All Financial Wisdom

Bitcoin is Already “Too big to Fail” which is why a black market will emerge in China.

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The actions of the Chinese government have shown that governments are approaching Bitcoin with extreme caution when trying to legislate (or annihilate) it.

Few governmental behaviors are the result of chance or improvisation, which is why in this analysis we will try to argue why the Chinese government has chosen to develop this sequence of events, which is surely calculated and planned. This analysis aims to work on the hypothesis that Bitcoin has become “Too big to fail” for some economies, and their governments appear to be realizing it.

A very volatile week in Crypto Currencies (more than usual)

But the apparent love-hate story of the Chinese economic authorities with Bitcoin is not as recent as some may think. The latest events are but one more episode of a long saga of chapters that have been occurring for many months.

The first death throes of this long agony began at the beginning of this year. As you can read in this Reuters news clip, Chinese authorities announced that they were opening an investigation into Bitcoin and its intermediaries to limit market risks. What initially sounded euphemistically to something innocent and unimportant among market operators was already perceived as a veiled threat, and as a likely preamble to a hardening of the hitherto permissiveness of the red giant with respect to Bitcoin. Bitcoin suffered a 35% “correction” as a result of this announcement.

Shortly after, in February of this year, after a meeting with the central bank of China, several Bitcoin intermediaries of that country announced that they would block the Bitcoins of their clients. The news was not irrelevant or purely a matter of national economy, but potentially had a strong impact on the crypto-currency market in its broader reach, and even the market was feeling the fear that its future would be in question: almost 100% of Bitcoins’ global transactions were carried out through Chinese intermediaries.

It should also be noted that the historic peak that Bitcoin marked only a few days ago approached $5000: almost five times the price of last February, which now seems not too far in time, but really far away when one observes its stock price.

But as I have already noted in the first lines of this analysis, China has never attempted to carry out a risky summary execution of Bitcoin, but is tightening and loosening the rope knot over the months, and squeezing a little more each time.

The rest of the story corresponds to the last couple of wekks, in which China has definitely tightened the rope knot, this time to its maximum. On the one hand, just two weeks ago, the Chinese authorities announced that they prohibited ICOs (the “Initial Coin Offering”, the equivalent of crypto-currencies to stock IPOs) in the country, as reported by TheVerge. But not content with this first enforcement action, the Chinese authorities continued with their funeral road map announcing last week the drastic measure that they have definitely opted to close the intermediaries and Bitcoin operators in their national territory.

Bitcoin sinks

Logically, with the weight that the intermediaries, operators and Chinese users in the crypto-market have acquired in the last months, the crypto-currency has experienced a sharp decrease in the market. In just a few hours, Bitcoin went from listing at nearly $5,000 to below $3,000. Something extremely corrective even for the high standards of volatility to which we are accustomed with this crypto-currency.

Crypto-currencies are related and rely on common legislation and, above all, a perception as a whole on the part of both the authorities and the general public. This explains why the second crypto-currency by market cap, Ethereum has accompanied Bitcoin in its plummet over the last few days. It lost about half its value from ~$400 to $200.

Note: the cryptocurrencies have rallied back strong over the past few days.

For no apparent reason, both Bitcoin and other crypto-currencies experienced a strong recovery from the monthly lows. In the absence of relevant news to justify it, we must assume that this rise may not be a new change of trend, but a mere reaction to the (overly) strong previous correction.

Indeed, the real risk that both the crypto-markets are facing is whether the Chinese authorities’ announcement could be the straw that breaks the camels’ back, and that we are witnessing the puncture of the potential crypto-currency bubble that many¬†(including myself) have been forewarning for a while now.

Too Big To Fail

But we must not leave aside optimism when there are reasons for it, and the market always offers new opportunities. It really all points to the fact that crypto-economy is here to stay. It involves a disruptive advance with multiple advantages at various levels, with particular relevance to Blockchain and, to cite just a few examples, IT security, drastic cost cutting, elimination of legal procedures and simplicity of implementation brought by smart contracts, the liberalization of funding, or even participatory economic management. The benefits are numerous.

It is for this reason that although this correction could imply a definitive puncture of the crypto-bubble, after the sinking we see more a buying opportunity for the crypto currencies likely to survive. In order to select our bets, it will be essential to evaluate both the reliability of potentially surviving crypto-assets, as well as their functionality and technical characteristics.

 

Stay tuned for Part 2 for more…

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