Bitcoin price crashes as China cracks down

Price falls 16 per cent as People's Bank of China begins inspecting bitcoin trading platforms in Beijing and Shanghai

Officials from the People's Bank of China are investigating the country's burgeoning cryptocurrency exchanges, prompting a sharp fall in the price of the most widely used cryptocurrency, bitcoin.

Bitcoin has become an alternative to gold as a refuge for investors in times of global economic uncertainty. During 2016 its value against the dollar almost doubled, peaking at more than US $1,100 in the New Year, as investors worried that stock markets and other assets were likely to drop.

Around 90 per cent of all bitcoin transactions originate in China, and the country is home to 70 per cent of all bitcoin miners, organisations and individuals who donate computing power to verify transactions in return for a fee.

Bitcoin allows people to move their money around semi-anonymously, allowing people to breach China's strict rules about currency exports; therefore a crackdown by the authorities has been widely predicted.

Day trading on the financial markets is a hugely popular past-time in China where the yuan cannot be exchanged for hard currency in the banks and a recent fall in the price of that currency has lead to an exodus of capital from the country. The yuan weakend by seven per cent over 2016, increasing the appeal of bitcoin, and contributing to its rise.

On Wednesday the People's Bank of China said it had begun inspecting some of the country's major bitcoin trading platforms in Beijing and Shanghai, citing foreign currency exchange, market manipulation, money laundering and financial security risks. The news caused the price of bitcoin to fall by 16 per cent overnight on the Bitcoin Price Index, an average of the major exchanges. In all, the price has dropped by over 30 per cent over the past week.

"China giveth and China taketh away," Gil Luria, an analyst at Wedbush Securities, told Bloomberg.

"The rally in bitcoin over the preceding few weeks was likely driven by Chinese capital flight and speculation, which is why concerns about China taking a firmer stance against the use of bitcoin is likely putting pressure on the price."

China is not alone in its desire to manage the bitcoin marketplace. Last year the European Union announced a plan to regulate and 'de-anonymise' the currency.