They say the best disinfectant is sunlight and the PBoC just opened the shades on bitcoin. According to multiple news reports, the PBoC will conduct ongoing examinations of bitcoin exchanges – this has caused the price of bitcoin to crash another 10%. Interestingly, despite bitcoin’s low volatility in 2016, a 10% drop is not unusual in the history of this emerging currency. Furthermore, increased oversight should be welcomed by those (like BK) who view bitcoin as the first of many digital assets in the fin-tech investing category.
The Chinese exchanges matter because that is where the majority of the trading takes place. Bitcoin trades more dollar volume on a daily basis than the Gold ETF (GLD) and 95%+ of that volume is traded in China. So yeah, China is kinda important to bitcoin and by extension the PBoC is very important to bitcoin.
Presumably the PBoC action is a response to speculation that bitcoin has been used as a tool for capital flight from China and I suspect they will find evidence of that activity. But it should be put into perspective – the total value of all the bitcoin in existence is $12.9 billion, last year official currency outflow from China was $320 billion – so any capital flight that was taking place via bitcoin was/is tiny. Of course, it had an impact on the price of bitcoin, but it’s not where the majority of capital flight is occurring. In fact, there are currently 16 million bitcoin in circulation and the population of Shanghai is 24 million – if every person in Shanghai wanted to buy just one bitcoin (current value of $800) they could not. The point being, if the PBoC finds that capital flight occurred it will be small and good cleansing of the system. What’s more, because institutional investors are becoming more interested in bitcoin, the price drop could move bitcoin from weak hands to strong hands.
The news has resulted many to panic sell and proclaim that “Chinese bitcoin exchanges are being raided.” This is exactly the type investor depression that BK likes to be on the other side. In fact, it was just last week that BK wrote these words when bitcoin was trading at $1100,
This extreme move coupled with one of the key drivers breaking suggests the ride might be over…for now. In the long run, BK is quite bullish on bitcoin, but in the near term he must wait until investor depression sets in before he can think about adding new positions.
It appears the market for bitcoin is approaching another inflection point and the time may have arrived to add new positions.
Moreover, there are other drivers of the price that investors have yet to recognize. BK is looking at you Mexico! Bitcoin has proved to be extremely useful as alternative currency – it’s been 40 years since the last fiat currency regime failure – after the Bretton Woods Agreement failed, investors had gold. This time we have bitcoin.