October 06, 2017

China and Bitcoin: The Rise and Fall

China appears to have an iron grip on Bitcoin. The blockchain technology that is making headlines everyday reacted to China’s ban with a dip in price, but how long will the ban actually last?

Many economists compare Bitcoin to the Dutch Tulip mania of the 1600s. During this period prices of tulips were so high you could afford to buy an entire house, furnished and repainted, all for the price of a single tulip. Bitcoin has become such a topic of controversy and debate that the word “bubble” has become almost synonymous with it.

China, a powerhouse in the world of cryptocurrencies, dropped a huge bomb when it declared a ban on Initial Coin Offerings (ICOs). To the surprise of many people, they came out guns blazing with another announcement, decreeing a ban on all Peer-to-Peer (P2P) and Over-the-Counter (OTC) exchanges.

Many large traders and miners saw the ban in China coming for a long time. China made its first step towards regulating Bitcoin after New Year’s 2016, when it banned no-fee trading. Before that, the volume of BTC trading against Chinese currency (Renminbi) was 90%. In its prime – around November 2016 – approximately 172 Million Bitcoins were traded for Yuan! This number dropped sharply only two months later because of the ban. Traders had moved to countries like Japan, utilizing their exchanges.

China seems to have its iron grip on Bitcoin.

Is Bitcoin really a threat to China?

Many Bitcoin enthusiasts will claim that the ban is linked to large financial institutions and their vendetta against cryptocurrencies. While it is true that cryptocurrencies are a powerful trading technology that has blossomed inside China, it is not a real threat to the biggest industries in China, let alone the world.

Most fintech researchers assert that the Bitcoin ban in China is only temporary until the country can setup regulations, following in the footsteps of Australia and Japan.

The Crypto-Terminator: “I’ll be back”

While it was troubling for those in the industry, the ICO ban was very understandable. Many people made an honest profit from cryptocurrencies, but others began to abuse the advantage of cryptocurrency anonymity. These factors, combined with a lack of information on cryptocurrencies created scams and Ponzi schemes. Everyone and their grandmother began pouring money into these scams, in hopes of a high ROI. Unfortunately, these schemes always led to disappointment. Some ICOs failed to return any product, let alone an investment, and some even ran away with the money.

China had issues left and right with these investments once it became a trend to start an ICO. By their nature, ICOs are not something evil. The shady intentions of the people behind the ICOs and the confusion of how cryptos work in general forced the government into placing a ban.

The Great Firewall of China

Now the Chinese Government is trying to untangle a financial headphones-in-the-pocket situation caused by all the Bitcoin trading, using brute force. Pressure from international agencies and the powerful communist party inside the country forced China’s hand. The Chinese Government needed to show it still had control over the financial systems that run the country, while also sticking to their usual attitude towards innovation – denial.

Make no mistake, this ban is serious. While it did not outright ban the possession or production of cryptocurrencies, it does include ridiculous regulations such VPN and Tor node monitoring.
The Great Firewall of China has successfully deterred all crypto trading within the country, validating the government’s agenda. Internationally, however, the ban is a failure considering S&P Global has ranked them one place lower.

With all eyes on China, Bitcoin trading still shows no signs of stopping. The Chinese Government has placed a hold on a very powerful asset, but the real question is what’s next? Strict regulations are expected, but has the damage already been done?

Most of the crypto traders in China are patiently waiting for trading conditions to return to normal at some point. Meanwhile, the price of Bitcoin continues to rise, unphased by regulatory pressure.