Investors wondering why the Bitcoin price is falling today need look no further than China.
China's central bank, the People's Bank of China (PBOC), announced early Wednesday (today) it would be taking a closer look at the business practices of the country's Bitcoin exchanges.
"The PBOC is joining hands with Beijing Financial Bureau and other related departments, and have sent inspection teams to Bitcoin trading platforms including Huobi and OKcoin, to check if they are running in accordance with foreign exchange management, anti-money laundering, and trading exchange rules," the central bank said.
In the following hours the price of Bitcoin fell by nearly 1,200 yuan ($173), or about 18%, on the Chinese exchanges. The reaction in China quickly pulled the Bitcoin price down on the world's other Bitcoin exchanges.
The CoinDesk Bitcoin Price Index fell today from about $915 to as low as $752. Today's decline also comes on the heels of a bigger fall just days ago...
Today's Falling Bitcoin Price Follows Big Drop Last Week
Today's falling Bitcoin price puts it just about back where it started in early December, before a 52% Bitcoin price rise pushed it from $753 on Dec. 1 to $1,150 on Jan. 5.
The Bitcoin price initially fell off those highs on Jan. 6, when the PBOC put out a statement advising the Chinese Bitcoin exchanges to make sure they were adhering to all relevant laws and regulations. The statement also reminded investors of the risk of investing in Bitcoin, and that the PBOC considers it a "virtual commodity," not a currency.
While that statement did not represent a change in PBOC policy, the renewed attention on Bitcoin spooked Chinese investors.
Today's news that the PBOC is now launching an actual investigation of the Chinese Bitcoin exchanges amplified the fears created by last week's statement, sparking another sell-off.
"This is a ratcheting up of the rhetoric from the Chinese authorities - instead of 'we're watching' you, it's now 'we're investigating' you," Charles Hayter, founder and CEO of the digital currency website CryptoCompare, told Reuters.
Trading on the Chinese Bitcoin exchanges make up more than 90% of global volume. Although the numbers are thought to be artificially inflated by exchange operators seeking status as the biggest, there's no doubt that Chinese sentiment controls the Bitcoin price.
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Chinese buyers played a major role in the 123% rise in the price of Bitcoin in 2016 for two reasons.
For one thing, the digital currency provides a possible avenue to evade China's increasingly restrictive capital controls. The falling yuan - it declined nearly 7% against the dollar last year --gave Chinese investors an incentive to use Bitcoin as a safe-haven investment.
While the reversal of the recent big gains in the price of Bitcoin is disappointing, it doesn't mean the digital currency is in a crisis.
In fact, the future of Bitcoin has never looked brighter...
Why the Price of Bitcoin Will Recover - and Then Some
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The worries in China are temporary. Remember, we've been here before.
Back in December 2013, when the PBOC began refining its policies on Bitcoin, many feared that an outright ban might result. But the PBOC never went that far. Eventually, when Chinese investors realized the PBOC wasn't planning a major crackdown, they resumed buying.
The recent rapid, steep rise in the price of Bitcoin put the digital currency back on the PBOC's radar screen, much like it did in 2013. The PBOC no doubt viewed that as a risk that it needed to confront.
In the long run, the heightened scrutiny in China will benefit Bitcoin.
"The long-term implications of this are positive as more rigor in the Chinese market only matures and brings respectability to the industry," said CryptoCompare's Hayter.
The Chinese Bitcoin exchanges have played down the PBOC's actions.
"I wouldn't call it an investigation. I think they are working closely with us to learn more about our business model and the Bitcoin exchange industry. We had a very fruitful meeting today," BTC China CEO Bobby Lee told Reuters.
The factors that argue for the continued growth of the Bitcoin ecosystem and a steadily rising Bitcoin price haven't changed.
In addition to growing adoption within the financial industry, the Bitcoin price will benefit from a shrinking supply of new bitcoins, its developing role as a safe-haven investment akin to gold, and a realization of the broad potential of its underlying technology, the blockchain.
Virtually all of the top digital currency influencers Money Morning contacted last month for their 2017 forecast predicted a Bitcoin price of at least $1,000. Tim Draper, founding partner of Draper Fisher Jurvetson (DFJ) venture capital firm, made a bold prediction of $10,000.
"Bitcoin Oracle" Vinny Lingham, a Bitcoin Foundation board member who has gained a reputation over the past year as one of the most accurate of Bitcoin forecasters, says the digital currency will reach $3,000 in 2017 and end the year between $2,000 and $3,000.
The latest Bitcoin price drop hasn't fazed him, either.
"The current Bitcoin downswing is very healthy for the charts and 2017. This should (a) keep exuberance in check and (b) clean up China," Lingham tweeted.
Up Next: Bitcoin Price Predictions and 2017 Forecasts from 11 Top Influencers
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.