Bitcoin plunged by as much as 12 percent on Friday after China’s central bank urged investors to take a rational and cautious approach to investing in the digital currency, which is on track for its heaviest two-day drop in two years.
Bitcoin had been on a tear until Wednesday, gaining more than 40 percent in two weeks to hit around $1,139 on the Europe-based Bitstamp exchange, just shy of its all-time record of $1,163.
But the web-based digital currency, which has shown an intriguing inverse correlation to the Chinese yuan in recent months, plunged as the yuan soared on Thursday, falling as much as 20 percent at one point.
It continued that fall on Friday, with its losses accelerating after the central bank’s warning.
It fell as low as $871, down almost a quarter from its peak on Wednesday, before recovering to about $900 by 1455 GMT. That still left it down 10 percent on the day and on track for its worst two-day performance since January 2015.
The Shanghai head office of the People’s Bank of China (PBOC) noted in a statement that bitcoin prices had shown abnormal fluctuations in recent days and said those investing in it should do so carefully, with awareness of the currency’s volatility.
The PBOC’s words carried echoes of its 2013 warning that financial institutions should steer clear of the digital currency, which sparked a $300 slide in bitcoin.
The PBOC also repeated on Friday its 2013 view that bitcoin is not a currency and could therefore not be circulated as a real currency in the market.
“This is the Chinese authorities saying: We are watching,” said Charles Hayter, CEO of digital currency data analysis website Cryptocompare. “The relative size of the bitcoin market is minor, but trading has reached up to $10 billion a day on the bitcoin-yuan pairs.”
“The full meaning of the government’s comments are not 100 percent clear, but restrictions and regulation of trading is one avenue that could affect volumes and therefore price.”
Hayter said trading between the yuan and bitcoin had made up about 98 percent of the market for the past six months, according to his analysis. Because there are no trading fees on Chinese exchanges, it is much easier to get in and out of trades and therefore creates a higher trading volume, he said.
Bitcoin can be used for moving money across the globe quickly and anonymously, and operates outside the control of any central authority.
That makes it attractive to those wanting to get around capital controls and also to investors who are worried about a devaluation in their currency — one of the reasons often cited for bitcoin’s surge in 2016. While the yuan fell 7 percent, its worst year since 1994, bitcoin outperformed all other currencies, with a 125 percent climb.
But many bitcoin experts say Chinese trading volumes are overstated and attribute sharp moves to speculation by, for example, US-based hedge funds.

Source: Arab News