Bitcoin Crashes Over 60% after China Bans Deposits.

Bitcoin reached a peak near $1230 per BTC on November 29th; by today, the value of a Bitcoin has crashed to nearly $450, losing over 60% of it’s value in only a little over two weeks. The beginning of the crash was largely in response to an announcement from the People’s Bank of China, when they declared it illegal for any bank operating in China to facilitate Bitcoin transactions.  As the Financial Times reports:

 With its booming market for commerce, China had been seen by Bitcoin enthusiasts as fertile ground for the virtual currency. However, regulators were concerned that people could use Bitcoins to skirt the country’s capital controls. They also grew alarmed at the rampant speculative demand for Bitcoins, warning it had the makings of a bubble.

The Chinese central bank took a hard line two weeks ago, banning the country’s financial institutions from handling Bitcoin transactions.

Although the People’s Bank of China said individuals were still free to trade it at their own risk, the ban on third-party payment service providers from doing Bitcoin business effectively makes new purchases of the virtual currency impossible.

“I’m not that surprised,” said Hong Hao, chief China strategist at Bank of Communications. “Even if the amount of Bitcoin in circulation wasn’t that large yet, it was a potential threat to the monetary system.”

An asset that loses over 60% of value in two weeks is undergoing a true crash. All is proceeding as I have foreseen.

Nobody should be surprised by this. Why would any Central Bank want to allow Bitcoin to operate freely alongside the national currency? Control over the money supply is a key element of control for politicians and bureaucrats. I do not think that Bitcoin has been or will ever be a real threat to any major fiat currencies, but Central Bankers are made uneasy by the virtual currency nonetheless. Of course they would want to shut it out; and they have the power to do so, as we’ve just seen. The Federal Reserve can follow suit and do the same thing at any time.

All the Federal Reserve has to do to squash Bitcoin is threaten to expel any banks who deal with Bitcoin from the official banking system. The US Treasury’s Financial Crimes Enforcement Network is already eyeballing new laws on businesses that deal in Bitcoin. The Drug Enforcement Administration and Center for Missing and Exploited Children have both already voiced their concern over Bitcoin’s use in illicit transactions. I have not yet heard anything from the Department of Homeland Security, but I would not be surprised if they have already started grumbling about the possibility of Bitcoin being used to fund terrorism on the sly. I can easily see the Federal Reserve, with the aforementioned concerns in mind, declaring Bitcoin transactions illegal in the official banking system. The banishment of Bitcoin from the Chinese banking system was bad enough; after being banned from the American Banking System, I can hardly see how Bitcoin would survive at all.

For Bitcoin investo-maniacs who were hoping to make a quick speculative buck, this is terrible. They’ve lost a lot of money in a very short amount of time, and I don’t think they’ll get it back anytime soon. However, I’ll say this: For real-deal Bitcoin enthusiasts who want to see it become a true currency, this is probably for the best. For Bitcoin to become a real currency, it is best for it’s value to remain fairly low and as stable as possible. Stability is the key. The wild ups and downs of Bitcoin are more suitable for a slot machine than a currency. If Bitcoin can stay moderately low and extremely stable for a long period of time, that will bode better for their hopes.

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