China To Ban Cryptocurrency Exchanges And Jamie Dimon Calls Bitcoin A Fraud

China to ban cryptocurrency exchanges

The big rumor that has been floating around this past week is that China is about to ban cryptocurrency exchanges. Since the publication of the rumor in the influential Chinese financial publication, Caixin, last Friday, the price of bitcoin has plunged nearly $750 (16%). The market was also spooked by JP Morgan's Jamie Dimon's comments that Bitcoin was a "fraud". With all this negative sentiment surrounding bitcoin and other cryptocurrencies, should you be worried?

China Banning Cryptocurrency Exchanges

China banning alternative currency is nothing new. One fascinating example that was covered in the book, Digital Gold, was when China banned QQ Coin, a virtual currency created by Tencent, that allowed holders to to buy things such as virtual flowers for instant-message buddies, cellphone ringtones and magical swords for online games. This was nearly ten years ago, back in 2007!

Back in 2013, China restricted local payment companies from providing yuan clearing services to bitcoin exchanges. That sent the price of bitcoin crashing almost 50%, to around $421. If ever there was a precedent for the kind of rumor we saw out last week, this would be it. Wouldn't be surprised if we saw a massive tank in price because a lot of the speculative moves have come from the Asian exchanges like China, Korea and Japan. 

Let's say that China gets draconian with bitcoin this time. Does it spell the end for all cryptocurrencies? Back to the QQ Coin example, ultimately, China was able to shut it down because it had a single point of failure - Tencent. Bitcoin doesn't have that and banning the cryptocurrency exchanges would be fantastic for decentralized exchanges like Waves and Bitshares.

What are Decentralized Exchanges (DEXs)?
A decentralized exchange is an exchange that doesn't hold the customer's funds. Instead, the trades occur directly peer to peer. Some systems currently being deployed include creating proxy tokens or by a multi-signature escrow system.

Contrast this with the more familiar centralized model, in which users deposit their funds and the exchange issues an IOU that you can trade with on their platform up to the IOU limit.

The Benefits of DEXs

The biggest benefit of decentralized exchanges over a centralized one is the fact that they're "trustless". If anything, the Mt. Gox fiasco highlighted the danger of trusting exchanges with your funds. You don't need to trust that the decentralized exchange is secure, honest or solvent, because your funds are held in your own personal wallet.

The other big advantage of decentralized exchanges is that you don't need to disclose your personal details like you do when you register on a centralized exchange. Your privacy is maintained and is disclosed only if there are bank transfers involved.

Last but not least, decentralized exchanges are hosted via nodes, which means that there is no risk of server downtime.

Drawbacks of Decentralized Exchanges
While there is a lot to love about DEXs, there are some drawbacks to current implementations, which explains why their adoption rates haven't been spectacular yet.

Some exchanges require the users to be online in order for trades to be placed and executed. You can't just set a price you're willing to trade at and leave it on the exchange.

Most decentralized exchanges also don't have the trading features that are common on most centralized exchanges like trading on margin and stop losses. They really function as very basic exchanges.

Even though Decentralized Exchanges are the wave of the future, they don't have the traction, which brings with it volume and liquidity, to be useful right now. Perhaps this rumored crackdown will shift some of the volume towards these exchanges and help them to flourish.

Jamie Dimon Calls Bitcoin A Fraud

Jamie Dimon, CEO of JP Morgan
By Steve Jurvetson (Flickr: Jamie Dimon, CEO of JPMorgan Chase) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons
Jamie Dimon calling bitcoin a fraud, to me, indicates that he's worried about the threat of bitcoin to the banking oligopoly. According to an article in the Harvard Business Review, blockchain technology has the potential to disrupt the financial system, like how the media was disrupted by the Internet.

I won't go into all the benefits of blockchains and bitcoin in this article, but it is worth mentioning that one of the big threats to the technology going forward is the banking lobby. If the big banks are starting to feel threatened, you can be rest assured that they will get their lobbyists to pressure their friends on Capitol Hill to pass restrictive regulations on cryptocurrencies. They spent a total of $6.8 Billion on lobbying activities from 1998 through 2011, which was way more than any other sector. 

While new restrictive regulations are obviously undesirable, i'm not too worried about bitcoin's future, because unlike QQ Coin, there is no single point of failure. Ultimately, bitcoin's success depends on people's faith in the project.

Final Thoughts

If China does indeed go about banning local bitcoin exchanges, i wouldn't be surprised if we see a 50% or more correction. $2800 provided strong support and is a level that i would look at closely to initiate a buy. If this level gives way, we could find it moving towards the level at the start of the year, closer to $700 - $1,000. As the Rothschild saying goes, you want to be buying when there are blood on the streets. Can you smell the fear yet?

Disclaimer: This isn't investment advice. It is merely my opinion and what i'll be doing should the above mentioned scenario pan out.
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