Bitcoin prices took a hit when China seemingly announced a crackdown, but the correction wasn’t tragic and, in the long term it won’t matter.
On the basis of mainstream hysteria and the questionable use of click-bait tactics, you’d think that bitcoin prices were completely collapsing. Certainly, the price chart doesn’t help matters. Since hitting an all-time high of $5,000, the digital coin fell briefly below the $4,000 mark. Due to what CNBC termed as a Chinese crackdown on cryptocurrencies, traders rushed for cover.
Again, on the surface, it’s easy to assume that China banned cryptocurrencies altogether.
If that were the case, bitcoin prices would have corrected with far greater magnitude. Fortunately, that’s not what’s happening here. If you read the fine print, ended the practice of initial coin offerings, or ICOs. To outsiders, the distinction may be lost, but it’s actually a critical one.
An ICO is a corporate fundraising operation similar to an initial public offering. The key difference is that rather than the issuance of equity shares, a company instead offers a new digital currency. Called tokens, these financial stakes are sold to investors, who acquire them via fiat currencies, bitcoin, or other major cryptocurrencies.
The granular details of the ICO isn’t really that important for our discussion. Rather, it’s the fact that ICOs effectively bypass financial laws and regulations that govern legitimate fundraising activities. This matter is further exacerbated (at least from the regulatory perspective) because of the “concealed” nature of bitcoin and cryptocurrencies.
China banned the ICO practice because it would mean substantive economic transactions are occurring outside of their yuan. Obviously, China has global ambitions, as noted by the rise of companies like Alibaba Group Holding Ltd (NYSE:BABA), Baidu Inc (ADR) (NASDAQ:BIDU), and JD.Com Inc (ADR) (NASDAQ:JD). They have incentives to protect their interests; hence, their reactionary moves and the ensuing correction in bitcoin prices.
Still, this is hardly the end of cryptocurrencies!
Bitcoin Prices Are Beyond China’s Power
First off, China struggled for years to address money outflow problems. Historically speaking, the average Chinese doesn’t have the saturated experiences that we do with the stock markets. Thus, they may not always react calmly to both bullish and bearish phases. Inevitably, this exacerbates the outflow issue as Chinese investors flock to safe-haven assets.
Such assets include U.S. and western real-estate markets. A big reason why we’re experiencing multi-year record home prices in many American neighborhoods is due to Chinese buying frenzies. China has largely been ineffective in curbing this outflow, but they want to plug any holes they can. The ICO crackdown is a “good” start for them.
Naturally, this event negatively impacted bitcoin prices, but don’t expect a permanent downfall in cryptocurrencies. The communist government will always make noise with their anachronistic policies, that’s what they do. But at the time of writing, bitcoin jumped up to $4,528. From its $5,000 high, the correction is now just under 10%, which is bad, but very much recoverable.
In my article about the possibility of $10,000 bitcoin, I cited the accelerated time frame as one way that cryptocurrencies will continue to surprise people. It’s also the reason why I’m not worried about China or the current bearish cycle.
The stock market is open on business days only for six-and-a-half hours (assuming public trading hours). Contrasting sharply, bitcoin is open 24/7, no exceptions. In one day, bitcoin will trade for nearly four “Wall Street days.” By next Monday, cryptocurrencies will have traded for 168 hours, or more than a month in “stock-market time.”
In other words, bitcoin prices have likely fully absorbed the China crackdown, to the point that it’s literally old news. China matters, but it doesn’t matter that much.
Cryptocurrencies Will Change Finance Forever
Where bitcoin is now, and where it will be are two different things. Currently, only the knowledgeable and the relatively well off are putting money to work with cryptocurrencies. But eventually, the digitalization of money is the ultimate frontier for the broader financial industry.
Strangely enough, this point is best illustrated in the recent flare-up involving North Korea. In the wee hours of the morning, the hermit nation is either testing their ICBMs or detonating hydrogen bombs. But traditional market investors have no way of trading this news in real-time. Instead, they have to wait, per (antiquated) protocol, for the stock market to open at 9:30am EST.
Should armed conflict breakout on a weekend or on Presidents’ Day, investors are completely out of luck. Not only are these rules and regulations completely ridiculous in a globally-connected, technologically-advanced world, they’re arbitrary and unfair. Market insiders and professionals can get in and out, whereas the general public will likely hold the bag.
Bitcoin’s revolutionary concept is to provide a fair platform for everyone, irrespective of nationality, social status, and education level. In my opinion, this idea is so groundbreaking that it cannot be suppressed indefinitely.
Sure, China and the ICO mess is concerning in the nearer-term. But innovations like bitcoin have a way of sparking mass integration. To contain cryptocurrencies is akin to containing the internet. I suppose you can be successful for a while. But once you go digital, you’ll never go traditional.
Josh Enomoto is long bitcoin.
