Here’s why bitcoin is tumbling

BI Intelligence

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The price of bitcoin continues to fall, and the digital currency has fluctuated wildly in recent weeks:

Following major success, including a 120% gain, in 2016, and crossing the $1,000 mark for the first time since 2013 in the first week of January, bitcoin is now down more than 17% from the beginning of the year. 

Its decline is due largely to recent events in China, which have investors worried that the government is planning a crackdown on the asset. Such fears have heavily impacted bitcoin’s value, as China accounts for a disproportionate volume of global bitcoin trading. 

Here is how events in China are driving down the price of bitcoin:

• Perceived government hostility. Early this week, the People’s Bank of China (PBOC), the central bank, cautioned investors to be “rational” toward bitcoin investments in a published statement, given the asset’s lack of stability. The statement also reiterated the PBOC’s stance that bitcoin is not a currency and cannot be traded as such in the markets. This may have put both domestic and foreign investors on the alert.  
• Meetings with China’s largest bitcoin exchanges. As the above statement was published, the PBOC, which also acts as China’s regulator, began meeting with representatives of China’s largest bitcoin exchanges, including BTCC, Huobi, and OKCoin. This sparked concerns that the meetings presaged a limit on outflows, though the exchanges in question denied the rumours. They emphasized that the meetings were only to underscore the importance of bitcoin exchanges continuing to abide by existing relevant regulations. However, the very fact that the meetings were taking place was seemingly enough to unnerve investors, regardless of their content or outcomes. 
• Bitcoin exchange inspections. Despite the reassurances from China’s bitcoin exchanges, the PBOC said on Wednesday that it would continue on-site inspections of major exchanges in Beijing and Shanghai to guard against market manipulation and money laundering, among other offenses, according to Reuters. While BTCC’s CEO hurried to point out that such inspections are routine in China, the PBOC’s announcement nevertheless added to investors’ jitters. 

The fact that rumor alone is negatively impacting bitcoin points to its inherent weaknesses. It is worth noting that the PBOC has not explicitly accused any of the exchanges it is inspecting of any violations, nor has it announced a crackdown on bitcoin trading — but the digital currency has continued to suffer anyway. This suggests that bitcoin may not be immune to the actions of a single country, as we previously thought.

The impact of mere rumors of a Chinese crackdown have made this clear. This means that the boost bitcoin saw in 2016 from geopolitical turmoil in Europe after Brexit, and in the US after the presidential election, is by no means guaranteed to last. 

Blockchain technology, which is best known for powering Bitcoin and other cryptocurrencies, is gaining steam among finance firms because of its potential to streamline processes and increase efficiency. The technology could cut costs by up to $20 billion annually by 2022, according to Santander.

That’s because blockchain, which operates as a distributed ledger, has the ability to allow multiple parties to transfer and store sensitive information in a space that’s secure, permanent, anonymous, and easily accessible. That could simplify paper-heavy, expensive, or logistically complicated financial systems, like remittances and cross-border transfer, shareholder management and ownership exchange, and securities trading, to name a few. And outside of finance, governments and the music industry are investigating the technology’s potential to simplify record-keeping.

As a result, venture capital firms and financial institutions alike are pouring investment into finding, developing, and testing blockchain use cases. Over 50 major financial institutions are involved with collaborative blockchain startups, have begun researching the technology in-house, or have helped fund startups with products rooted in blockchain. 

Jaime Toplin, research associate for BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on blockchain technology that explains how blockchain works, why it has the potential to provide a watershed moment for the financial industry, and the different ways it could be put into practice in the coming years.

Here are some key takeaways from the report:

• Spending on capital markets applications of blockchain is expected to grow at a 52% compound annual growth rate (CAGR) through 2019, according to Aite Group, to reach $400 million that year.
• Banks and major financial institutions are working both collaboratively and independently to develop blockchain tech. Over 50 major financial institutions are involved with collaborative blockchain startups, like R3 CEV or Chain. And many are investing in the technology on their own as well.
• Putting blockchain to use for real-world transactions is likely not that far off. If working groups’ tests are successful, firms could be using it to transact real value as early as the end of this year and we could see widespread industry application within the next few years. 

In full, the report:

• Examines the funding increases that are pouring into blockchain
• Assesses why blockchain is becoming so popular and what factors are driving up increased research and development
• Explains in full how blockchain technology work and what assets make it valuable and vulnerable
• Identifies pain points in the financial industry and profiles how various firms are using blockchain to solve them
• Demonstrates the challenges to mainstream adoption and their potential solutions

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