Official Chinese warnings over the perils of cryptocurrencies have knocked the price of bitcoin to a six-month low, providing another reminder to investors of the shifting regulatory environment, just weeks after President Xi Jinping gave his backing to the potential of blockchain technology.
In European trading on Monday, bitcoin slipped as much as 11 per cent before rebounding to about $7,250. The cryptocurrency has fallen about 15 per cent over the past five days, pushing it down to levels not seen since May.
The slump in the digital currency, notorious for its booms and busts, has been prompted by indications that Beijing is sticking to a tough line on crypto trading.
“People were getting very excited,” said Mati Greenspan, founder of Tel Aviv-based investment research firm Quantum Economics. Hopes grew that China would remove the bitcoin ban imposed two years ago and allow exchanges to operate, which would have led to “huge volumes” for trading in the currency, he said. “They were overly bullish and now China is smacking them down a bit.”
The speculation that the Chinese bitcoin ban could be relaxed intensified last month, after an apparent endorsement by Mr Xi of blockchain, the technology that underpins bitcoin and other cryptocurrencies. The leader called blockchain a “core technology” requiring more support and investment, the official Xinhua news agency reported at the time.
His comments sparked a furious rally in bitcoin and in shares of companies with any tie to distributed ledger technologies. In China, official support can confer billions of dollars in cheap financing and other subsidies, making investors highly sensitive to signs of any sectors being favoured.
That optimism is now unravelling, with bitcoin down more than a third since its latest peak in October. In a statement on Friday, China’s central bank said that “virtual currency speculation has shown signs of rising”, adding that it would continue to target illicit trading.
“Investors should be careful not to mix blockchain technology with virtual currency,” the central bank added. It pointed to pitfalls in the issuance, financing and trading of cryptocurrencies, including “false asset risk”, “business failure risk” and “investment speculation risk”.
Despite its ban on crypto trading, China’s central bank has spent the past few years researching virtual currencies as it works to leapfrog other countries when it comes to cashless payments. It plans to use such technologies to eventually replace part of its cash in circulation. Facebook founder Mark Zuckerberg has warned the US Congress that Beijing’s digitisation efforts could leave American finance behind.
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