Following the reports on September 11 that Chinese authorities would shut down the country's bitcoin exchanges, the price of the cryptocurrency took a nosedive: CoinDesk's Bitcoin Price Index is at $3,469.76 as of 1:05 p.m. EDT on September 14, down from highs above $5,000 at the beginning of the month. (Of course, recent comments from longtime bitcoin bear Jamie Dimon hardly helped.)

China's crackdown on cryptocurrencies has escalated quickly; on September 4 the central bank announced a ban on initial coin offerings (ICOs), a fundraising technique that involves issuing blockchain-based tokens, most often using the Ethereum​ platform. But skepticism greeted rumors that the country's vibrant bitcoin exchanges were next. Bobby Lee, co-founder and CEO of Shanghai-based BTCC (the country's oldest bitcoin exchange), solicited opinions on Twitter. The poll's verdict: "fake news." (See also, Bitcoin Slides Down to $3,500.)

#China regulators have finally decided to officially #ban all #Bitcoin exchanges & trading platforms.#True? or #FakeNews?
Please #Retweet

— Bobby Lee (@bobbyclee) September 8, 2017

On September 14, though, BTCC announced it will "stop all trading" on September 30.

1/ After carefully considering the announcement published by Chinese regulators on 09/04, BTCChina Exchange will stop all trading on 09/30.

— BTCC (@YourBTCC) September 14, 2017

The following day a second exchange, ViaBTC, said it would shut down its mainland exchange on September 30. There is as yet no word from other major exchanges such as Huobi and Bitfinex. OKCoin told Investopedia via email that the exchange is working normally and has no plans to shutdown yet.

Yuan-der Control

China has had a complicated relationship with cryptocurrencies, and bitcoin in particular, for some time. Bitcoin trading volumes in yuan​ leapt ahead of those in U.S. dollars in November 2013, according to Bitcoinity data. China's appetite for bitcoin trading reached monstrous proportions in 2016: that December, 98.4% of all trades were conducted in yuan. Overall trading volume reached nearly 171 million bitcoin, double what it had been the previous year. (See also, How Bitcoin Works.)

At the beginning of 2017, though, yuan-denominated bitcoin trading collapsed. Officials inspected exchanges in Shanghai and Beijing in January, looking for money-laundering violations. In February, overall bitcoin trading volumes fell by 96.6%, due entirely to trading in yuan, which by then represented a much smaller slice (24.8%) of a much smaller pie. 

Chinese enthusiasm for bitcoin has more than one source. Electricity is cheap in much of the country, making it a hub for mining operations. The surge in bitcoin trading came just after a precipitous fall in the country's stock market, which in turn was preceded by a delirious run-up: the speculators had found greener pastures.

The primary reason the government eyes bitcoin with such suspicion, however, is its role in avoiding capital controls. Anxiety about the state of China's economy prompted massive capital flight in mid-2014, which continued through 2016. The government burned through $1 trillion in foreign exchange reserves to defend the yuan's value over that period. (They still have by far the largest pot in the world, at $3.1 trillion in August; compare that to second-place Japan's $1.3 trillion.)

China's hedgers got creative: individuals bought art and property, or went gambling in Macau. Companies went on a foreign acquisition spree. And of course there was bitcoin. The authorities, having cracked down on all of these avenues for capital flight, have helped the yuan rally by around 6% against the dollar this year, after falling 6.5% in 2016. They've been less kind to bitcoin, but hodlers don't have too much cause for complaint: it's up 258% since the beginning of the year. (See also, 5 Ways to Short Bitcoin.)