Last week, Chinese authorities signaled that they would begin to crack down on Bitcoin exchanges and trading activity taking place in the country. This sent the price of Bitcoin down from a near-term high of over $1,100 to below $750 as investors and traders in China scrambled to sell, some forced to liquidate positions automatically due to margin calls. The price of Bitcoin has since stabilized somewhat, now trading around $830, but due to China's influence and size of the global Bitcoin market, people are still paying attention to what the government will do next.

China and Bitcoin

Chinese individuals have flocked to Bitcoin, the semi-anonymous, borderless, digital currency in an effort to circumvent strict capital controls imposed by regulators, and to stave off the effects of systematic devaluations in the Chinese currency, the Yuan. China's activity in the Bitcoin market has grown such that currently more than 95% of all exchange activity is between Bitcoin and Yuan (BTC/CNY), with around 4% Bitcoin to U.S. dollar, and the rest to currencies such as the Euro, Canadian dollar or Russian ruble. To put this in to perspective, according to Bitcoin price data aggregator, Bitcoinwisdom, over the last 24 hours, 1.2 million Bitcoin traded in exchange from CNY while just 15,250 traded for dollars. In dollar terms, that is nearly $1 billion worth of Bitcoin notional has changed hands in China and jus under $13 million in the U.S. The market cap of Bitcoin is currently just under $14 billion. (For more, see: Is Bitcoin Being Used for Chinese Capital Flight? )

"When China sneezes, Bitcoin catches a cold," remarked Charles Hayter, CEO of digital currency comparison website CryptoCompare. The latest drop was set off by news of spot checks from Chinese regulators on local bitcoin exchanges. Indeed, bitcoin prices have spiked in the past when China has announced currency devaluations or capital control measures, and so it is not surprising that the market has operated in reverse on potential negative news.

According to CNN/Money, "Finance officials inspected exchanges in Shanghai and Beijing on Wednesday to check whether they were sticking to anti-money laundering rules and other regulations, according to statements from the Chinese central bank." Meanwhile, one of the largest Chinese bitcoin exchanges, BTCC, issued a statement on the matter saying, "All operations at BTCC are normal and we continue to actively work with regulators to ensure that we remain compliant." (See also: Could Bitcoin Surpass $2,000 in 2017?)

The Bottom Line

Bitcoin prices tumbled 30% from near-term highs after Chinese regulators announced inquiries into a number of bitcoin exchanges in the country. Many Chinese individuals have seen the digital currency as a safe haven against capital controls and currency devaluation. The price of bitcoin has since stabilized after much of the panic selling, and forced liquidations due to margin calls, has cleared.