Bitcoin value plummets after China orders trading in currency to cease

The value of bitcoin collapsed below $3,000 (£2,200) at one point on Friday after Chinese authorities announced a crackdown on the digital currency.

Q&A

What is bitcoin?

Show

Bitcoin is a 'cryptocurrency' – a decentralised tradeable digital asset. Invented in 2008, you store your bitcoins in a digital wallet, and transactions are stored in a public ledger known as the bitcoin blockchain, which prevents the digital currency being double-spent. 

Cryptocurrencies can be used to send transactions between two parties via the use of private and public keys. These transfers can be done with minimal processing cost, allowing users to avoid the fees charged by traditional financial institutions - as well as the oversight and regulation that entails. The lack of any central authority oversight is one of the attractions. 

This means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it is hard (but not impossible) to trace a bitcoin transaction back to a physical person.

The exchange rate has been volatile, with some deeming it a risky investment. In January 2021 the UK's Financial Conduct Authority warned consumers they should be prepared to lose all their money if they invest in schemes promising high returns from digital currencies such as bitcoin.

In practice it has been far more important for the dark economy than it has for most legitimate uses. In November 2021 it hit a record high of more than $68,000, as a growing number of investors backed it as an alternative to other assets during the Covid crisis.

Bitcoin has been criticised for the vast energy reserves and associated carbon footprint of the system. New bitcoins are created by “mining” coins, which is done by using computers to carry out complex calculations. The more bitcoins that have been "mined", the longer it takes to mine new coin, and the more electricity is used in the process.

The virtual currency, which emerged in the aftermath of the 2008 financial crisis, fell as low as $2,972 on Friday – a drop of 40% from a high of $5,000 earlier this month - before recovering to about $3,600 in the afternoon.

The drop came after Beijing ordered cryptocurrency exchanges to stop trading and block new registrations, due to fears that increasing number of consumers piling into the market could prompt wider financial problems.

“All trading exchanges must by midnight of 15 September publish a notice to make clear when they will stop all cryptocurrency trading and announce a stop to new user registrations,” the government notice said, according to Chinese state newspaper Securities Times.

BTCChina, one of the biggest Chinese exchanges, said on Thursday it would stop all trading by 30 September. It was followed by a series of other exchanges, including OkCoin and Huobi, announcing closures on Friday.

China accounts for almost a quarter of bitcoin trades and is also home to many of the world’s biggest bitcoin miners, who use huge amounts of computing power to make transactions in the digital currency.

Using Bitcoin allows people to bypass banks and traditional payment processes to pay for goods and services directly. Banks and other financial institutions have been concerned about Bitcoin’s associations with money laundering and online crime, and it has not been adopted by any government.

Despite the concerns, the currency had soared in value by more than 700% in the year to the end of August.

But the value of Bitcoins came under pressure this week when Jamie Dimon, the chief executive of the biggest US bank, JP Morgan, warned that the digital currency was “a fraud” that would “eventually blow up”.

Dimon said he would fire “in a second” anyone at the investment bank found to be trading in bitcoin. “The currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart,” he said. “If you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than US dollars.”

Some of Dimon’s former colleagues hit back, suggesting he didn’t understand the currency. Alex Gurevich, a former JP Morgan executive, tweeted: “Jamie, you’re a great boss and the GOAT [greatest of all-time] bank CEO. You’re not a trader or tech entrepreneur. Please, STFU [shut the fuck up] about trading.”

David Coker, an expert in bitcoin at Westminster Business School, said it was surprising that Dimon attacked bitcoin as JP Morgan was working on its own cyrptocurrency called Quorum. “One can’t help but wonder if Mr Dimon’s comments regarding cryptocurrencies would apply to JP Morgan’s own offerings, should they come to market?” Coker said.