Investors Rush for the Exits as China Moves to Halt the Rally in Bitcoin

Investors Rush for the Exits as China Moves to Halt the Rally in Bitcoin

  • January 10, 2017
  • /
  • James Evans

Bitcoin recorded a surprising crash on Thursday January 5 to halt the expectations that the cryptocurrency will continue its rally to surpass its previous all-time high. Bitcoin had already crossed the $1,100 threshold and it was nearing the $1,200 threshold before it lost its footing. Bitcoin almost dropped to $800 on January 7 and it currently trades around $908 as at 9:27AM EST today.

Many people have tried to find out the reasons for the short-lived rally in Bitcoin prices. Interestingly, the prevailing opinion in the market submits that the People’s Bank of China is behind the unexpected crash in the price of Bitcoin. This piece seeks to examine how China unwittingly orchestrated the crash in Bitcoin prices.

Here’s how China ended Bitcoin’s rally

Bitcoin is already taking up position as a cryptocurrency that could displace troubled fiat currencies and end government interventionist monetary policies. Last week, we wrote on how Bitcoin is already building momentum to displace the Bolivar in Venezuela.  Well, the People’s Bank of China made a preemptive strike to ensure that thoughts to use Bitcoin in place of the Chinese Yuan don’t begin to take root in China.

The PBC issued two notices from its Beijing and Shanghai branches emphasizing its position on Bitcoin’s place in the economy. The PBC noted that it considers Bitcoin as a commodity and not a currency and that investors should only trade Bitcoin with the understanding that it carries investment risks. The PBC also requested meetings with Bitcoin exchanges to encourage “self-examination” in ensuring that exchanges stay within the ambits of regulations and that they are managing risks properly.

The more troubling development that caused the price of Bitcoin to tank is the revelation that China’s foreign exchange regulator SAFE was investigating the use of Bitcoin in avoiding capital controls on China. Beijing has placed strict capital controls on the inflow of funds in and out of China but speculators believe that China’s wealthiest are using Bitcoin to bypass those capital controls.

In fact, a decent part of the rally in Bitcoin was fueled by the rumors of an increase in Bitcoin adoption amidst China’s wealthiest. In essence, moves to investigate the use of Bitcoin to evade capital controls could be a precursor to a clampdown on the use of Bitcoin in China. A clampdown on Bitcoin use in China could result in losses for investors; hence, many people have started unloading their Bitcoin holdings.

OKCoins thinks the Bitcoin should be regulated in China

Leading Bitcoin exchanges in China are supporting the government’s plan to push more regulations through the Bitcoin industry in the country. OKCoin is the second-largest Bitcoin exchange for CNY Bitcoin-trading in China – BTCC leads OKCoin in 7–day-volumes. OKCoin revealed that it had had dialogue with the PBC on its plan introduce a third-party platform. The firm however notes that the PBC is yet to make a decision on creating such a platform.

Nonetheless, OKCoin CEO, Star Xu observes that regulating the Bitcoin industry could benefit all stakeholders and that the panic selloff in Bitcoin is unwarranted. In his words,

“The industry can benefit from balanced, risk-based regulation and oversight and we look forward to further constructive discussions with the regulators and industry participants.”