UPDATED on 5th December at 17:30 GMT
The price of bitcoin has climbed back up to $1,012, according to the Coindesk BPI.
The price of bitcoin fell by $300 on popular exchange Mt. Gox this morning after China's central bank warned financial institutions to steer clear of the digital currency.
According to the People’s Bank of China, it doesn't consider bitcoin a threat to China's financial system, but it does believe the digital currency carries significant risks.
“The concern is that it interferes with normal monetary policy operation,” Hao Hong, head of China research at Bocom International Holdings Co. in Hong Kong, told Bloomberg.
“It represents an unofficial leakage to the current monetary system and trades globally. It is difficult to regulate and could be used for money laundering. I think the central bank is right to make this move," he added.
On a positive note, the bank didn't ban trading platforms, such as BTC China, from dealing with bitcoin and other digital currencies, it merely said these companies have to register with authorities.
The trading platforms were also told that user anonymity is not permitted – the exchanges must receive identification documents from their customers. Plus, they must report any suspicious transactions to the authorities. The bank claims that this measure will “effectively prevent money laundering associated with bitcoin”.
Although the bank clearly stated that it would allow individuals to freely use bitcoin, the announcement has already caused a massive price drop on several exchanges, namely BTC China. In heavy volume trading earlier this morning bitcoin lost roughly 10% of its value in a matter of hours.
The opening price on BTC China was 7,005 CNY, but it quickly shed more than 10%, with the lowest bid coming in at 4,521 CNY. At the time of writing, the latest price on CoinDesk’s Bitcoin Price Index was $889.01, with a daily change of -22.5%, or $257.23.
The volume of transactions on BTC China spiked shortly after the bank's statement was published at 07:45 GMT. At this time, the volume of trades was 225.71 BTC, increasing by a massive 2975% to 6940.85 BTC over the next 45 minutes.
Garrick Hileman, an economic historian at the London School of Economics, said that, as he warned in his piece for CoinDesk last week, the Chinese regulatory situation has shifted unexpectedly, resulting in a significant negative impact on bitcoin’s price.
"China is arguably the largest enforcer of financial repression and the paradox we observed there prior to today has, as expected, now been resolved," he added, going on to say:
“What was less clear last week is how much impact a sudden shift in China’s regulatory posture, and a large drop in the price of bitcoins traded in China, would have on the price of bitcoins traded outside of China.
Given the pullback we’ve observed in the Bitcoin Price Index it’s clear now that what happens in China also matters a lot outside China.”
Defining bitcoin and its risks
In a Q&A-style post on the bank's website, the institution said that it does not consider bitcoin a true currency. Roughly translated, it said:
"Some people call bitcoin "currency", but because it is not issued by the monetary authorities, it is not truly money. Bitcoin is a virtual good, it does not have legal status and cannot and should not be used as currency in circulation in the market."
Although the total value of bitcoins in circulation is dwarfed by national currencies, Chinese authorities seem to be taking the issue very seriously. Many Chinese citizens are investing their savings in bitcoin and some even argue they are basically hoarding the currency. This also represents a risk in terms of price fluctuations, as many speculators have no qualms about leaving the market at the first sign of trouble.
The post puts a heavy focus on the risks associated with digital currency, stating that the public currently lacks an adequate understanding of bitcoin.
It highlighted the volatility of the cryptocurrency as one of its biggest dangers plus outlined the potential of its use by criminals, hackers, illegal trading sites/scams and money launderers.
The bank is keen to prevent money laundering using bitcoin, so it is putting appropriate measures in place to target this kind of criminal activity.
The boom of bitcoin in China
Bitcoin has become extremely popular in China over the past few months, with some of the largest mining operations taking place there and BTC China becoming the world’s largest-volume bitcoin exchange.
Not only did BTC China beat Mt. Gox and Bitstamp to become the world’s highest volume bitcoin exchange, it recently secured $5m in funding from Lightspeed Venture Partners' local arm Lightspeed China to expand its operations further.
Also, back in May China surpassed all other countries in terms of downloads of the original bitcoin client, Bitcoin-Qt.
According to Bitnodes, China is now home to the world’s second-highest number of bitcoin nodes with 14,100 online in September, which represented 11.3% of the global total.
This recent statement from the People’s Bank of China follows comments made on 22nd November by Yi Gang, the deputy governor of the bank, who said it would be impossible for China’s central bank to recognize bitcoin as a legal, legitimate financial instrument “in the near future”.
Perhaps more significantly, he added that people should be free to buy and sell bitcoins on exchanges with no interference from the central bank, and that he would personally look at the digital currency with a long-term perspective.
The price of bitcoin is likely to fluctuate throughout the day as those involved in the space try to figure out what exactly this new development means for bitcoin in the short- and long-term not just in China, but globally.
Stay tuned for more updates to this story.
Co-authored by Emily Spaven and Nermin Hajdarbegovic.