China – The Bitcoin Villain

February 25, 2018 by
China - the Bitcoin Villain

First, China decided to block ICO’s, then came the shutting down of domestic bitcoin exchanges.Both bits of news has sent shockwaves through the larger cryptocurrency community around the world. After all, China has been one of the largest presences in the cryptocurrency community for some time: it is home to about a third of all initial coin offerings, and its miners produce a hefty sum of new tokens every day.

Bitcoin value has been rising for more than a year – from around $230 a piece to over $1000. But 2017 has been a year of the ultimate downtrend in the bitcoin price. On Feb 9, 2017, bitcoin price plunged by more than 9%. The previous growth, and, especially, the latest drop were both a result of market sentiment caused by news from China. Huobi and OKCoin, the two largest cryptocurrency exchanges in the country, have announced that they stopped all Bitcoin and Litecoin withdrawals for a month.

The pause is needed for the companies to implement software updates. Everything happened so fast and the market was so unpredictable, analysts barely had time to weigh in their analysis. Should we buy the dip or the price will go further down or just “hodl”– was the question floating around on online forums. China is home to the largest group of bitcoin miners on the planet. Some reports estimate that China’s share of total worldwide hash rate is at 71 % or higher. Without access to domestic bitcoin exchanges any longer, many of the flourishing mining operations in China closed down or switched to other cryptocurrencies as a central focus. Bitcoin production worldwide changed substantially, and the overall effect on the price of the currency is somewhat hard to say.

This was not the first market crash brought about by the news coming from the People’s Republic of China. In fact, China has caused bitcoin plunges before too. It serves both as a staple in the community’s meme production and a source of constant unrest and frustration for the people holding onto their Bitcoins long-term.

The first plunge happened from November to December 2013 and it was a truly dramatic experience for all the parties involved. Those months have seen the most rapid rise and fall of bitcoin price to date. During the period from September to November 2013, Bitcoin has surged from just over $100 to more than $1000.It changed overnight after the PBoC called Bitcoin “not legally protected” and having “no real meaning” and prohibited its use by financial institutions in mainland China. This led to BTC China, the then-largest Bitcoin exchange in the country, to cut all Yuan deposits indefinitely. They were resumed in February 2014, but the harm has already been done.

PBoC’s actions have had far-reaching implications across the world, and Bitcoin price lost more than half of its value over the next two weeks.In early January 2017, the PBoC carried on-site inspections at the three largest Chinese cryptocurrency exchanges: OKCoin, Huobi and BTCC. The inspections were motivated by the bank’s desire to look into capital flight, money laundering and market manipulation instances potentially present throughout the exchange companies and the result was that bitcoin went down from a high of about ₹900 by more than 10%

China is arguably the only country to influence Bitcoin’s price to such an extent. Major news from other countries has impacted Bitcoin price too. One of the most prominent examples is the infamous collapse and bankruptcy of Mt Gox.It used to operate from Japan and at one point was the largest Bitcoin exchange in the world. Its closing led Bitcoin price to go down from around $700 to about $550.

However, that was an incident internal to the Bitcoin industry. It didn’t have anything to do with any government’s actions. No other country’s government has had such a consistent and powerful effect on bitcoin’s price.

Can Government Regulations control cryptocurrency prices?

There are a couple of ways in which government intervention can influence the price of cryptocurrencies. First, governments can regulate the price of assets, such as fiat currencies, through buying and selling actions in international markets. Second, they can tamp down excessive enthusiasm for an asset class by saddling it with regulations that increase the cost of doing business.All three types of actions have the potential to fail in the case of bitcoin and cryptocurrencies. This is because cryptocurrencies are extra-national and have decentralized ledgers that are spread across multiple countries. Their regulation will require a well-coordinated effort across several economies. This might be a difficult task, given varying levels of interest in cryptocurrencies and their impact on national economies in different places.The differing reactions of China and Japan to bitcoin is an example of the difficulties in such an approach. China banned initial coin offerings, which use cryptocurrencies as a funding mechanism, to prevent capital outflow and money laundering. On the other hand, Japan considers cryptocurrencies legal tender and is reportedly developing its own currency.

Nobody can say for sure that Bitcoin’s price will still continue to fluctuate or not. But it looks like China’s influence on the global market is waning.t is easy to see that with every new time the PBoC does its “thing” the effect on the price becomes less and less pronounced. The latest drop of 7% simply pales in comparison with the 51 % loss of value, which Bitcoin suffered back in December 2013, as another result of the PBoC’s harsh regulations. In any case, it looks like Bitcoin may have grown too big to be easily influenced by any single govt. authority. Still, all that does not guarantee that a new sharp fall isn’t impossible. The chance of a “black swan” reaction should always be kept in mind, even if the signs point to the market being stable

Download IBC Investment Report - Nov'2017

As Bitcoin soars, we achieved an 85% signal accuracy for the month of November. Download this report to learn more. 
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Download IBC Investment Report - Nov'2017

As Bitcoin soars, we achieved an 85% signal accuracy for the month of November. Download this report to learn more. 

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