As Texas, Florida and the surrounding states continue to reel from the devastation wrought by Hurricanes Harvey and Irma, the People’s Bank of China (PBOC) has been brewing a virtual storm of its own on the other side of the planet by ceasing exchange trading of Bitcoin, causing a sharp sell off in the benchmark digital currencies.
This was exacerbated by Jamie Dimon bluntly asserting that Bitcoin is a fraud. We spoke with an asset manager who has been very active in digital currencies for years and other market participants who have been active investors as well as keen followers of the PBOC’s words and actions in this arena for many moons. Our takeaway is that the pullback in prices will be temporary and that there could be significant buying interest on this retreat.
Source: EthereumWiki YouTube Channel
There is a strong belief among the market participants with whom we spoke that the PBOC and US banks are all intensely interested in Bitcoin, Ethereum and the hundreds of other digital currencies because they recognize that they missed the first leg of the move to the upside and they are concerned they may get left behind on all of the subsequent moves.
There are many stories throughout history about asset valuation and the mispricing thereof, but the belief here is that Bitcoin is neither a novelty, a tulip nor a fraud. As we have discussed previously in this space, we consider Bitcoin to be emblematic of the paradigm shift pitting fiat currency against peer-to-peer transactions built on a simple and inexpensive clearing system called blockchain. Even Mr. Dimon admitted to being a believer in blockchain.
Those who trade these alternative currencies accept the volatility that comes with this new asset class, and the Chinese Government’s attempts to stop the outflow of money from its population are likely to be futile. We think Bitcoin, Ethereum and other digital currencies will shake off the selling pressure and ultimately continue their march higher. Not even the PBOC can control the market forces that drive 850+ digital currencies, though many market watchers believe the SEC will certainly make an attempt.
It is critical to note that China plans to ban trading of bitcoin and other virtual currencies on domestic exchanges only as the country outlawed initial coin offerings last week. The PBOC ban will not apply to over-the-counter transactions, and that’s the key takeaway. For those of you who may equate “otc” only with non-exchange-listed equities, the latest data from the Bank for International Settlements (BIS) puts the notional value of global otc derivatives contracts at $483 trillion.
It may be a frightening thought for these governments watching their currencies flow out of the country into Bitcoin, Ethereum and LiteCoin. It may also be equally disconcerting to people like Mr. Dimon who are seeing their wealthy clients withdraw funds from their banks to put into unregulated Coinbase accounts.
The mass exodus from the renminbi has certainly been noticed by the PBOC, and we fully expect similar actions from US and other global regulators. But the horses may be out of the barn already, and regulators may be facing a Sisyphean battle that simply can’t be won. Perhaps a better focus for regulatory efforts might be damage to consumers resulting from the jawdropping failures in security at Equifax?
Bitcoin slumped on Friday after Caixin magazine reported China’s plans to ban exchange trading of digital currencies, putting an exclamation point on the virtual currency’s biggest weekly retreat in nearly two months. The country accounts for about 23% of global Bitcoin trades and is also home to many of the world’s biggest Bitcoin miners, who use vast amounts of computing power to confirm transactions in the digital currency.
We believe the exchange ban is unlikely to have a major long term negative impact on the prices of cryptocurrencies globally because venues outside China will continue to trade. We note that the country’s role in the Bitcoin market had already started shrinking dramatically this year as authorities tightened regulations. (At one point, exchanges in China accounted for more than 90%. What is Mr. Dimon is wrong? What if Mr. Dimon’s daughter truly is a genius?
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