It seems Bitcoin isn’t as independent as I thought it was.
Today around 13:00 the price of bitcoin fell sharply after the Chinese central bank announced that they would not allow two of the major Chinese exchanges to permit bitcoin and litecoin withdrawals for a month.
How I read it is:
- Bitcoins can be freely exchanged between individuals. Blocking this would be as restrictive as blocking internet access to certain webpages (something that China has already done in the past)
- Since it’s hard to block people from exchanging bitcoins, what governments can do is force the hand of the exchanges (Kraken, Poloniex, or in this case Chinese exchanges Huobi and OKCoin) to block withdrawals or exchanges into fiat currency.
- Since businesses, salaries and day to day life still happens in fiat currency. By blocking the exchange from cryptocurrency to fiat currency, the value of the cryptocurrency can be put into question. If you can’t turn your cryptocurrency to “money”, you are stuck with something worthless.
This could change in the future if payment in cryptocurrency becomes ubiquitous. Then people would not have to change back into fiat.
This could also change if the central banks issued their own cryptocurrency and guaranteed a 1 to 1 matching between their fiat and their cryptocurrency. This would also reduce the volatility of the cryptocurrencies.
As we speak, kraken.com, one of the major UK Based Exchanges is offline, probably due to the excess traffic from so many people panicking to sell their bitcoins. Also, as a side note, my personal bitcoin portfolio has taken a big hit, I will follow with interest the next days for this rare new world of virtual value 🙂