China’s Central Bank Urges Caution; Tanks Bitcoin

Urging of caution when it comes to investing in bitcoin by China sent the price of bitcoin plunging 12 percent late last week.

According to a report by Reuters, bitcoin had been surging, gaining greater than 40 percent in two weeks, hitting around $1,139 on the Bitstamp exchange, which is close to its all-time high of $1,163. That all changed when the central bank in China asked investors to be rational and cautious when it comes to investing in the digital currency. Bitcoin fell to a low of $871 on Friday (Jan. 6), losing nearly a quarter from the peak earlier in the week. It recovered to around $900, leaving it down 10 percent for the day.

Reuters reported that, in a statement, the Shanghai head office of the People’s Bank of China said bitcoin prices had shown “abnormal fluctuations” in recent days and said “those investing in it should do so carefully, with awareness of the currency’s volatility.” In 2013, it had cautioned that financial institutions should stay away from bitcoin, which prompted a $300 decline in its price. On Friday, it reiterated its stance from 2013 that bitcoin isn’t a currency that can be circulated in the market as real currency.

“This is the Chinese authorities saying: We’re watching,” said Charles Hayter, CEO of digital currency data analysis website Cryptocompare, in the Reuters report. “The relative size of the bitcoin market is minor, but trading has reached up to $10 billion a day on the bitcoin-yuan pairs. The full meaning of the government’s comments aren’t 100 percent clear, but restrictions and regulation of trading is one avenue that could affect volumes and therefore price.”

Bitcoin experts told Reuters the trading volumes in China are overstated, and the sharp moves are driven by speculation in part by hedge funds in the U.S.