A large portion of bitcoin trading takes place in China. Because of that their position on cryptocurrencies affects the whole industry. However, the attitude of Chinese regulators towards bitcoin and other digital currencies is more complicated than what is being propagated by mass media.
POBC and crypto: from breakup to trying to make it work
China’s recent crackdown on several exchanges and the ban on ICOs gives the impression that crypto currencies are not welcome in China. Officials from the People’s Bank of China (POBC) stated that the digital currency is considered as a threat. Yet during the summer of 2017, long before the ban, the Chinese government, without much media hype opened a Digital Currency Research Institute.
On October 12, Yao Qian, Director of the new institute, stated that their research suggest that the best action is the creation of state-backed digital currency, cementing the mentality that China wants to suppress the use of decentralized digital currencies. Yet, the government has not stopped supporting miners with cheap electricity.
It is no secret that most of the hashing power of the Bitcoin network is concentrated in China. Miners like Antpool, Bitmain and other all get cheap renewable energy from the government. The rumors that emerged after the ban of ICOs that mining is next on the line, did not materialize and faded. Now the going mentality when reading different articles is that China is making digital currency work for them.
Official sources claim that around 70% of Bitcoin is produced in China, mostly in the rural areas of Inner Mongolia. As well as that all the largest pools from the ranks of Antpool are located in China. Before the ban 90% of all trading volume was there as well. Even with the shift of traffic to Japan and South Korea, China remains one of the largest markets.
The pattern: ban, price drop, all times high
Back in 2013, POBC prohibited that banks and payment companies from dealing with bitcoin, see this. Basically, there was no way to exchange crypto into fiat money. Back then Bitcoin was enjoying its high at little below $1200. After the ban the price feel to $196 in the lowest point. Once the price recovered it reached a new all times high.
This year in the end of September, China declared ICOs illegal and started procedures for shutting down exchanges, until the undergo licensing procedures. We saw a drop in the price, shortly after which bitcoin reached the staggering $17,178. The pattern is similar. The only difference is the pace of recovery – while in 2013 it the recovery took a couple of years, in 2017 it took less than two months.
Cryptomania engulfed the world back in 2016. With all the media hype, for 10 months (Dec 1, 2016 to Sep 30,2017) the price of bitcoin increased 478%. After the ban in a bit more than 2 months (Sep 30,2017 to Dec 13,2017) the price increased with 294%. That is more than half of the change for 10 months only in 2 months. Such a growth although pleasant for many is rather worrisome as it breaks all kinds of trends observed from previous periods.
An ingenious strategy
It is well known that the Chinese people, are not very fond of the numerous financial limitation they have to abide to in terms of holding different currencies and the government meddling in their affairs.
It is possible that the reason why after a clampdown on crypto its price increases is that some Chinese people want to do the opposite of what the government says. So, when official state crypto is a threat , those that do not agree with the status quo would want to hold more of bitcoin as a means to gain independence from the state.
Anyone with basic understanding of finance would know that putting a restriction on the trade of an asset in the biggest market would make its price fall. Is it possible that POBC is aware that its citizens would demand more bitcoin if the government speaks up against it?
Mass media booms that crypto is dead in China. The risk intolerant investors hurry to sell before the price falls more.The price plummets. The bank buys up bitcoin at the low price. Once the trade is made at the low price, officials state that actually the restrictions would be more lenient than initially stated.
In 2013 the government forbade banks and payment companies from holding bitcoin but allowed the operation of exchanges. In 2017 exchanges and ICOs initially seemed to be banned entirely, shortly after the price drop officials announce that the ban would not be permanent and that its aim is for these exchanges to undergo licensing. Saying that they are simply trying to make crypto work for them, not trying to fight it. Investors’ confidence returns, and the price starts going up. And together with it increases the asset side of POBC.
Wrap it up
Chinese authorities’ position on bitcoin is much more complicated than what the media portrays. There is indirect evidence that there is concentration of bitcoin ownership in China. However, whether it is the POBC or separate individuals would remain a mystery.
Concentration of ownership is rarely any good. The total market cap of bitcoin is only 301 billion. Although it sounds a lot it is not. Institutional players that do single transactions with volume in the millions or more affect the price of bitcoin. The cryptocurrency industry as a whole is a wild west right now. A market marker’s galore.
All that being said, price manipulation was a common thing in the stock market a decade or two ago (see Wall Street 1987). It is where pump and dumb schemes were first created. Price manipulation is a stage of a financial market’s development and by no way renders cryptocurrencies a bad investment. As the market grows and there are more players, the value of the market would become so large that price manipulation would become impossible.
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