What we learned from China's BTC Exchange crackdown
This week, Chinese authorities decided it was time to crackdown on the cryptocurrency market. The move is ostensibly aimed at protecting Chinese consumers, many of whom have gotten caught up in the recent ICO bubble that has swept the globe. Before I talk a bit about what I've learned from China's BTC exchange crackdown, I think some calming words from my favorite cryptocurrency analyst, Simon Dixon are instructive here...
My guess is the wise institutions will be using this fear (generated by the closures) to accumulate into the retail selling volume of people panicking. And I think there will be a lot of institutional buying here as the ideal way to go your hands on some Bitcoins. It will be a race for the cheap ones.
Listen to more of Simon's remarks in the video at the bottom of this post or follow him on Twitter for some of the most poignant and timely thoughts on cryptocurrency you're ever likely to find.
There might not be a way to buy Bitcoin in China anymore
Earlier this year, Chinese authorities took steps to crackdown on artificial cryptocurrency trading volume in the country. There was speculation that 'fake volume' was being created within Chinese exchanges. When the regulators got wind of this, they moved in to clean up the system and remove any bad actors. This was seen as a positive move by many cryptocurrency analysts and enthusiasts who wanted to see an end put to those fake transactions. Tone Vays of World Crypto Network was one such analyst who saw this move by regulators as a huge positive for the Bitcoin network generally.
Way before this ICO boom got out of control, Chinese exchanges were on lockdown, with regulators freezing some assets and preventing withdrawals and deposits in many cases. The exchanges were initially cooperative with regulators, to an extent at least. The authorities were most concerned about various kinds of leverage trades, understandably because these raise of whole slew of concerns and mean that the contents of the trade are treated like any other kind of derivative. Then the exchanges were asked to go through an exhaustive know your customer (KYC) process to ensure they were representing their interests.
Earlier this year, all these changes seemed to be having a positive impact. The Chinese Bitcoin Exchanges looked to be transforming into standard regulated financial institutions. Much like what has happened in Japan over the past few months. But in the wake of the recent ICO boom, those same Chinese authorities have now demanding the closing of all Bitcoin exchanges based on the mainland of the country. The decision was reportedly taken largely in response to recent ICOs and as a means to protect Chinese consumers.
Don't despair - exchanges may still re-open
Given that this massive and unprecedented closure of exchanges has happened in response to the recent ICO bubble, there has been some speculation that it will only be a short-lived ban. China's peer-to-peer lending industry underwent a similar transformation back in January. Consumers were being placed at risk from dodgy dealers in the space who were walking away sometimes with the equivalent of thousands of $ in unfulfilled transactions. When regulators stepped in, it brought stability to the industry, largely removed fraud form the system and made peer-to-peer lending feasible and safe for Chinese Consumers.
Never rely on exchanges to store your cryptocurrency
This crackdown by Chinese regulators is yet another reason why Bitcoin users should use Bitcoin as it was originally intended. This means keeping a copy of the blockchain on your computer and by storing your own currency in a wallet on a spare computer or in cold storage. Bitcoin's economics really haven't changed that much. If you're using Bitcoin as intended, you're much less exposed to the risks associated with disagreements between exchanges and regulators.
Mining still wins for fluctuation insulation
In my opinion, cloud mining is still the best way to insulate yourself from price fluctuations in Bitcoin. These fluctuations come all the time. Whether it's another Hard Fork, a stupid comment from a banking Exec like Jamie Diamond or some kind of speculation that regulators are going to drop the hammer. The highly-volatile price of any cryptocurrency makes entry and exit points incredibly difficult to pick. Why bother? Buy some hashpower and forget about it for the next few years. It's the safest way to invest in Bitcoin or Ethereum right now, especially if you're an emotional investor.
Chinese mining hashpower won't change - may even increase
In fact, there's a chance this measure will actually spur a massive investment in Chinese Bitcoin and Ethereum mining. With all mainland exchanges being shutdown, there might not be any other way for Chinese Bitcoin and Ethereum enthusiasts to get access to the currencies. With the relatively cheap cost of electricity in some parts of China, there may be a push towards mining rather than buying through offshore exchanges. What amount of hashpower will Chinese miners add in the coming weeks and months? It's difficult to know at this stage and nobody is really speculating. But it's likely that a large amount of this hashpower will come from new miners in China trying to transition to mining as a way to acquire Bitcoin.
Japan, South Korea and Hong Kong set to benefit
At one point in its history, some 90% of Bitcoin transactions were taking place within China. That's a massive amount of market share, even for the world's most populous country. Now, with exchanges closing, it seems unlikely that the demand for Bitcoin in China will go with them. Who benefits? More than likely, those same exchanges will re-locate to Hong Kong and may be able to retain some of their customers in the process. More likely though, Chinese consumers will flock to South Korean and Japanese bitcoin exchanges rather that buying mining equipment in order to create Bitcoin.