Bitcoin Collides With Government Concerns

The rapid rise of Bitcoin is running into some crosswinds.

A recent succession of moves by governments around the world has cast doubts on the legitimacy of the virtual currency, and its price fell as much as 50 percent at one point on Wednesday morning from its high earlier this month. It later recovered some as the day went on.

The price volatility is underscoring Bitcoin’s sensitivity to decisions by government officials despite its promised status as the first global currency free of government intervention and oversight. Money, it turns out, is still a government prerogative.

“This tight regulation is really counter to what a lot of folks thought was going to happen,” said Mark T. Williams, a finance professor at Boston University who has been tracking Bitcoin. “Regulation is the future of e-currency, not decentralization as many had hoped.”

The most damaging news for the digital currency has come out of China, where the largest Bitcoin exchange, BTC China, said on Wednesday that it would no longer accept deposits in renminbi, the Chinese currency.

“For reasons we all know, BTC China has had to cease renminbi-account charging functions,” the exchange said in a message on its verified account on Weibo, China’s Twitter-like messaging service. It said that it would continue operating and that deposits denominated in Bitcoins and renminbi withdrawals would not be affected.

By Wednesday evening, the Shanghai-based BTC was quoting Bitcoins at about 2,300 renminbi, or about $380, each. That was a drop of nearly 40 percent from the price on Tuesday and less than half of the peak price of 7,395 renminbi on Dec. 1.

The development comes less than two weeks after the Chinese authorities barred mainstream financial institutions from dealing in the virtual currency and a series of moves that followed elsewhere.

While China had been the fastest growing part of the Bitcoin world, it is not the only place where government officials have started to address virtual currency. Over the last week, the authorities in Denmark, Norway, Australia, New Zealand and the European Banking Authority have all raised alarm about the speculative nature of the new online currencies.

The Danish Financial Supervisory Authority issued a warning on Tuesday that gave a long list of dangers, including that the “value of your virtual currencies can change very quickly and can in principle fall to zero.”

The warnings have pumped the brakes on the acceleration of Bitcoin after the price of a single coin rose nearly 500 percent in November, fueled by hopes that the currency could serve as a cheaper global payment system.

Bitcoins are created and traded according to an open-source program released in 2009. The decentralized network of computers that runs the system is set to release only 21 million Bitcoins, but they are worth only what someone will pay for them.

The volatility provides some vindication for critics who have recently been calling Bitcoin a bubble that was sure to pop. Earlier this month, Alan Greenspan, the former Federal Reserve chairman, said on Bloomberg Television that it had no “intrinsic value.”

Mr. Williams, the Boston University professor, said that Bitcoin had followed the trademark patterns of past asset bubbles and predicted that the value will fall as low as $10 next year.

But Bitcoin aficionados are far from accepting that the recent declines spell any sort of long-term trouble for the movement. Users took to Twitter to mount a defense. And the currency has survived past swings in value. In April, the value fell 70 percent in a matter of days but eventually recovered fully. Even after the recent declines, the price of Bitcoin is still up 180 percent from where it was in early November. During the day on Wednesday, the price had risen more than 40 percent from its morning low.

“If you look at charts going back for the last few years, this happens all the time,” said Greg Schvey, the founder of Genesis Block, a research firm that follows digital money. “The price is going to fluctuate, but more people know about it, more companies use it and more investment is going into Bitcoin. Bitcoin itself is stronger than it’s ever been.”

Some advocates for Bitcoin have actually been unhappy with the recent run-up in the price, which has caused many users to hoard their coins rather than spend them. This has led many people to say that Bitcoin cannot rightfully be called a currency.

Many of the recent announcements from the European authorities have questioned whether virtual currencies live up to their name. A Norwegian official told Bloomberg News last week that Bitcoin could not be called money and would be treated as an investment asset.

But the news out of Europe has not been all negative for the future of digital money. The warning from Denmark this week suggested that consumers would be free to use Bitcoins despite the risks. The United States has taken a similarly cautious but accepting attitude toward virtual currencies. Officials with the Treasury Department have indicated that virtual currency exchanges will be allowed to operate as long as they register as money-transmitting operations.

But there are questions about how successful a global decentralized currency can be if people in China, the world’s second-largest economy, are shut out.
According to Chinese news reports, the People’s Bank of China, the central bank, met Monday with more than 10 of the country’s biggest third-party payment processing companies, ordering them to stop all transactions involving digital currencies. Alibaba’s Alipay service, the country’s biggest processor of online transactions, was among the companies represented at the meeting, according to the reports.

On Dec. 5, the central bank and the four agencies jointly banned dealing in Bitcoin, saying the government was acting to “safeguard the interests and property rights of the public, protect the legal standing of the renminbi, take precautions against the risk of money laundering and maintain financial stability.”
“Within that region it’s hit a bit of a hurdle that will have to sort itself out,” Mr. Schvey said.