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Bitcoin: Too big to fail? Will a Bitcoin black market emerge in China?

This article is part of a series of translations from Spanish to English, as I am going to undertake TOEFL iBT.

After the last ups and downs of the Chinese government, which follows a pattern of tightening Bitcoin, then relax the noose, tight it again, and so on..., we have the perfect example of the mainstream government which acts with extreme caution when it comes to legislate Bitcoin and other cryptocurrencies.
Very few governmental behaviors and decisions are the product of coincidence or improvisation. In this analysis we will try to argue why the Chinese government has opted for implement this sequence of crypto-incidents. We will discuss the hypothesis of Bitcoin becoming Too big to fail for some economies.

The love-hate relationship of Chinese authorities and Bitcoin is not so recent as it seems. The truth is that the last events are not one more episode of this series, it has been dilating for months.
The first rales of this agony started in early 2017. As you can see here, at that time Chinese authorities announced they will initiate an investigation with respect to Bitcoin and its intermediaries, in order to reduce the market risks. In principle, that sounded like some irrelevant and innocent procedure, but the market operators perceived it as a threat and the preamble of Chinese toughening of Bitcoin permissiveness. The cryptocurrency plunged 305%.

Shortly after, in February of the same year, following a meeting with the Chinese Central Bank, some Bitcoin intermediaries announced that they were going to freeze their clients BTC accounts, keeping them from withdrawing. The news was not irrelevant or tied to China, but it affected the whole cryptocurrencies market; there was even fear that the future of Bitcoin was at risk of being thrown out of joint. At that time, almost 100% of BTC transactions were processed in China.
The cryptocurrency reaction came swiftly, and it depreciated by 10%. Well, we must take into consideration that the slump was nothing compared with Bitcoin volatility. A few days earlier BTC price was close to $5,000, then it fell to $1,000.
As we have said in the first lines of this article, China has never seek to kill Bitcoin, but fiddles with tightening and freeing the cryptocurrency. Every round China does this, it tighten BTC a little more. At the end of May, the country allowed intermediaries clients to withdraw their BTC, as you can read at cryptocurrency-oriented newspaper Coin Telegraph. Once again, the Bitcoin volatility roller coaster gained value through an increasing slope.
The rest of the story corresponds to the last months, when China definitely crushed the cryptocurrency to maximum levels.
On one hand, Chinese authorities banned ICOs through legally considering them as "Illegal public financing". Not content with that first executory action, the authorities continued their roadmap by announcing the drastic measure of permanently ban all country-based intermediaries and operators.
Obviously, taking into account the importance of Chinese intermediaries, operators and users, the Bitcoin response was immediately unleashed, and it suffered an impressive drop. In a matter of a few dozens of hours, the BTC price dropped from close to $5,000 to under $3,000. Something extremely corrective, even for the highest standards we are used to of this cryptocurrency; which let us describe it as value sinking.
But if there is something in common to all cryptocurrencies is that many of them are twinned by sharing the same legislation and, above all, by the general "as a whole" perception. In fact, Ethereum, the second-largest cryptocurrency by market capitalization, has accompanied Bitcoin in its sinking: Eth suffered a 50% correction, moving from $400 to $200, as you can read.
Before concluding this point, we must say that, a few weeks later, BTC and other cryptocurrencies experienced an important price increase of 20%. As you can see at Reuters, the response has lead to an upwards trend, but after several drops in the absence of relevant news justifying them, we must assume that this spike has nothing to do with a change in tendency, but a mere reaction to a hard correction.
Days after such reaction, the high volatility of the roller coaster seemed to prevail, with BTC back to the red numbers, clearly indicating that such spike could be a mere technical reaction like the ones from stock markets: do not forget that cryptocurrency price variations, as other markets do, are subject to multiple factors, such market psychology, with its panic, euphoria, reactions and overreactions. What we witnessed is not different from any other cryptocurrency-free market.
Actually, the real risk that frighten crypto-markets is whether or not the last Chinese authorities announcement is the straw that breaks the camel's back, and if we are witnessing the burst of the crypto bubble, of which we are hearing about at the "commodity" media.
But optimism shouldn't be put aside when we have reasons for it, and the market always provide new opportunities. Actually, everything points to the fact that cryptoeconomy has come to stay. It represents a disruptive advance with several distinct advantages, in special the things related to Blockchain, to name only some examples, cybersecurity, drastic expenses cut, removal of legal procedures and implementation simplicity of smart contracts, financing liberalization, or the collaborative economic managing as the article we wrote about TheDAO.
That is why probably, although this correction could represent a definite burst of the cryptobubble, after the sinking we shouldn't see anything but the opportunity of buying cryptoassets that are being called to survive. In order to pick our "bets" it will be essential to evaluate reliability of potentially cryptoassets survivors, and also their functionality and technical characteristics: be cautious and remember that the vast majority of current cryptocurrencies emerged from the vibrant cryptobubble will end disappearing, and vanished savings is all what will be left on the hands of the investors, with strings of useless zeros in their hard drives.

BUT... WHAT'S BEHIND THE CONTINUOUS BACK-AND-FORTH OF CHINESE AUTHORITIES?
We could classify the story of Chinese authorities with respect to Bitcoin as, at least, suspicious. The undergoing events have resulted in a constant change between "I know Bitcoin circumvents my unwavering monetary policy" and "I dare not totally ban it because I'm afraid of what could happen". Only Chinese authorities certainly know what is behind its declarations and ensuing Bitcoin legislation, but the most likely hypothesis is that all these news going on are part of a very well planned strategy. In fact, from the perspective of the market, it is the less dramatic implementation strategy, assuming that Chinese authorities could have taken Bitcoin out of their economy in the last months.
The attitude of the Chinese government seems to be trying to deflate the Bitcoin economic bubble that has grown in its country, with continuous ups and downs, trying to frighten the common Btc user, with the sole objective of killing Bitcoin with successive micro heart attacks, instead of one serious heart attack. In order to evaluate the impact on the Bitcoin community and the Chinese miners, we shouldn't forget that many times through our recent cryptocurrency history, the activity of such miners amounted to 90% of Bitcoin transactions.
I cannot deny that those movements could be weird, given the possible intentions of Chinese government trying to eradicate Bitcoin from China, but we have to take into account that cryptoeconomy of some countries (as China) is so important that the evolution of cryptoassets may influence the economic policies of those countries. In fact, one important reason to consider which explains the continuous Chinese renege on crypto bans could be that authorities are worried about a too-deep-sinking of crypto market capitalization, considering the great acceptance cryptocurrencies are enjoying. Such concern may stem from the fact that, due to widespread cryptoassets adoption in China, a great sinking could decrease wealth perception of Chinese citizens.
The risk is nothing but Bitcoin price plummeting followed by a decrease in consumption, with its implications in macroeconomics. I greatly fear that authorities of every high crypto acceptance country accepts that cryptocurrencies are Too big to fail. Maybe some of you think that such idea lacks any basis, and is it true that Bitcoin market capitalization looks small if compared with Chinese GDP, but the truth is that there is a huge weight of psychological and confidence factors in a cryptoasset that is on everyone's lips: although not all citizens have their money invested in Bitcoin, the psychological effect is very important, particularly because many Chinese citizens think of it as way out of the unwavering state over-regulation on fiat currency and capital markets.
Certainly, the Chinese authorities war on Bitcoin seems to be lost. Over-regulating and drastically legislating the market often results in the creation of a black market, just like this suggests it will happen in China unless we see a change in the course of events.
The likelihood that this happens is significantly increased by the fact the Bitcoin will keep its value after its official death in China, hence it will keep its value for the Chinese citizens who operate in the black markets.
Something similar happened with the dollar black market in the communist Eastern Europe. And Bitcoin's value will be sustained by other countries' policies, like Japan, where Bitcoin was officially accepted as payment method. Also, we must talk about the recent turnaround of Russian authorities, who firstly talked about banning Btc and imprison Bitcoiners, then started to embrace the new socioeconomic paradigm and tried to benefit from Blockchain and cryptocurrencies. Another example of Central banks which help increasing Bitcoin value is Finnish Central Bank, which recently adopted a permissive and tolerant policy towards Bitcoin.
We see that Chinese events towards Bitcoin are a matter of confidence and perception instead of Bitcoin weight in the economy. For these cases we should coin the term "Too influential to (make it) fail" instead of the classical "Too big to fail". Indeed, Chinese authorities seem to have chosen to trigger a controlled detonation of Bitcoin domestic market, but the move could result into a -black- surprise. At least this is what it seems to anticipate the last news about cryptocurrencies in China, and how this story could end with a black crypto-market emerging from the Asian giant.

That new side of Bitcoin implies an important shift of the cryptoexperiment in which we were inadvertently involved by Satoshi Nakamoto, which has its multiple side, unpredictable, effects.
Maybe this "Too big to fail" is not one of the intended effects visionary Nakamoto pursued, but it has ended up one of the effects we've seen in our socioeconomic landscape. Probably, it has come to stay, because Bitcoin is interweaving with many economic systems and policies of several countries, and despite of Chinese restrictive case, to legislate simply means one more step above publicly accepting  Bitcoin in our economic fabric. Finally, we must conclude that this is how economy looks like: when a government tries to stop a river, water always ends up overflowing from some place.

Source [Spanish]

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