by Jamie Holmes
China’s central announced the launch of ongoing spot checks on Chinese bitcoin exchanges on January 11, forcing the price of bitcoin down even further, trading just below $790 at the time of writing. While there has been no statement made that the appropriate regulations are not being adhered to, the People’s Bank of China (PBOC) said its probe was to examine whether exchanges were breaking the rules regarding "market manipulation, money laundering, and unauthorized financing."
By cracking down on bitcoin exchanges, the Chinese central bank is looking to stem the skydiving value of the Yuan, driven by capital outflows. Concerns about the excessive enforcement of regulatory control or oversight could impact on volumes, creating a bearish outlook for BTC-USD in the short term. The latest move which spooked the markets may drive away volume, interest or precipitate more appetite for downward momentum, especially in light of any misconduct.
However, the move lower exhibited by bitcoin could represent a long-term buying opportunity. The probes may find no wrongdoing; the central bank may just be eager to learn more about the ecosystem and aim to apply some sensible regulations. In this case, the latest development is just the start of the journey toward a more robust and credible market, followed by wider adoption and greater stability.
As stated by Reuters, the PBOC said it visited BTCC in Shanghai, noting its checks "focused on whether the firm was operating out of its business scope." The PBOC officers also paid a visit to the Beijing offices of OKCoin and Huobi stating, "spot checks were focused on how the exchanges implement policies including forex management and anti-money laundering."
CEO of BTCC, Bobby Lee, stated he believes the exchange has not acted out of line, “I wouldn't call it an investigation. I think they are working closely with us to learn more about our business model and the bitcoin exchange industry.” The exchange expects to continue with additional meetings during the week, according to a statement given January 11. As Lee notes, this could be the start of some meaningful, positive regulation:
Very excited that we can finally openly talk about & acknowledge these important mtgs!
Road to successful Bitcoin regulation is always long. https://t.co/7kyFCFBGAM
— Bobby Lee (@bobbyclee) January 11, 2017
So the inspections may be a matter of cleaning out the bad actors and verifying the legitimacy of bitcoin.
But as the Chinese central bank is fighting the foreign exchange market on multiple fronts, it cannot keep up the balancing act for much longer, with SeekingAlpha columnist David Deuchar making an interesting point:
"It [China] must soon make a choice between the following options: 1) Open free capital flows (bad in short-term; good in long-term) by allowing a floating exchange rate. 2) Maintain the fixed exchange rate by restricting capital movement further. 3) Maintain the fixed exchange rate by giving up independence of monetary policy (e.g. interest rate policy)."
With Deuchar suggesting China is avoiding the first choice, instead, restricting capital movement to control their exchange rate. Restricting bitcoin and other forms of capital outflows further may exacerbate the problem even further. Instead, China should allow a floating exchange rate to encourage investment and stop capital outflows. A short-term loss in capital outflows will be compensated for by the long-term investment flows into productive enterprises, driven by the price signal, undistorted as the exchange rate floats freely.
The other possibility is a regime of capital controls to maintain a fixed exchange rate, which will act to devalue the currency over the long term. Deuchar argues no matter which way China decides to go; Bitcoin will thrive.
Looking at the PBOC probes from a different perspective, to escape US hegemony of the global economy, you must escape the US dollar. Gold has served this purpose to some extent, with Russian and Chinese central banks aggressively stocking up on the yellow metal. Given some similar properties between bitcoin and precious metals, as well as some advantages, eventually, we could see a shift in global reserve currencies to include cryptocurrency as well.
Bitcoin was predicted to be the sixth largest reserve currency by 2030 in a study based on interviews with leading bitcoin companies, where governments and institutions will hold the cryptocurrency as part of their foreign exchange reserves. With the PBOC spooking the markets, have they resultantly stumbled upon a more favorable price to add to their reserves the most battle-hardened cryptocurrency, bitcoin?
One anonymous bitcoin trader, who predicted the start of a Mega Bull Cycle for BTC-USD on December 8, 2016, when the price was hovering above $750, has suggested insider trading may have taken place, precipitating the recent sell-off. The anonymous blogger argues that exchanges were "aware in advance" of the PBOC probes and meetings and participated in shorting in advance of the panic that was to surface. While according to his (or her) analysis the Mega Bull Cycle for BTC-USD is still in place, the sell-off has yet to test a key support around $650, highlighted by the yellow dotted line below. Under the prediction based on cycles in the price of bitcoin, the most conservative target is just above $2,600, where the analysis points to a fresh all-time high for BTC-USD February 16, 2017.
While the market is still feeling tremors from the shockwave unleashed out of China, the worst may be over. Nevertheless, ongoing reports emanating out of China will hold a significant bearing over the market’s psychology. Support at $890 has been broken, suggesting the upward trend is invalidated. But if the fundamental support provided by the Fibonacci level at $778.85 remains intact, this will provide some hope for bulls. There could be a great buying opportunity, which may not be that obvious, that could present itself in the days to come.