The short answer to the question of whether bitcoin is going to die? It’s not. Bitcoin will survive the China crash, just as the internet survived the dot-com bubble and the global economy survived the Great Recession.
But China’s move to halt initial coin offerings (ICOs), close bitcoin exchanges and possibly make Bitcoin illegal in that country does hold an important lesson that traders ignored for most of the year.
As the price of BTC skyrocketed in 2017 (going from about $800 per coin in January to a high of nearly $5,000 early in September) the commentary was a lot like that on the internet itself in the 1990s. Bitcoin was global and governments can’t touch it, they said.
The truth is quite different.
Bitcoin is global, just like the internet, but governments can indeed touch it. While cryptocurrency does not need government sanction, it does require government sufferance. China has removed that sufferance.
China can do this. It has made internet freedom an economic good — Jack Ma of Alibaba Group Holding Ltd (NASDAQ:BABA) can see any site he wants. But citizens there accept that there are things you don’t talk about and truths you don’t access, even online. It’s part of the Chinese social contract.
China may be a special case, but it represents nearly one-fourth of all humanity, and it’s not alone. The big trend of 2017 is the nationalization of the internet, with Europeans finding they can make the internet forget them, and even Americans seeking limits on violent rhetoric.
This is now finding its way into cryptocurrency markets.
Another important point is that the size of the market matters when you’re looking to make an investment.
Of all the cryptocurrencies, bitcoin has done better during the crash than others. Bitcoin prices are down 30%, but those of Ethereum have been cut in half. This is also true for coins like Ripple that were supposedly based on other factors, like international trade.
The bigger a market, the more liquid it is, and the more resistant it is to shocks. Bitcoin’s share of the cryptocurrency market was down to 40% a few months ago. It’s now back up to 50%,
Cryptocurrency boosters are trying to buoy the market by writing about how celebrities are bitcoin curious or professional traders are giving bitcoin a second look, but if you read closely the traders aren’t buying. They are waiting to see where the price stabilizes.
You should, too.
What Comes Next
But cryptocurrencies are not currencies. They are fear indices. When governments are distrusted, when they lose power over their economies, cryptocurrency trading will flourish. If I lived in Zimbabwe or Venezuela, I would have all my assets in cryptocurrency, and the recent falls in the market would not worry me at all.
But I live in the United States, where the currency is relatively stable. A crisis may send the price of bitcoin, relative to the dollar, rising quickly, but when the crisis ends that will reverse. If, as part of its crisis management, the government decides to crack down on bitcoin, as China has, I may have trouble getting out of my bitcoin-for-currency trade. I may be reduced to trading bitcoin for other crypto-currencies and in direct exchange for goods instead.
Cryptocurrency speculation is based on rejection of the law. What did they say a half-century ago? If you don’t like cops, then the next time you get mugged call a hippie? Bitcoin puts you on the side of everyone who dislikes, distrusts, or defies the rule of law, even Kim Jong Un.
If you can handle the risk of financial life outside the rule of law, buy bitcoin at current prices. I can’t.
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 firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA. To follow the value of crypto currencies bookmark this.