China is behind the recent bitcoin crash - can gold yuan and bitcoin co-exist in the long-run? Will SDR replace bitcoin?

This week, the Chinese authorities acted on their much-anticipated crackdown on cryptocurrencies by banning initial coin offerings (ICOs - the equivalent of stock market initial public offerings, or IPOs). This was preceded by the Chinese government's January 2017 meeting with bitcoin-related Chinese executives. This the strongest regulatory challenge so far to the burgeoning market for digital token sales.

The People’s Bank of China said on its website that it had completed investigations into ICOs, and will strictly punish offerings in the future while penalizing legal violations in ones already completed. The regulator said that those who have already raised money must provide r e f u n d s.

What is even more important, the People’s Bank of China also said digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies (in other words, digital tokens are NO LONGER CURRENCY in China), followed by the Chinese financial publication Caixin that authorities plan to shut key bitcoin exchanges in China.

This reminds me of 1933, when President Roosevelt signed Executive Order 6102, “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States” - except for the fact that the Patriot Act notwithstanding, no US government has ever introduced censorship so severe as the current communist China (if you can basically exercise a total control over the content of the social media posts, as China has done, then blocking your access to bitcoin in China would be a doddle for the Communist Party in China).

When the Indian Government issued a decree in November 2016, stating that high denomination notes would cease to be legal tender almost immediately, Indian citizens had to queue up in banks to deposit old currency notes:

which, by the way, resulted in an increase in the demand for bitcoins in India.

Of course, it is impossible for a government to seize your bitcoins or ether, unless you decide to hand over your private keys; h o w e v e r, the majority of citizens and institutions like to stay on the right side of the law (after all, trading heroin is even more profitable than trading cryptos - smuggling hard drugs from the so called golden triangle into Europe can yield up to 20,000% - and y e t we don't want to do it...).

Cryptocurrencies have become popular in China due to the Chinese government’s stringent control of the yuan - as the Chinese government has been artificially devaluing the currency for trading purposes, affluent individuals in China have found a more stable and accessible alternative to the yuan in cryptocurrencies; so predictably, the Chinese government's stringent control of the cryptos would shift the interest from the cryptos to other assets, such as gold backed yuan.

There is another problem - if China continues and intensifies its anti-crypto policies, most crypto miners would have to find another country with low electricity costs (China has an abundance of cheap energy and hardware, which facilitates crypto mining), where they can set up their mining hardware again (after all, it might get confiscated by the Chinese authorities). That cannot be, i.e., a major Bitcoin trader Japan, as the crypto mining cost in Japan is more than THREE TIMES the mining cost in China (Japan’s trading volume grew from 1% to 6% - due to:

a) Chinese crackdown on crypto-currencies

b) Quantitive easing leading to extremely low-interest​ rates, which have occasionally even become negative, meaning that it costs an individual to save money).

As in China, crypto-currencies​ in Japan became viewed as a more stable asset than the native currency.

Some Chinese miners have already pre-emptively opened overseas operations, such as in Sweden (where the electricity is the cheapest in western Europe):

https://www.cryptocoinsnews.com/chinese-bitcoin-mining-firm-canaan-to-open-10-mw-facility-at-node-pole-sweden/

However, higher electricity costs and the Swedish government's well known love for exerting a total control over its population are not the only disadvantages of mining Bitcoins in Sweden: unlike the rest of the world, from September 24, 2013, three-month experiment in zero fees, China-based exchanges did not charge fees on bitcoin trades, making money instead on withdrawal charges out of the exchange; furthermore, the more the Chinese trading volumes increased, the more these charges were reduced, this incentivised Chinese traders to bolster this figure by buying and selling from themselves at zero cost.

Expressed as a ratio to non-Chinese volume, it went from 17% to well over 100% in barely six weeks!

In January 2017, IG Markets chief market strategist Chris Weston said, “Some 90% of bitcoin trading is taking place in China at the moment and if you compare the rise in value of bitcoin against the performance of the yuan against the US dollar, then you will see there is a clear correlation”.

Well, if there was a correlation between weak yuan, strong dollar and the bitcoin bubble, then gold backed yuan will correlate with weak dollar - pricking the cryptobubble (as the money will move to gold yuan - provided of course that it becomes the world's trading currency for oil, which is a big ask, as in keeping with Spykman's rimland theory, that would require China to oust the US from controlling the maritime routes and the so called chokepoints).

Global restrictions on sovereign currencies are playing a major role in driving increased bitcoin demand according to Sam Lee, chief executive of Blockchain Global and developer of Australia’s largest bitcoin exchange.

“Utilising bitcoins to evade capital controls is happening on a global scale and not unique to China, as all responsible governments have varying degrees of capital controls in place to prevent anti-terrorism financing and money laundering,” Lee says.

“There is certainly increased interest as a result of these monetary policies, as blockchain-based assets like bitcoin are considered a borderless digital value store … governments will find that their citizens will increasingly distance themselves from their national currency.”

Mr Weston debunks the myth that the Chinese were buying bitcoin because of its alleged rampant adoption and use in the world market (by the way - bitcoin trade is only a fraction of gold trade and all cryptos transactions are only a fraction of VISA card transactions).

“People in China are also buying bitcoin simply because it’s a currency on the rise. Chinese investors love speculating and they love momentum trading. Bitcoin has gone parabolic and people are chasing that. They are following the money flow,” says Chris Weston.

“This, of course, is to be expected. There is huge FOMO (fear of missing out) trade going on in China. If you have real momentum then it comes into the trading psyche and they want to be part of that.

“So the real story behind bitcoin is not its rampant adoption and use in the world market. The real story is to do with speculators, capital outflows and bitcoin being used as a vehicle to get money out of China.”

The fact is that China's debt is higher than the US's debt.
China’s debt surpasses 300% of GDP - $29 trillion in overall debt; compared to $19 trillion in the US's overall debt - in China, that's corporate debt alone! By the end of 2017, bad debt in China will hit $7.6 trillion (68% of GDP), which by the way shows how much the Chinese authorities are lying (this will make the bad debt ratio 34% of all loans, as opposed to 5.3% they proffer).

Thus the Chinese investment in bitcoin was just - like the Chinese investement in the real estate in London or San Fransisco - the way to rescue the Chinese assets from the inevitable debt bubble burst in China (over the last decade, an estimated $3.8 trillion in capital has left China, $1 trillion last year - while net foreign direct investment over the same period of time has amounted to $1.3 trillion, leaving the country with a net loss):

So...

In the long run, can gold yuan kill bitcoin?
Most of you would find it unlikely. Furtheremore, even I find it unlikely. However, while it may not kill it, in the long run, it may render it worthless - p r o v i d e d that the gold yuan becomes a major part of the SDR:

Bear in mind that just r e c e n t l y, ethereum prices briefly plunged from above $300 to 10 cents (TEN CENTS!!!) on one exchange before recovering!