There was a new report today that continues the narrative of the People’s Bank of China further intervening with bitcoin. However, the action didn’t lead to the price declines which previously occurred with past announcements. There was a burst of volatility after each part of the report came out, but the price of bitcoin recovered from then and is now at $894. This may show any action by the Chinese government has been priced into the market. This is a great sign. It’s not about the price going higher; it’s about maintaining stability.
Critics of bitcoin like to pronounce its death every time the price declines, so the more we can avoid this, the better. To make an analogy, this is like someone saying a company like Schlumberger is going bankrupt because the stock was down over 45% after oil prices fell. The rebuttal to the claim that bitcoin is worthless is 8 years of data of it having value. While some people not believing in bitcoin does nothing to the price, media reports make the public skeptical of it which hurts potential adoption. A story can be framed to make someone have a desired opinion. If a report begins with, “bitcoin, the cryptocurrency alleged to be used for illegal activities” it will confuse the public.
The biggest question bitcoin faces is whether the technology can overcome the negative discussion of the potential harm it can do. Most new technologies can be used for bad things, but it doesn’t make them fundamentally bad. Bitcoin being built on the internet has the perfect outlet to provide information which counters the mainstream media reports. The only positive reported by mainstream outlets is when the price appreciates. Other stories need to be reported to explain how it can be used and its advantages. This why I consider the chart below important. It shows the traffic ranking Coindesk has. I consider Coindesk to be the best place to find out information on bitcoin, so its improving traffic ranking is healthy for bitcoin.
I write for Seeking Alpha. The company recently put out a note asking for writers to post about bitcoin. This means traffic from retail investors searching for bitcoin articles is growing. This also could’ve been a bad omen because whenever someone who doesn’t usually discuss a financial instrument, starts talking about it, it means the price has gone up too fast. In my own personal life, my uncle, who isn’t in finance, tells me he hears the Dow is going to 50,000. This is another anecdotal, but useful bad omen in terms of analyzing human psychology.
There have been a few trends within bitcoin in terms of conventional wisdom. Many are willing to accept blockchain technology, but not bitcoin. I’m in favor of anyone utilizing the technology to solve a problem. One potential advancement is smart contracts. While the blockchain can solve other problems, it’s important to not go along with the latest trends which claim bitcoin can never work as a means of exchange. I recognize it will take time for the consensus to move in my direction which is why I support any positivity surrounding the currency.
Getting back to the Chinese intervention, Beijing News reported that margin trading and short selling violations were found at the bitcoin exchanges OKCoin and Huobi.com. Violations were found at BTCC as well. These were unauthorized businesses and illegal margin businesses according to Shanghai Security News. I have used Google Translate to read this story on the Beijing News in English, so it may be slightly imperfect. It seems to say ‘on site’ investigations will lead to a policy announcement on Friday. According to the People’s Bank Business Management Department the violation of regulations is the cause of the latest volatility in bitcoin’s price.
As you may have gleaned from my previous posts, I think these interventions are a terrible idea. As far as I’m concerned, the Chinese government is making up these violations to create an excuse to intervene in the market to prevent people from using bitcoin as a method to skirt the capital restrictions. This skirting of capital restrictions and speculation is the reason for the rise of bitcoin’s price. Therefore, the government is mad at the free market for something it caused. The question is how far the government is willing to go with its bullying tactics.
The response to this announcement by the bitcoin community was similar to past responses which aimed to downplay the latest news of government interventions with the exchanges. Eric Zhao who is an engineer at the Chinese Academy of Sciences said the announcement was “to be expected.” I agree with this sentiment because the Chinese government has been getting more involved with bitcoin without totally shutting down the bitcoin exchanges. Eric Mu who founded a bitcoin mining firm said the report was “nothing new.” BTCC issued the statement which said “BTCC will continue to actively cooperate with the central bank and its associated departments and carry out rectifications. BTCC is currently operating normally.” This is a standard boiler plate response aimed to calm the market and customers. The CEO of BTCC, Bobby Lee, said he’s “open to all ideas and modifications.”
In the past two Chinese actions, I have said these bitcoin people who were putting a positive spin on the announcements were expressing bias. The market clearly was worried. I sided with the market and stated these actions were negatives for bitcoin because removing margin trading hurts liquidity and every move hurts confidence in the system. In this latest case, the market was able to recover from the initial sell-offs as you can see from the chart below. The current price is $894, so it isn’t worse for wear. It’s uncertain what the penalties for these supposed violations will be. The fact that the market isn’t reacting to PBOC actions may ruin the incentive for the government to make pronouncements. The manipulation not working either means the government will leave bitcoin alone or it will come up with a bigger measure which does move the market. The future price of bitcoin will depend on which path the government takes.
