HONG KONG/BEIJING -- Bitcoin has experienced another epic rise and fall in China, home to most of the trading in the virtual currency, with actions by the authorities hastening the sell-off just as they did in 2013.
After hitting a record high in yuan terms, bitcoin lost roughly half its value in the space of a week. It reached 8,896 yuan ($1,290) on Jan. 5, according to Shanghai-based bitcoin exchange BTCC, topping the high set in 2013. Then came a plunge precipitated by an upturn in the offshore yuan.
Increased oversight by People's Bank of China added a sense of urgency to the correction. The central bank announced Jan. 6 that it had told bitcoin exchange executives in a meeting to play by the rules. And this past Wednesday, the PBOC said it had begun spot checks of exchanges for evidence of money laundering or other wrongdoing. With the authorities seemingly intent on curbing bitcoin trading, the cryptocurrency tumbled to 4,890 yuan on Thursday -- the lowest since November.
Bitcoin provides Chinese with both a way to skirt tight limits on foreign exchange transactions and a vehicle for speculation, alongside stocks and real estate, in a country starved for investment options. Hot money in China drove up the value of bitcoin more than 10-fold in just two months in 2013. The bubble proved short-lived, and the PBOC pulled the trigger. The central bank has only scorn for the notion of bitcoin as a real currency that could threaten the yuan's primacy and bans financial institutions from dealing in it.
The PBOC as recently as Jan. 6 reiterated that virtual currencies are "virtual goods," not legal tender. The latest warning comes as bitcoin serves as a facilitator for unwanted capital outflows. President Xi Jinping and others in the Chinese leadership have indicated zero tolerance for asset price bubbles in their economic agenda for this year. Bitcoin will prove no exception.
PBOC out to 'legitimize,' 'harness' bitcoin
Bitcoin exchange operators have remained calm, at least outwardly, knowing it is probably unwise to challenge Chinese regulators. Bobby Lee, co-founder and CEO of BTCC, told the Nikkei Asian Review that "it was more of a colloquial dialogue, and the People's Bank of China was asking us" for cooperation on "how they should regulate bitcoin."
Despite bitcoin's recent volatility, Lee is "optimistic." He said China's regulatory framework, including a license requirement, should lead to healthy development of the virtual currency.
OKCoin CEO Star Xu revealed that the Beijing-based exchange has been in discussions with the central bank since last week. "The overall goal [of the regulation] is to ensure financial market stability, guard against financial risks and regulate market transactions," he told the Nikkei Asian Review by email. While he does not expect any immediate measures against bitcoin, he said OKCoin would have "no problem with strictly complying with any regulatory decision."
Aurelien Menant, founder and CEO of Hong Kong-based Gatecoin, echoed this sentiment and thinks the central bank is "helping to legitimize our industry and should help to sustain its long-term growth."
The PBOC has no intention of crushing bitcoin, argued Ross O'Brien, a technology analyst and managing director at Intercedent Hong Kong. "It is pretty clear that they value and want to be able to harness it to create their own cybercurrency," O'Brien said.
China accounts for 90% of global transactions in bitcoin, with bitcoin-yuan the most important pair. Yet the country does not recognize bitcoin as a legitimate currency. Expect bitcoin's value to continue ebbing and flowing with the rush of speculative money against regulators manning the exits.