Happy (Lunar) New Year!
The biggest news in the bitcoin world this week, bigger even than the medley of price predictions, was the update from China regarding regulation and government involvement in Chinese bitcoin exchanges. The dominant movers in the bitcoin exchange ecosystem have long been Chinese exchanges, which typically offer no-fee trading and high liquidity. Among the unknowns that traders must consider when using Chinese exchanges is the unclear regulatory environment. The government of China, which controls most facets of the economy, has turned a blind eye toward bitcoin and other cryptocurrencies. Lack of regulation meant tacit approval, and traders have made the most of it.
Though most bitcoin believers dislike the idea of government regulation, in this instance, regulation would be welcomed with open arms. The regulation of bitcoin in China would represent the formal acceptance of the digital currency, an upgrade over the current mixed messages. The recent “inspection” of three leading bitcoin exchanges stoked fears of a crackdown by Chinese authorities, a significant blow to the bitcoin ecosystem. But the result has instead been apparent acceptance by the authorities rather than regulation or arrests. The authorities were possibly concerned by capital flight related to economic reports in China of pending downturns owing to thoughts of property bubbles and stock market uncertainty. Exchanges made some changes to trading, including limiting leverage that was previously offered as high as 100x, and likely reflect concerns about risk and fraud.
This government involvement signals a big positive for bitcoin in China, and for traders of the cryptocurrency in general. Though leading exchanges remain unregulated and trading volumes and order books remain unverifiable, the implication is that no wrong-doing was apparent to government investigators. Of course, the Chinese government could have had concerns other than the fiduciary responsibility of exchanges to their customers, but outright fraud or theft would have most certainly drawn their ire. The end result for bitcoin users and traders is the successful passage over another hurdle; an increase in price led to an increase in trading, and this trading was done in a satisfactory way according to the Chinese inspectors. For an industry marred by fakes and frauds, this is improvement.
While exchanges offer liquidity to most users, over the counter (OTC) trading is a growing segment of the bitcoin economy. The recent price jump has rekindled interest in the digital money, and large investors who don’t want to risk slippage on an exchange have sought out OTC firms that provide large quantities for fixed prices. Sustaining an OTC industry is another good indicator for bitcoin believers, as money entering the bitcoin ecosystem will fuel future development and interest. Of course, all the recent positives are still related to the price of bitcoin. The price has been up, but the price has also been down. For all the talk of “fundamentals,” bitcoin’s survival is still at the mercy of price fluctuations.
The movement of bitcoin in 2016 was at best lateral. Little progress was made in accessing mainstream markets, and a number of bitcoin firms closed up shop. Hacks and fraud remained prevalent. The year ended on a significant high note, though, as the price crossed $1100, a massive increase. This drove interest and relevance, bitcoin was back in the mainstream media for several weeks. The year 2017 has seen a sharp downturn, and if the price continues to drop, interest may follow. The good news for bitcoin believers is that China hasn’t shut the door to bitcoin. Now the industry has to figure out how to open the door to the mainstream consumer.
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