The last crash was also due to a new round of regulatory storm. Where will Bitcoin go?

Bitcoin trading, which had been silent for nearly three years, had just begun to show signs of golden opportunities when it was immediately hit by a new round of regulatory intervention.

In the early morning of January 5, the price of Bitcoin in the Chinese market broke the historical record of 8,000 yuan set more than three years ago, and then soared to a high of nearly 8,900 yuan.

Upon discovering this situation, the central bank quickly summoned the main persons in charge of the three bitcoin trading platforms, Huobi.com, Bihang and BTCChina, and asked them to strengthen self-inspection and standardize operations, such as not promoting products on the market or faking orders. As a result, the price of bitcoin "flash crashed" and once fell below 6,000 yuan.

More stringent measures followed. On January 11, the Beijing Operations Management Department of the Central Bank and the Shanghai Headquarters of the Central Bank announced that they would form an inspection team with local financial departments to enter Bitcoin trading platforms such as Huobi.com and Bihang to conduct on-site inspections on the implementation of foreign exchange management, anti-money laundering and other related financial laws and regulations, and relevant regulations on trading venue management. This directly led to a further increase in the decline of Bitcoin, with a daily decline of more than 15% and a drop below the 5,400 yuan mark.

The last time Bitcoin plummeted was three years ago, which was also related to regulatory intervention.

On December 5, 2013, the People's Bank of China, which had remained silent, issued a notice stating that although Bitcoin is called "currency", it is not a real currency because it is not issued by the monetary authority and does not have monetary attributes such as legal tender and compulsion. "In terms of nature, Bitcoin should be a specific virtual commodity that does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market."

China’s central bank stopped short of outlawing bitcoin, saying ordinary people were free to participate at their own risk. But it banned financial institutions from doing bitcoin business and highlighted the dangers — such as market manipulation, money laundering and use for criminal activities.

The People's Bank of China then interviewed more than 10 third-party payment companies and asked them to stop all transactions related to virtual currencies. Soon, China's three largest electronic trading platforms - Alibaba (Taobao), Tencent and Baidu - successively stopped Bitcoin payment services. Bitcoin China, China's largest Bitcoin exchange, also received instructions from the central bank not to absorb RMB funds from Bitcoin buyers.

The vote of no confidence from China's monetary regulators caused the price of Bitcoin to plummet by two-thirds and remained silent for two years. It was not until the end of 2015 that Bitcoin trading gradually picked up. In the following 2016, its price in China rose by 145%.

Unlike the situation in Europe and the United States, most Chinese investors are interested in Bitcoin not because of its "liberal ideal" of subverting the previous government-issued "legal currency" when it was first created, but because of its speculative nature. In addition to reflecting the gambling nature of some investors, this also highlights the current lack of high-quality investment products in China to a certain extent.

From the original design of Bitcoin, the biggest feature of this digital virtual currency is decentralization and constant total amount. This means that inflation cannot be created by over-issuing currency; at the same time, because it is a point-to-point decentralized transaction, its system will not be completely destroyed, and there is no risk of central settlement system failure causing the entire trading system to be paralyzed.

In addition, Bitcoin has many advantages: 1. It circulates globally without borders, bypassing foreign exchange controls; 2. There is no seigniorage, and transactions are simple and cost-effective; 3. It is easy to store (the "electronic wallet" protected by the "private key" password can be kept online or stored offline), and there is no problem of theft; 4. Anonymous transactions, maximum privacy protection...

China’s foreign exchange controls prevent the free transfer of funds overseas, and speculation is rife that some Chinese use Bitcoin to move money abroad to circumvent capital controls. The apparent correlation between the decline in the yuan and the surge in the value of Bitcoin in recent months has reinforced that speculation. However, most experts in the Bitcoin industry believe that existing rules make it very expensive to use the virtual currency to move large sums of money out of the country, and all steps are clearly documented, leaving no room for evasion.

But no matter what, the influx of Chinese investors has in turn become the main driving force behind the rise in Bitcoin prices. From the dynamic data, since 2013, the Chinese Bitcoin market has always been in a leading position, driving up the global Bitcoin price.

In view of the popularity of Bitcoin transactions, major financial regulatory agencies around the world have paid more and more attention to it. In short, the attitudes of regulatory authorities around the world towards Bitcoin can be roughly divided into three types:

EU countries, represented by Germany and the United Kingdom, have basically adopted a laissez-faire attitude. They only claim that it is necessary to closely monitor the development of Bitcoin and protect consumer rights from being harmed.

Emerging developing countries represented by Russia and India are in stark contrast. They have already or intend to declare Bitcoin illegal and completely ban it. These countries also include Thailand (which is the first country in the world to ban Bitcoin).

The United States, China and Japan, the world's top three economies, are located in the middle of these two extremes. These three countries have not banned Bitcoin transactions, but have explicitly banned its monetary function and simply classified it as an ordinary commodity.

Radical libertarians were eager to use Bitcoin to challenge "annoying" government regulation because they prefer the market to the government, and modern countries actually monopolize currency. This is also the original intention of Bitcoin's invention and the focus of its design.

But its history shows that this ambition has not been fulfilled much. Its price crashes are almost all due to regulatory intervention, an irony that shows that Bitcoin is actually more vulnerable to shocks than other investment markets.

At present, different positions determine different people's expectations about the future of this virtual currency that lacks sovereign guarantees and government supervision.

Negative views on the prospects of Bitcoin mainly focus on the following two aspects:

First, this ambitious experiment failed because security technology could not keep up with the needs of the rapid expansion of the market. Bitcoin's inherent genes give it unpredictable risks (which is actually the dark side of its inestimable value), such as the many incidents of hackers stealing bitcoins from trading websites.

Second, and related to this, the characteristics of Bitcoin make it particularly attractive to criminal activities, and many regulators around the world are concerned that digital currencies may be easily used for money laundering or illegal purchases of weapons and drugs. This makes it very likely that this innovation will be killed by regulators due to its huge side effects. Moreover, the willingness of governments to ban Bitcoin will be further strengthened because they are worried about the competition of sovereign currencies.

Fortunately, at least so far, the governments of the world's most important economies - the United States, Europe, China and Japan - have not completely closed their doors to it, giving it a chance to "reform."

As for the criminal risk inherent in anonymity, Bitcoin believers believe that Bitcoin transactions are at least electronically recorded, and there is no transaction that leaves no trace and is more difficult to track than cash. However, from shells, precious metals to paper money, humans have been using cash for thousands of years and are still using it today. Therefore, the crux of the problem is not security risks, but improving the ability to prevent and control risks.

In my opinion, Bitcoin will face a long-term and continuous "stress test". If Bitcoin is to become a truly viable and reliable currency, it must prove that it can cope with the various crises and tests that real-world currencies face.

The future is unpredictable, and Bitcoin, a "currency", may eventually be eliminated in the fierce competition for survival, but the era of digital virtual currency it represents may eventually arrive. Bitcoin may trigger a currency and credit revolution, but even if it happens, it will be much milder than the radical liberals who are eagerly looking forward to it hope.