Did The Chinese Government Just Admit Bitcoin Poses A Risk For The Financial System?

[The following post is by TDV editor-in-chief, Jeff Berwick.]

Overnight Wednesday-Thursday in North America the bitcoin price dropped as the People’s Bank of China announced banks cannot offer bitcoin services and btcchina.com , leading bitcoin exchange, went down.

Overall, the announcement was akin to the announcements by FinTrac and FinCen out of Canada and the US, respectively. Essentially, advising bitcoin exchanges to know their customers, the People’s Bank of China moved to protect the yuan and assure state banks did not get involved in bitcoin because it could possibly, in the future, pose a risk to the financial system.

The announcement follows a near 90-fold increase in the virtual currency’s value since it was created in 2009. Bitcoin dipped to the $800 range after the announcement, but climbed back above $1,000. After having appreciated in price from $125 to more than $1,200 in the matter of the past few months, the crash that everyone has been waiting for is underway with Bitcoin prices dipping to under $650 and currently around $750. 

The statement in China warned that crypto-currencies like Bitcoin pose risks to the Chinese financial system. The central bank stated it would outlaw financial and payment institutions from using Bitcoin, including buying and selling or insuring bitcoin-linked products.

According to the document, individuals were free to use bitcoins and private exchanges had to follow know-your-customer and anti-money laundering protocol.

Now the world’s largest bitcoin exchange, after passing Mt. Gox, BTC China transmitted 500,000 bitcoins last week; 30% of the market share. This before the site went down overnight Wednesday-Thursday.

Of What is the Bitcoin Price Made?

Is it, as Mark Faber argues, “A symptom of excess liquidity?” Or is it a symptom of extreme volatility in markets across the board? The feedback loop of volatility created between disruptive technologies like bitcoin and alt-coins and volatile stock markets and currency supplies will not be so easy to disentangle from each other. With all attention diverted towards bitcoin, paper is drained from stocks.

The price of bitcoin is not due to “excess liquidity” like Faber asserts. That’s like answering the question, “Why are you wet?” with the answer “water,” when you had recently gotten out of a nearby hot spring. What is excess liquidity the result of? It is the result of bad decisions made by central actors.

Bitcoin’s success is a result of its contrariness to centralization of the money supply and bad faith on the part of the actors leading us in this play of folly we call life. Moreover, bitcoin’s success is not necessarily tied to its price. Instead, overall adoption is much more important, in my opinion. And, with each wave upwards, the adoption of bitcoin implied for now and in the future only increases.

The document issued by the Chinese government was its first step towards regulating the virtual currency, much like FinCen in the US’s and FinTrac is Canada’s actions from earlier in the year. The move by the People’s Bank comes on the heels of a surge in bitcoin interest, just as the state’s North American counterparts reacted to increased North American interest in the spring.

The central bank said the public could take part in internet transactions provided they don’t rely on the government sort out the risks for them. Internet trading platforms should require clients to register with information, such as name and identity card number. Further, such exchanges will have to answer legal inquiries about suspicious transactions.

Bitcoin is not out of the water quite yet in terms of its next leg up. TDV has been alerted to individuals who have taken out credit loans for bitcoin. Everyone of course knows the old-adages “pigs get slaughtered” and “what goes up must come down.” A day after we said that, the bitcoin price plunged below $650. That’s why we recommend diversifying into foreign real estate and second passports, as well as gold and silver.

In terms of bitcoin, has any viral p2p platform ever gone away (if not for the force of government)? No. Is the banking industry about as adored as the arms and drugs industry? Yes. Are decentralized crypto-currencies a solution to the ancient method of banking? Yes.