What’s Going On Here?
Bitcoin fell below $3,000 a coin on Friday (tweet this) – a drop of over 40% in two weeks – after three Chinese bitcoin exchanges announced they were closing due to pressure from the Chinese government.
What Does This Mean?
About two weeks ago, China banned “initial coin offerings” (ICOs) in the country (ICOs allow a company to raise money from investors by selling a new cryptocurrency). That move foreshadowed a bigger crackdown: a decision by the Chinese government to close down virtual currency exchanges, such as those that offered a way to trade bitcoin. There was no actual announcement by Chinese authorities, but last week three major Chinese bitcoin exchanges announced they would soon close – seemingly validating previous reports of the crackdown.
Why Should I Care?
For markets: Cryptocurrency values got walloped – partly because China accounts for a significant portion of demand. Buying cryptocurrencies is, reportedly, a popular way for Chinese people to circumvent regulations that don’t allow them to buy much of other currencies. Whatever the reason, Chinese people buy a lot of bitcoin. The prices of many different cryptocurrencies fell sharply along with bitcoin last week, reflecting the fact that it could become much harder for those buyers to access the market (i.e. demand will likely fall).
The bigger picture:
Time will tell whether bitcoin is a fraud – or the currency of the future. Jamie Dimon, the head of JP Morgan and one of the world’s most influential bankers, called bitcoin “a fraud” last week. This pessimistic argument often rests on the presumption that currencies need to be backed by a government in order for people to have faith in them over the long term. Proponents of bitcoin typically point to gold as an accepted “currency” that isn’t backed by a government, and argue that bitcoin is establishing itself as the digital version of gold. Who’s right? We’ll see.