Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Bitcoin investors can thank China for popping a bubble in the digital currency. 

The 10-day volatility of bitcoin dropped 50 percent in a matter of days after authorities stopped leveraged bets and, on Monday, nudged exchanges to start charging transaction fees. The squeeze began in the first two weeks of January when a spike that took the currency's price close to a record prompted regulators to inspect the offices of Huobi.com, OKCoin and BTCChina.

Pop Goes the Bubble
Bitcoin's volatility has plunged since China banned leveraged trading and forced exchanges to charge fees
Source: Bloomberg

Perhaps more meaningfully, trading volume has plunged 98 percent compared with the first days of 2017, according to data from bitcoinity.org. On Jan. 1, when bitcoin traded at $1,012.3, 4.8 million coins exchanged hands. On Wednesday, only 80,092 did. Sure, many Chinese investors, who still represent the lion's share of trading, are away from their desks because of the Lunar New Year. Still, the speed and pattern of the decline make it hard not to draw a line to the regulatory action.

Swift and Furious
Trading of bitcoin has plunged since news of a regulatory crackdown in China surfaced
Source: Bitcoinity.org

A conspicuous change in the yuan's share of trading tells the story. On average, 97 percent of all bitcoin transactions between the end of July and Dec. 31 were performed in the Chinese currency. This week, that number dropped to 63 percent; Wednesday's 33 percent was the lowest since December 2013. 

Chinese Dominance Challenged
Less than a third of bitcoin trades on Wednesday were done in yuan, the lowest percentage since 2013
Source: Bitcoinity.org

With the East-West balance restored, the digital currency is settling into a range and looks set to start following normal supply and demand factors again. However, the sudden spike in December and subsequent rapid drop are raising questions about how free bitcoin -- beloved of libertarians because it's outside the clutches of any central authority -- actually is.

Gadfly's Tim Culpan and I have received several emails pointing to signs of manipulation, for instance. It's hard to prove that anyone was deliberately moving the currency, but equally it wouldn't take much to do so. Even at the peak, when bitcoin had breached $1,000, there were only about 10,000 trades per minute. That suggests that it would take only $50 million to dominate the market for five minutes, which could be enough to create momentum. This shows how easy it can be to move the price (bitcoinity.org even keeps track of how many orders would be necessary to cause a shift). 

Bitcoin is a peer-to-peer system with transactions recorded on a public distributed ledger, so as well as being free from any central authority, it has no regulator. That means disgruntled investors have no one to go to, something that's already been demonstrated by the demise of exchanges Bitfinex and Mount Gox. The closest thing to a supervisor ensuring the health of the market has been this month's Chinese crackdown.

Libertarian bitcoin investors can breathe easy, then: A communist government has their backs.

--Tim Culpan contributed to this column.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net