold.) Speculators see bitcoin as a “safe haven” investment for two scenarios: tightened capital controls, and general market uncertainty.
At the moment, investors in China see both of those happening: The PBOC cracked down with stricter capital controls in 2016, and the price of the yuan has fallen 5% against the dollar over the past 12 months.
Chinese authorities have taken note of the move toward bitcoin, and they are trying to throw cold water on the coin in order to tamp down capital outflows and help the yuan.
Will it work? It clearly affected prices, but bitcoin has regular price hikes and falls, and it has fallen much farther than this before—usually after a reported hack of a major bitcoin exchange, like the bitcoin “flash crash” in 2013 after the fall of Mt. Gox.
The price already appeared to be climbing back on Thursday, after hitting a low around $760. And the price is still up 87% in the past 12 months, and 246% in the past two years.
The latest two actions by the PBOC aren’t the damaging blow that some news outlets are making them out to be.
The first was simply a warning that bitcoin is volatile. That’s true (though it has been less volatile over the past two years), as one of the targeted exchanges, BTCC, acknowledged in a muted public response to the PBOC release: “The press release put forth from the PBOC today outlines that there is significant volatility in bitcoin trading… bitcoin is a virtual good and doesn’t have legal tender status.”
The second was just an indication China will watch bitcoin companies more closely. In fact, BTCC CEO Bobby Lee told Coindesk, “We’re now working closely with the government about what makes a healthy market… We’ve been trying to get their attention for years.”
Make no mistake: China is the most important market for bitcoin prices. During the price ride at the end of 2016 and in the first week of 2017, more than 90% of trading volume was coming from China. Positive sentiment toward bitcoin among Chinese investors is crucial to a high bitcoin price. And while China’s central bank succeeded this week in bringing bitcoin back down to earth, it is very unlikely that Chinese bitcoin buyers have been turned off for good.
Here’s what to expect next, although it could take a few years: the Chinese government will likely begin regulating the major bitcoin companies there, and making them go through licensing hurdles.
That may turn out to be good for the price. That’s what happened in the U.S. in 2013, when the government began to regulate and license bitcoin companies as “money transmitters”: the price rallied thanks to regulatory clarity.
“If the end result is there’s actually kind of some legitimacy around regulation of this in China, then I actually think the market rallies,” says Jeremy Allaire, CEO of the peer-to-peer payments company Circle. “It will be very interesting to see if the outcome of the People’s Bank of China examining [bitcoin exchanges] leads to new guidance, new rules. Even if there’s enforcement actions, the result and output might actually be more legitimacy.”
Daniel Roberts is a writer at Yahoo Finance, covering technology and sports business. Follow him on Twitter at @readDanwrite.
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