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Published On: Sat, Dec 21st, 2013

Bitcoin’s Crash on China

You may remember our discussion of the volatility of Bitcoin just over a month ago, and recent events have shown how true our worries were. In case you have not heard, this week China took some actions which caused the value of a Bitcoin to plummet to less than half in one day.

Bitcoin is a virtual currency, invented and existing solely online. Its advocates claim this is a good thing, and that we should all put faith in its value, pointing out that other major currencies keep their value on the same basis, with the gold standard having been replaced many years ago by “print as you need it” money. When money is printed by or on behalf of governments around the world, this can fuel inflation, and without this local restraint we might have seen significantly more new money entering the markets to help governments meet their bills.

The Chinese ban will make it harder for locals to swap their yuan for bitcoins

Although the problems for Bitcoin came to light on Wednesday (18th), China actually started in its move against bitcoin on 5 December when the central bank banned the nation’s banks from doing transactions in Bitcoins. The Chinese view is simple – because the currency is a virtual one, instantly transportable over the Internet, Chinese people can use it to get around restrictions that limit the amount of money they can move across the borders. This indeed is related to questions that have previously been raised in the Western world, where other countries have suggested that Bitcoin provides a wrongdoer with an easy way to launder money.

On Wednesday the 18th, China stopped payment providers using Bitcoin exchanges, and this resulted in a fall in value of Bitcoin to below half their previous $1000+ level. In response, it appears there was a Denial of Service hacking attack on the website of China’s central bank, which briefly caused the website to be unusable.

Bitcoin Chart

Bitcoin Chart

China appears resolute in its stance against Bitcoin, with China’s news organization Sina reporting, “the virtual currency has posed a threat to China’s capital control and there are concerns that China would take further measures to limit the development of the Bitcoin”.

As you may know, there are some alternative virtual currencies such as Litecoin available. It seems that these were hit as badly by the news from China. In fact, the decline in value of litecoin almost exactly mirrored that of bitcoin. This annoyed some investors who thought that by diversifying into several different virtual currencies, they could avoid the worst swings of the market.

The future of Bitcoin must still be in question, if a market the size of China is able to regulate it away. However, in related news the American liquidation store, Overstock.com, has stated that it will start accepting bitcoins in payment for its goods. Some news reports have even called this the first major US retailer accepting Bitcoins, inferring that it is the start of a trend that will result in validation of the system of virtual currency.

Overstock.com sells online only, and does not seem to rank as a major retailer. The other problem with seeing this as the start of a trend towards Bitcoin is that Overstock seems to have done this as a publicity gimmick. Chief executive Patrick Byrne is quoted as saying, “We’ll want to avoid any currency exposure by converting Bitcoins to dollars as soon as they come in”. This seems to suggest that Byrne still places more faith in the US dollar, despite debates about America’s increasing debt levels, than he does in the virtual currency.

Our current view is that the jury is still out on the viability of Bitcoin. It may have faded away in a couple of years, or on the other hand by then it might be the universal system it was designed to be. Only time will tell how well it can take hold, and until it is proven, it remains a risky investment.

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About the Author

- Robert is a private trader with over 15 years experience trading the financial markets.

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