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So why hasn’t the bitcoin price crashed?

February 14, 2017

I’ve been talking to a lot of people that are wondering why the price of bitcoin isn’t crashing now that China has closed the exchanges.

First of all, China hasn’t closed the exchanges.  They’ve stopped the ability to withdraw in bitcoin, but you can send bitcoin to the exchange and convert it to Chinese currency.  That might strike you as useless, but it’s actually not.  There are people who are interested in converting bitcoin to cash, and those people include bitcoin miners as well as people like Russian and African traders that want to buy Chinese goods.  The exchanges can make good money accepting bitcoin deposits and converting to cash.  The exchange can then take their bitcoin and sell it on the wholesale markets.  The bitcoin eventually makes it back to Russia and Africa as people in China buy things like oil or send money back to Africa in the form of remittances.

Also, if you look at how the bitcoin market works in China, it becomes more obvious what the government is trying to do.  If you are moving USD 1-2 million there are a lot of people that will help you since it’s likely that you are an “ordinary rich person” who is just buying overseas real estate.  If you start moving USD 10-100 million, then the odds increase that you are someone that is politically connected, and if you want to move USD 100 million and you are really, really desperate, then there is a good chance that you are worried that the friendly folks from the Communist Party Central Disciplinary Inspection Commission are about to knock on your door and ask you to come down to a nice hotel to “drink tea” and where you can talk all about how you got the USD 100 million and why you are so desperate to move it out of China.  Since there is an upcoming Party Congress in the fall, the friendly people of the CDIC would be very interested to find out who has been paying you off and who you’ve been paying off.

Now if you go to a bitcoin broker and ask to move USD 10-100 million, they will say no, because they don’t want to be invited to “drink tea” with the CCP, but they’ll tell you that you should go to an exchange and cash out.  Now before two weeks ago, it would be possible to take your USD 100 million, find a lot of friends and relatives to open up a dozen accounts on the Chinese bitcoin exchanges, and then over the course of a month move that money offshore.  The actions of the PBC make that a lot harder.  First they put in a transaction fee.  What they did was to dramatically reduce the volume of the exchanges so that if you are trying to sell a large amount of bitcoin, you’ll get noticed.  What I’m pretty sure is happening now is that the PBC is “politely asking” the exchanges to put in measures to detect “smurfing” (i.e. someone putting in large numbers of small transactions through related accounts).  I also suspect that the exchanges will be under restrictions until mid-March when the National People’s Congress and the CPPCC meet.

As far as the future of bitcoin in China, I’m quite optimistic, although I think that people who believe that it will create radical political changes will be disappointed.  I haven’t talked to any Chinese official that’s particularly afraid of bitcoin.  The basic thinking goes that the Communist Party managed to tame the internet, and one scary thing is that the Communist Party now has created a system by which it has more access to the personal details of most people in China than Stasi ever dreamed of.  Rather than put in secret agents, you make personal surveillance convenient and fun.  The CCP has managed to tame the internet and make it serve its purposes, so I figure that they think they can do the same with bitcoin, and I wouldn’t bet against them.

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