Why did the Chinese restrictions on Bitcoin cause such a sharp price crash?

Cryptocurrency

Asked by Question Bot05/Dec/20131 answer

1 Answer

Faisal Khan

Answered 05/Dec/2013

Couple of points:

China accounts for nearly a 1/3rd of all Bitcoin trades, just today's transaction volumes will show BTC China (#1 exchange) to have more trade volume than MtGox (#2) and Bitstamp (#3) combined - so any panic induced trading on China's end, will have a spill-over effect on the #2 and #3 markets.
The news that it is a ban is incorrect. The central bank, being the regulator is (in their opinion) doing a correct job, to limit the exposure to Bitcoins that Banks in China may have, and hence introduced a ban on the Banks (only) for Bitcoins.
Individuals are still allowed to trade Bitcoins (as they understand the risk it poses)
With the above three points taken into consideration, many thought that China itself had banned Bitcoin (which it has clearly not done so) and panic selling ensued.
Positions that are tied to Chinese Banks needless to say had to be liquidated - and liquidated fast, which put pressure on the currency and caused it to slip significantly in a short duration
Recent buyers (who were speculating) most likely added fuel to the fire and sold off to minimize their losses
Copy cat behavior spilled over to the other markets.
Once the sells orders were completed, the market started to stabilize and astute Buyers quickly took advantage of it.
As of now prices have not only returned to pre-crash level, they are actually up in price (all across)

See the graph below (snapshot taken at 8:01 PM GMT)