China Regulates Bitcoin

The price of bitcoin has stabilized in the low $800s. This isn’t to say that’s a permanent or even temporary bottom, because we saw the stabilization in the $900s vaporized within hours. However, I do have reason to believe the chance that the correction is over is higher than it was before because of progress the Chinese government has made on the regulatory front. I’m not one to agree with regulations, but, for clarity’s sake, it’s better to have them done with then to have them hanging over the market causing uncertainty.

As someone who is a proponent of bitcoin, I have experienced the flawed arguments against bitcoin. I find the gold bugs to be hypocritical because they make the same arguments that others in finance who don’t like gold make to them. You would think they would recognize the irony in what they say. To be clear, I think’s wise to own both because bitcoin works better on the internet, but gold has the historical precedent of being highly valued for hundreds of years. Because of game theory, it will never make sense to not value gold. You value gold because someone else values gold. It would be impossible to change enough people’s minds to make them believe it is just a yellow rock.

The gold bugs make the argument that bitcoin doesn’t have intrinsic value. That’s the same thing that people who don’t like gold say. They say it has no cash flow and doesn’t do anything. Yes, gold is used in jewelry, but I’d argue that part of the reason it is used in jewelry is because it is highly valued. The critics are right that gold doesn’t have much intrinsic worth (besides some industrial uses), but their argument doesn’t work in practice because of the game theory I described earlier.

The only thing different for bitcoin is that it is newer and isn’t tangible. While newness leads to uncertainty, bitcoin’s mathematic innovations overcome that. Clearly they have, because gold bugs continue to be wrong in their predictions that it will to go to zero. If you think gold and bitcoin are worth zero, then you don’t understand human nature. People use every form of currency because others accept it. This feedback loop cannot be broken. Finally, I don’t see how bitcoin’s lack of tangibility matters if it doesn’t have intrinsic value anyway. Holding gold in your hand doesn’t give you any benefit. You can argue that for some people tangibility matters, but we’ve seen dollars become pixels on a screen without a problem, so I don’t this will prevent bitcoin from being widely adopted.

Now I will review the new regulations pushed by the Chinese government. The Chinese bitcoin exchanges halted their lending-based bitcoin trading services. In other words, there’s no more levered margin accounts for bitcoin trading. Ironically, the initial movements by the Chinese government to clamp down on speculation already crushed many Chinese speculators who were using levered margin accounts. The Chinese government is telling the traders they can’t use a method which just cost them their money. I doubt many were interested in using margin accounts after the crash in prices anyway!

Huobi, OKCoin, and BTCC adjusted their terms and conditions, but only BTCC made a statement. The statement made the point that the People’s Bank of China made “informal guidance” which caused the elimination of levered margin trading. The question which is unanswered is if this change is permanent or temporary. The language ‘informal guidance’ is code for force. There isn’t any way to not follow the orders of a communist regime without being shut down.

Getting rid of levered margin accounts hurts liquidity, but may limit volatility. As a proponent of free markets, I think the Chinese government should let traders take as much risk as they want. However, I do recognize that if the government only wants to shut down levered margin accounts, it is a good signal. If it wanted to shut bitcoin down, it would have tried to do so. Instead it wants to work with bitcoin exchanges. This is a step in the right direction which reinstates my point that China wants to embrace free markets, at least partially. The market agrees with me as the price of bitcoin is up 2.16% today.

The most common argument against bitcoin is that it is too volatile. I have refuted this claim by making three points. Bitcoin is young so volatility will decline over time. Bitcoin is small so volatility will decline when it gets larger. The final point is the volatility has already been declining as it gets larger and older. China reacted to bitcoin reaching over $1,000 in a similar way in 2013. It said bitcoin isn’t money and then restricted financials from getting more involved with it. As I said, there’s 30 times more trading now than in 2013 which is why volatility is lower. There’s no reason to panic about there being a repeat crash of that magnitude.

An article on Coindesk quantified the point that volatility has decreased since 2013. The chart below shows the level of volatility surrounding both PBOC announcements. The shock to the system was lower. It could mean that at some time in the future, a PBOC announcement will cause even less angst among traders. This may cause further crack downs, but given the fact that this series of regulations wasn’t worse than the last, I’m not expecting that to happen.


The chart below shows the same information in a different manner. One additional point it evidences is that the relative volatility increased more in the week after, in 2017. This may be caused by traders having flash backs to 2013.



Bitcoin is doing well with China’s recent actions. Clarity has been reached which signals to me that the worst declines in the price are possibly over. Keep in mind that the gold bugs who are claiming bitcoin is worthless are being hypocritical. Part of the reason for this is bias. Some people involved with bitcoin may be biased against gold for the same reasons, but I haven’t seen them get as much coverage. It makes sense that critics of a new technology would be louder than those involved with it because the people in bitcoin are too busy focusing on growing the platform instead of bickering.

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