China’s moves to shut down Bitcoin trading is the start of a government versus encryption war that those on the encryption side have been relishing for some time.
The whole idea behind Bitcoin is that governments are inherently corrupt — governments can’t be trusted with money, and Bitcoin will make you free of all that.
Similar arguments were made by internet advocates like Larry Lessig 20 years ago, in Code and Other Laws of Cyberspace. Technology will make you free of government.
China’s Government Monopoly
China, whose government sees its monopoly on power as essential to maintaining civil stability, has been fighting internet freedom hard ever since Lessig’s book came out. It is natural that it has taken the lead against Bitcoin.
China has not only forced Bitcoin exchanges to close, but told their managers, and Bitcoin miners, that they can’t leave the country. This at a time when 70% of the new Bitcoin being discovered or “mined” is Chinese.
The initial reaction to this was a crash in Bitcoin prices, but the fall was steeper for other alt-coins like Ethereum. A savvy trader could have arbitraged prices between Bitcoin and its rivals to make a lot of money.
Traders who “bought the dip” in Bitcoin after China’s moves also made money. The peak in Bitcoin prices early in September was over $4,900. The trough, achieved Sept. 15, was a little over $3,000. The Bitcoin price today is $4,190.
It seems the market worked.
This told Bitcoin traders that their creation can’t be killed, even though yet-another split between miners and developers could see yet-another fork in the market as early as November, creating a new coin to go along with Bitcoin Cash.
Such forks give life to the idea that Bitcoin supplies are limited.
Not Just the Chinese
China’s leaders aren’t the only folks going after Bitcoin and other cryptocurrencies today. Jamie Dimon, CEO of JP Morgan Chase & Co. (NYSE:JPM), recently called Bitcoin a fraud even though his trading desks are still in the market.
Peter Schiff, chief strategist at EuroPacific Capital Inc., has compared Bitcoin to dot-com stocks and Dutch tulips, noting that it’s not backed by governments.
Is it any surprise, then, that governments now want their own cryptocurrencies, like India’s Lakshmi Coin? A government-sponsored crypto-coin would seem the best of both worlds. It’s not.
It’s the Technology, Stupid
Ultimately, the argument over Bitcoin’s value and Bitcoin’s nature comes down to a question of technology.
As James Altucher, a former hedge fund manager, notes, executing trades using Blockchain technology, a shared, encrypted general ledger database, saves money over other transaction methods, especially when the transaction crosses borders.
Each time my daughter in Denmark buys something, for instance, she sets off a chain of financial events, in which our dollars are changed to euros and her transaction is processed.
Each step costs us money, money we’re not paying for goods but simply for bookkeeping. Blockchain, and cryptocurrencies, can do away with most of these fees. If both sides in a deal are using a cryptocurrency, the transaction is processed once, not translated by multiple institutions in multiple places.
The power of cryptocurrency, in other words, lies in the Blockchain technology, not in the coins themselves. Their value will rise, and fall, depending on demand and how easily they can be translated into real-world transactions.
But it’s the blockchain that matters, and this is something no government, no big bank, and no Bitcoin bear has yet begun to deal with.
Bitcoin represents a demand by the market that the way we trade value costs too much and must fundamentally change.
Dana Blankenhorn is a financial and technology journalist. He is the author of a mystery novella involving Bitcoin, The Reluctant Detective Saves the World, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not own any of the cryptocurrencies or securities mentioned in this story. To follow the value of cryptocurrencies, bookmark this link.
