Bitcoin, arguably the most famous cryptocurrency, is notably volatile. Within 2017 alone, Bitcoin has faced two major crashes and recoveries.1 Yet, so far, keeping money in Bitcoin, and in the cryptocurrency market more generally, has been wildly profitable.2 In fact, cryptocurrency’s market capitalization in the last year was about six times that of the dot-com boom of the 1990s.3 This year alone, Bitcoin is up 260 percent, with a valuation topping 40 billion dollars.4 Despite this impressive and potentially lucrative opportunity for its citizens, China recently stated it would shut down local cryptocurrency exchanges.5 This decision is part of a string of recent crackdowns on exchanges.6 China had already banned no-fee trading and enforced other regulations against Bitcoin and similar currencies.7
Regardless of China’s ultimate motives, the continuing attempts to regulate cryptocurrency and exchanges are reasonable steps in an attempt to combat the apparent problems stemming from the recent increase in cryptocurrency value. Some problems with Bitcoin have existed since its creation. Most notably, Bitcoin’s infrastructure is based on anonymous peer-to-peer trading, which facilitates money laundering and evasion of taxes.8 More recently, however, the skyrocketing value of Bitcoin and other cryptocurrency has created a massive 100 billion dollar bubble that could financially cripple investors.9
A recent trend in cryptocurrency illustrates just how unjustifiable market evaluation of cryptocurrency has become.10 Initial coin offerings (ICOs), a new form of crowdfunding, raise funds for a cryptocurrency ventures by offering vouchers in that project known as “tokens” or “coins.”11 In April 2017, three individuals comprising the company Gnosis started an ICO to raise money for “user-driven prediction market based on a coming ‘Cambrian explosion of machine intelligence.’”12 In exchange for economic investments, they offered GNO “tokens,” a new form of currency that could be used in their upcoming platform.13 In theory, GNO tokens would increase in value as their platform got more usage.14 Gnosis hoped to raise 12.5 million dollars for their company.15 That only took eleven minutes. By the end of their ICO, their project, which had “little more underlying it than a 49-page white paper and a few thousand lines of open-source computer code” was worth $300 million.16 Two months later, it was worth $3 billion.17 This is not an anomaly. Bancor, a company creating new cryptocurrency, offered tokens through an ICO and raised 153 million in three hours. IOTA, launching the next day, was valued at $1.8 billion. Status, a messaging platform, raised 102 million selling tokens the next week.18 Inflated evaluations always threaten crashes and the 2000 dot-com burst where one trillion dollars were lost in a month set strong precedent.19 In other words, “unless you think a prediction-market concept is instantly worth $3 billion, history [of crashes] will repeat.”20
Making matters worse, the profitability of ICOs and cryptocurrency created a market for exploitation. Ponzi schemes and similar scams were created under the guise of ICOs and currency exchanges.21 Excited by impressive returns, even the relatively technologically handicap elderly were investing their retirement savings.22 This was possible, in part, by lower barriers to entry in China, allowing more access to uninformed investors.23 Not all investments are created equally and even a “normal” mooncake company created a ICO.24
China was uniquely involved in Bitcoin markets. As of a year ago, 90% of Bitcoin trading took place in China, largely because they had ample exchanges without trading fees and inexpensive electricity.25 This is partially why it could have a major effect on the Bitcoin market. China has already successfully flexed it muscles by shutting down ICOs and getting the vast majority of money refunded to investors.26 Yet, by its very nature as a decentralized digital economy, Bitcoin and other cryptocurrencies are not very susceptible to governmental regulation. There is seemingly no contest that China has the legal authority to shut down exchanges and ICOs, but there remains a question as to whether or not China’s regulations will have a significant long-term impact on Bitcoin.27 As it stands, Bitcoin exchanges are already getting recognition and price boost from other markets, like Japan.28 Furthermore, since “China remains open for business, so long as your company [or exchange] is headquartered elsewhere,” it is unclear what the real impact of shutting down Chinese exchanges will be.29 Currently the Bitcoin market has stabilized around 4000 a coin, down from its peak at 5000 but nowhere near bottom value30 and Bitcoin has traded within a relatively small range as the Bitcoin market is seemingly taking a “wait and see” approach.31 Whether or not other countries will follow China’s attempt to regulate a currency specifically formed to combat government regulation remains to be seen. One thing is for certain, China’s announcement that it is ending coin exchanges and ICOs has yet to kill the market or burst the inflating bubble.32
See Jeff John Roberts, 5 Big Bitcoin Crashes: What We Learned, Fortune (Sept. 18, 2017), https://www.fortune.com/2017/09/18/bitcoin-crash-history/. ↩
See Laura Shin, The Emperor’s New Coins: How Initial Coin Offerings Fueled A $100 Billion Crypto Bubble, Forbes (July 10, 2017), https://www.forbes.com/sites/laurashin/2017/07/10/the-emperors-new-coins-how-initial-coin-offerings-fueled-a-100-billion-crypto-bubble/#7391711a6ece. ↩
Id. ↩
Id. ↩
Charles Bovaird, Bitcoin Trades Sideways As Investors Look To China, Forbes (Sept. 24, 2017), https://www.forbes.com/sites/cbovaird/2017/09/24/bitcoin-trades-sideways-as-investors-look-to-china/#7207b6526e43. ↩
Id. ↩
Id. ↩
Cao Li, China Bitcoin Exchange to Stop Trading Virtual Currencies Amid Crackdown, N. Y. Times (Sept. 14, 2017), https://www.nytimes.com/2017/09/14/business/china-bitcoin-exchange.html. ↩
Shin, supra note 2. ↩
See Id. ↩
Kenneth Rapoza, After Crackdown, Nearly Every Chinese ICO Returns Cash To Investors, Forbes (Sept. 25, 2017), https://www.forbes.com/sites/kenrapoza/2017/09/25/after-crackdown-nearly-every-chinese-ico-returns-cash-to-investors/#75d0b6a619ff. ↩
Shin, supra note 2. ↩
Id. ↩
Id. ↩
Id. ↩
Id. ↩
Id. ↩
Id. ↩
Ben Geier, What Did We Learn From the Dotcom Stock Bubble of 2000?, Time (Mar. 12, 2015), http://time.com/3741681/2000-dotcom-stock-bust/. ↩
Shin, supra note 2. ↩
Laura Shin, From Blockchains to Mooncakes: Two Chinese Crypto Founders On The ICO and Bitcoin Exchanges Ban, Forbes (Sept. 19, 2017), https://www.forbes.com/sites/laurashin/2017/09/19/from-blockchains-to-mooncakes-two-chinese-crypto-founders-on-the-ico-and-bitcoin-exchanges-ban/#184d048d6a3d. ↩
Id. ↩
Id. ↩
See id. ↩
Id. ↩
Rapoza, supra note 11. ↩
See Li, supra note 8. ↩
Bovaird, supra note 5. ↩
Rapoza, supra note 11. ↩
Bovaird, supra note 5. ↩
Id. ↩
See id. ↩