The price of Bitcoin, the world's largest cryptocurrency, spiked by roughly 35% on October 25 after Chinese President Xi Jinping said that China should "seize the opportunity" to expand its use of blockchain technology. That single comment by the leader of the world's second-largest economy had a "sweeping impact" on Bitcoin trading, says Mati Greenspan, a senior analyst at trading and investment platform eToro, per Barron's.

Significance For Investors

Bitcoin is created, distributed, traded and stored with the use of a decentralized ledger system known to tech experts worldwide as blockchain. So any expansion in blockchain could benefit Bitcoin. Because of Xi's comments, “The U.S.-China trade war now has a new battleground," Greenspan said. "After focusing on agriculture, imports-exports, technology, patent infringements, and spyware, the focus is now squarely on FinTech.”

After surging to nearly $10,100 on Oct. 25, Bitcoin has retreated to about $9,400 in morning trading, which is still a more than 25% gain in less than five days.

Key Takeaways

  • Leadership in blockchain development is a key goal for China.
  • Various measures indicate that China already leads the world.
  • Recent comments on blockchain by President Xi sent the price of Bitcoin soaring.
  • This speculative surge may not be sustainable, however.

Just a day before Xi's comments were reported, Facebook Inc. (FB) CEO Mark Zuckerberg warned Congress that China is poised to seize leadership from the U.S. in digital currencies. Facebook has been developing its own digital currency, usually referred to as Libra.

China already is by far the world leader in the use and development of blockchain technology, based on the number of patents filed and the number of prominent companies in the field, per a research report from The Wharton School. Last year, Xi also called leadership in blockchain development a national priority, and it is a key element of China's current Five-Year Plan, the report adds.

Greenspan notes that the Chinese government has been exploring the possibilities of developing a digital currency. In this vein, the People's Bank of China (PBC) reportedly has been considering creating a digital version of the official national currency, the yuan.

Xi's comments also sent the shares of more than 70 Chinese tech companies soaring on Monday to their daily limits on price changes. Cooler heads prevailed on Tuesday, with the Shenzhen Stock Exchange Information Technology Index closing 2.8% lower on Tuesday, for its largest daily retreat in a month, Bloomberg reports. Meanwhile, China's exchange operator has asked companies whose shares surged by at least 10% on Monday to clarify their precise involvement with blockchain technology and to warn investors of the risks.

“The future is here for blockchain, but we need to stay rational,” the government-controlled newspaper People’s Daily said in a commentary, per Bloomberg. The Chinese paper noted that the technology is still at an early stage, and that it also needs to be regulated. It also drew a distinction between technical developments in blockchain and speculation in digital currencies.

Looking Ahead

To be sure, the Chinese government previously has tried to crack down on the mining of Bitcoin, partly on the grounds of conserving electricity usage. Moreover, cryptocurrencies such as Bitcoin that are developed and managed independently of the Chinese government offer the potential for citizens to hide assets. That means that Beijing is likely to keep cryptocurrencies including Bitcoin under tight control and scrutiny in the domestic market, limiting their upside for investors.