One thing is certain: The persistent rumors and the eventual confirmation of a Chinese regulatory crackdown on bitcoin and others cryptocurrencies took down the collective market capitalization, from $179 billion on Sept. 9 to $100 billion on Sept. 15.
The rest of the story is less clear-cut. The People’s Bank of China (PBOC) only officially confirmed on Sept. 4 that it would make illegal the issuance, sale, and trading of new cryptocurrencies and tokens in initial coin offerings (ICOs).
Although the price of the largest cryptocurrency, bitcoin, dropped on this news, the bitcoin network and its digital currency have little to do with ICOs, which mostly use the technology from the second-largest cryptonetwork, ethereum, or the Chinese alternative, NEO.
However, a week later the first rumors about a wholesale shutdown of all cryptocurrency exchanges in China, including bitcoin, emerged, which sent the bitcoin price dropping from a high of $4,975 to just below $3,000 on Sept. 15. The rumors were confirmed when the fifth-largest exchange, BTCChina, voluntarily announced Sept. 14 that it would cease all trading in China on Sept. 30.
1/ After carefully considering the announcement published by Chinese regulators on 09/04, BTCChina Exchange will stop all trading on 09/30.
— BTCC (@YourBTCC) September 14, 2017
Since then, and without an official confirmation from regulators, most other Chinese exchanges have made similar announcements, planning to shut down trading by Oct. 31 at the latest.
— cnLedger (@cnLedger) September 15, 2017
In the case of the ICOs, which mostly have been used for scams, the consequences are clear: They have been deemed illegal by the regulator and will most likely cease to exist in China. Even though most people knew the tokens were scams, the ability to trade them on exchanges and make huge gains attracted a mass of speculators, which kept the bubble going.
Since quick and easy trading on exchanges will now be illegal, the appeal of the ICOs for Chinese gamblers has dropped, and we will likely see them fade from the scene after the trading shutdown.
Implications for Bitcoin
For bitcoin, the exchange ban may not have such a big effect after all. The Chinese regulators have tried to limit exposure to bitcoin several times, including blocking banks from using bitcoin in late 2013 and suspending withdrawals of the currency from exchanges in early 2017.
Will that be the end of it? Chinese regulations and bitcoin price. pic.twitter.com/aH2kKOptVt
— cnLedger (@cnLedger) September 15, 2017
Bitcoin has always been a thorn in the Chinese authorities’ side. They cannot control it, and citizens can use it to transfer money out of the country, bypassing the cash limit of $50,000.
And although the price always initially dropped whenever a new measure was implemented, it went higher afterward as Chinese sought different routes to get their hands on the alternative currency. Bitcoin makes transferring their money out of the country easier and protects them from inflation and problems in the Chinese banking system.
For example, after regulators barred Chinese from taking their bitcoins out of an official exchange in January this year, the volume on the over-the-counter trading platform LocalBitcoins exploded in China, and it did again last week after the news of an exchange ban.
After the crackdown early this year—withdrawals were resumed in the summer—bitcoin trading volume in Korea and Japan increased dramatically. Although the two countries are experiencing their own crypto boom and have implemented favorable regulations, many experts believe the surge in volume is due in part to Chinese using Korean and Japanese exchanges now.
Another question is mining, the process of verifying transactions on the bitcoin network, which is mostly done by just a few companies in China.
So far, none of the statements by the exchanges or the regulators have indicated that owning or mining bitcoin will become illegal, a sign that maybe even the exchanges could reopen after they are in full compliance with regulatory standards.
The quick rebound of the price of bitcoin from below $3,000 to just above $4,000 confirms that hope remains in the future of bitcoin in China, but the recovery in price is also a testimony to the resilience of the decentralized digital currency and payment network. Even if bitcoin became illegal in China, citizens could still hold their bitcoin in wallets like Blockchain.info. They could earn bitcoin or buy them via over the counter services like LocalBitcoins.
With respect to mining, a complete shutdown of the computing power in China would make the bitcoin network slower, but it won’t go away. There are already other countries like Japan that have announced a major investment in bitcoin mining.
For instance, a Tokyo-listed company is spending over $3 million to get into bitcoin mining.
In fact, the Chinese crackdown is a great test for bitcoin, whose only promise is to serve as digital cash irrespective of having the government’s blessing. So far, bitcoin has always emerged from crises as a stronger currency. This time doesn’t look any different.