Why is Bitcoin going crazy again in China?

Since the middle of last year, Bitcoin has been rising rapidly under the impetus of Chinese investors. Bitcoin has been around 2,700 yuan for about half a year, and then rose all the way to 8,000 yuan, breaking the historical high. Then it turned downward and the price soared in one day. On January 6, the People's Bank of China and its Shanghai headquarters interviewed three Bitcoin exchanges - Huobi, Bihang and Bitcoin China in Beijing and Shanghai respectively, asking them to conduct self-inspections on recent abnormal situations and carry out corresponding rectification.

The Bitcoin exchanges that participated in the talks stated that they would actively cooperate with the central bank in self-inspection and would establish an industry alliance to enhance self-discipline.

The three Bitcoin exchanges interviewed by the central bank currently rank among the top three in terms of trading volume in China. According to US media reports, Huobi and OKCoin account for about 92% of the total global Bitcoin trading volume. Chinese funds already account for a large proportion of Bitcoin funds.

Bitcoin has existed for a long time and has gone through several rounds of media hype. Why has Bitcoin experienced such huge fluctuations and craze recently? What does the People’s Bank of China’s interview mean?

1. The value of Bitcoin

The origin of Bitcoin is mainly a legend. Legend has it that someone invented Bitcoin and used computer technology to create blockchain, artificially creating a currency.

Bitcoin was unknown for a long time after it was created, and was regarded as something similar to game currency, until its role in evading regulation was discovered. Due to the decentralized and anonymous nature of blockchain, traditional financial regulation is ineffective for Bitcoin. Bitcoin is a big black box to the outside world, and Bitcoin transactions cannot be traced back to who actually gave money to whom.

Moreover, Bitcoin is on the Internet and has transnational characteristics. Financial regulators in various countries cannot control it. At the same time, the virtuality of Internet currency makes it very easy to store and transfer. A person can be worth billions of Bitcoins, but in the real world, no one will know as long as he does not exchange them.

Bitcoin was quickly discovered by marginal industries in society and became a means of payment for drugs and illegal transactions in the United States. Hackers also tend to use Bitcoin for payment. Anonymity, evasion of regulation, convenient transactions, cross-border, and the decentralized reliability of blockchain give Bitcoin real value.

When the Bitcoin market is established, it will become something similar to the stock market. People can buy Bitcoin not only for settlement to evade regulation, but also for profit by buying high and selling low.

All things that fluctuate (stocks, futures, commodities, and even carbon emissions trading) are in fact casinos. The supply of Bitcoin, a casino, is subject to computer calculations and cannot be issued in large quantities like the stock market. It is more like the gold market, which relies on the production capacity of gold.

For those who like financial transactions, Bitcoin is indeed a good speculative option.

After the US government recognized the legality of Bitcoin, Bitcoin has become a de facto financial product in recent years. Although the People's Bank of China remains highly vigilant about it and does not recognize its legal status, the Chinese government has not banned websites, closed down institutions, arrested practitioners, or confiscated Bitcoin users' funds.

Bitcoin does exist in China.

2. Why the sudden rise and fall

As early as December 2013, the central bank and five other ministries and commissions issued the "Notice on Preventing Bitcoin Risks", which clearly stated 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 compensation 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.

This document directly triggered a market sell-off, and the price of Bitcoin was halved within a few days, and bottomed out at around 1,000 yuan more than a year later.

Recent Bitcoin price trend chart (Source: Huobi.com)

In mid-2015, as China's A-shares turned from bullish to bearish, Bitcoin began to rebound from its lows. It was also at this time that the RMB exchange rate against the US dollar entered a unilateral depreciation channel. Bitcoin began to be favored as an investment channel that is anonymous, evades regulation, and allows cross-border transactions.

This trend continues to strengthen, and Bitcoin rises higher and higher. The surge in Bitcoin has triggered a money-making effect.

Bitcoin itself is a safe haven for evading regulation, and as Bitcoin itself soars, holding Bitcoin becomes more profitable. Under China's current financial system, investors have many channels to leverage their investments.

As a result, the rise of Bitcoin began to accelerate and turned into a surge, breaking through historical highs.

When leveraged funds were introduced, Bitcoin became a balloon that was getting bigger and bigger without regulation. As long as there was follow-up funding, Bitcoin would soar, and once the funding was unsustainable, Bitcoin would plummet.

Speculative funds will withdraw, leaving behind those seeking safety and evading regulation.

So after rising to a high of 8,890.77 yuan, Bitcoin plummeted sharply.

3. What does the People’s Bank of China’s interview represent?

The central bank and five other ministries issued the "Notice on Preventing Bitcoin Risks", which did not give Bitcoin a legal status. Therefore, Bitcoin business activities can theoretically be defined as illegal financial activities and cracked down on as financial crimes.

Theoretically, the People's Bank of China has no power to interview or supervise Bitcoin trading websites and the companies behind them. There is no law that gives the People's Bank of China the power. Therefore, this interview is actually very vague.

Due to Bitcoin's ability to evade regulation, the government usually does not intervene. This is not because the government cannot intervene, but because the government does not pay attention to it.

The current surge and plunge in Bitcoin prices will, on the one hand, cause many investors to lose their positions and cause chaos. On the other hand, some of Bitcoin's characteristics of evading regulation may affect the country's overall financial policy layout.

This talk can be considered a polite move before a forceful one. Originally, Bitcoin had no legal status and was in a gray area in China, but it caused too much noise and affected policy implementation and social stability, so it was necessary to talk to you first to get you to exercise self-discipline.

It is very necessary for Bitcoin-related companies and personnel to listen to the opinions of the central bank. After all, without legal status, there is only a thin line between operating Bitcoin and illegal financial crimes.

I hope that this meeting will make Bitcoin more standardized in the future. After all, the issuance of virtual electronic currency using blockchain technology is also a kind of innovation. If we utilize its good side and avoid its bad side, it can also benefit society.