China’s Bitcoin Drama Isn’t A Financial Meltdown

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China, currently the world’s largest Bitcoin trader, has caused some complications for the cryptocurrency since the beginning of the year. The amount of Bitcoin traded in the country has plummeted from 10 million a day to 30,000-90,000 due to ‘abnormal’ changes in Bitcoin prices, spurred on by a crackdown in regulations.

Cracking down

On January 11, the central bank announced the investigation of Bitcoin exchanges in Beijing and Shanghai for potential involvement in unlawful activities, such as money laundering, margin trading, and transferring funds abroad. By the end of the day, Bitcoin prices declined more than 10%.

More than a week later, on January 22, China’s three largest exchanges ended free Bitcoin trading to curb speculation. With a fee imposed, Bitcoin trading dropped further.

And on February 9, the People’s Bank of China met with nine Bitcoin exchanges to remind them of potential risks and to curb capital flight. Later that day, the two largest exchanges, OkCoin and Huobi.com, temporarily halted withdrawals from their platforms. BTCChina too announced a 72-hour waiting period for withdrawals. Additional platforms, including BitBays, BTC100, BTCTrade, CHBTC, HaoBTC and Yunbi, imposed withdrawal constraints the next day.

The increased scrutiny has left investors are unsure what to expect going forward, as the potential for further regulation looms large. But this isn’t the first time they’ve found themselves in such a position.

A rocky relationship

Bitcoin’s relationship with China has been rocky for years.

Back in December 2013, the People’s Bank of China forbade firms from accepting Bitcoin and restricted banks from converting Bitcoin into RMB due to concerns over financial stability. Financial and payment services were prevented from participating in Bitcoin-related business. As a result of the regulations, in April 2014, Chinese banks closed down the trading accounts of the largest Bitcoin platforms.

These measures resulted in not only declines in trading volume and Bitcoin prices, but also panic among investors.

Bitcoin Prices, December 2013 through February 2017

Source: Bitcoinity

Bitcoin prices plunged 29% between December 5 (when regulations were announced) and the end of the month. Prices rose steadily toward the end of 2015 as Chinese investors gained interest in the virtual currency, but it all feels like deja vu now.

Charles Hayter, CEO of CryptoCompare, stated in January, that“the market has gone from being led up by the Chinese to dragged down by panic.”

Another major market meltdown?

But despite the current Bitcoin market roller coaster ride, we have to put things into perspective. This isn’t the Chinese stock market meltdown of 2015.

Just before that crash, the total market was valued at over $10 trillion and the Shanghai Stock Exchange made up $5.9 trillion of that sum. In just two weeks, it lost 30% of its value. The losses were enormous and affected investors large and small, resulting in financial panic due to the bursting of the stock asset price bubble.

Bitcoin’s recent price fluctuations are not as large and have been relatively contained among a smaller set of investors. The total amount of Bitcoin is also limited to a much smaller dollar sum.

The total number of Bitcoin in existence amounts to 21 million, so when the price reaches $1,000 (as it recently has), the total volume is worth $21 billion, and at $900, close to $19 billion. Considering this is a global market, $19-21 billion is not much. And the Chinese share of this are even less. The market is not a major financial one by any means, and its ties to the real economy are limited.

Good for the long game

What’s more, regulations are not anathema to a functioning Bitcoin system. Even though they have led to investor panic now, in the long run, they should be viewed as a positive development toward legitimizing the use of the cryptocurrency.

Volatility and panic associated with the implementation of these regulations should be taken in stride as normal side-effects of reining in a burgeoning market. Certainly, the wild ride and decreased trading volume in China have created new winners and losers in the Bitcoin market. However, the fact that Chinese regulators are taking Bitcoin seriously should be a positive sign for users.

Follow me on Twitter, at @SaraHsuChina.