It’s been a volatile year so far for bitcoin. The value of the cryptocurrency jumped 20 percent in the first trading week of the year to a record high of $1,161 per virtual coin. Its value then plunged by more than a third over seven days, to $750, before climbing back up to top $1,200 on Friday.
Traders said the main cause of this roller coaster ride has been China, where the country’s central bank put domestic bitcoin exchanges on notice early last month that they needed to do more to tighten foreign exchange controls. China has been trying to curb the practice of using bitcoin to circumvent rules limiting the amount of money Chinese mainlanders can send abroad, which is currently capped at $50,000 a year.
This capital flight has caused a drop in the value of the renminbi and Chinese regulators have connected the dots between last year's drop in the value of the country’s currency and a corresponding rise in the value of bitcoin. Bitcoin bought in renminbi accounted for a staggering 98 percent of all bitcoin trading activity in the last six months of 2016, according to bitcoinity.org.
Eager to convert the Chinese currency into a more stable global currency and stash that wealth abroad, many Chinese mainlanders have been buying bitcoin locally in renminbi and then, using bitcoin’s blockchain technology, which allows users to safely transmit bitcoin through the Internet, they’re sending bitcoin to other countries where recipients (family members, friends or other contacts) convert bitcoin back into a local currency which can then be used to make investments outside of the country.
But why isn’t China simply clamping down hard on the whole bitcoin thing?
“You have a government that likes to retain control, and bitcoin is a decentralized currency outside of the control of any nation-state,” Christopher Burniske, blockchain products analyst at New York-based ARK Investment Management, told Salon. “So that right there is a bit threatening, but at the same time China is working to be recognized as a global leader in technology and economics and the political fallout from outright banning or confiscating bitcoin is arguably too great.”
Burniske said China may have other motives for not taking a hardline stance, such as working to develop its own form of digital currency, informally known as ChinaCoin. Early last year, the country’s central bank said it was mulling a rollout of its own digital currency.
The amount of bitcoin bought using the Chinese yuan has plummeted to less than 5 percent this week, thank to efforts by domestic exchanges to cool bitcoin trading activity with a one-month ban on making withdrawals and per-transaction fees that went into effect this month. Traders expect China’s central bank to eventually impose regulations on local bitcoin trading, too, which helped to push the price of bitcoin down. Currently the market is unregulated in China, but traditional financial institutions are barred from dealing in bitcoin.
With so much less bitcoin trading activity from mainland China, why has the value of the currency bounced back to a record high?
Some of it has to do with traders betting the U.S. Securities and Exchange Commission will approve at least one of three proposed exchange-traded funds based on bitcoin trading before a March 11 deadline. Though it’s uncertain whether U.S. regulators would actually allow trading securities based on the fluctuation in the value of bitcoin, some less cautious investors are buying bitcoin hoping the value will jump after an announcement is made. The other reason is that bitcoin has become a alternative safe-harbor investment, like gold or U.S. Treasury bonds. U.S. inflation is expected to rise this year and bitcoin is being used by some to hedge against a drop in the value of the U.S. dollar. Global political uncertainty may also be playing a role.
Whatever the case may be, bitcoin’s quick rebound from the China scare could be a sign that the cryptocurrency is becoming more mainstream, according to Burniske, being used more frequently to buy goods and services from merchants that accept it.
“This is a sign of global traction for bitcoin,” he said. “You now have more bitcoin being transacted as a means of exchange than traded as a store of value. I’m seeing this as a positive indication of bitcoin’s globally distributed support, that it’s not as reliant on China as many people believed it was just a few months ago.”