Earlier this week, Bitcoin for the first time crossed the $10,000 milestone. In just three days, its value jumped 20 percent. In particular, this recent increase could be explained by the activities of the People’s Bank of China.
Last week, the Chinese regulator injected a total of 810 billion yuan ($122 billion) into the economy via reverse repos. A reverse repo is a process in which the central bank buys securities from commercial banks, with an agreement to sell them back in the future. Some experts suggest that Chinese businessmen invested a share of the money into the cryptocurrency market, which contributed to Bitcoin skyrocketing.
China remains the main player in the cryptocurrency market, with over 85 percent of mining and processing equipment being manufactured in China and over 50 percent of the Bitcoin processing power located in China as well.
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Until recently, 95 percent of global Bitcoin trading was done though Chinese exchanges. The Chinese government, however, has banned cryptocurrency exchanges on its territory, prompting Bitcoin trading to move to other jurisdictions and a rise of non-exchange cryptocurrency operations. For instance, the share of P2P transactions in China involving Bitcoin was five percent in September and rose to 20 percent within a month; after the ban was imposed it doubled by the end of November.
The situation in the Chinese economy, however, provides an explanation only for the recent spike in Bitcoin’s value, which has been on the rise this past year. In September 2016, Bitcoin traded at some $1,000 and has grown tenfold throughout the year. Many officials and market participants are now worried about the future of the cryptocurrency.
"Creating money out of thin air without government backing is very different from money with government backing," Dimon said at the time.
He recently repeated his criticism of the cryptocurrency market, saying, "If you're stupid enough to buy it [Bitcoin], you'll pay the price for it one day."
In an interview with Sputnik China, Zhang Ning, a financial analyst at the Institute for Strategic Studies at the Chinese Academy of Social Sciences, has disputed such an attitude towards cryptocurrencies. According to Zhang, Bitcoin has real value.
"Any novelty is usually rejected by people, in terms of their psychology. In fact, anything can be used as money. The main requirement for a thing to be used as money is to be widespread and recognized as a new standard of value. Now, Bitcoin is a new standard of value," the analyst pointed out.
READ MORE: Cryptocurrencies May Become Global, but are Unlikely to Replace the US Dollar
Zhang also underscored that the amount of Bitcoins in circulation is limited and because of its "deflationary nature" Bitcoin cannot be used as a national or global payment tool.
"On the other hand, this guarantees the constant increasing of its value. To a certain extent, Bitcoin allows for compensating the shortage in the issuance of fiat currencies. We may not call Bitcoin a conventional currency; it can be store of wealth or an asset. But it has a high value. This cryptocurrency has changed our understanding of money," Zhang explained.
Debates over cryptocurrencies are now raging on, with conventionalists calling Bitcoin another bubble and their opponents asking in response about the backing of conventional money. Today, a national currency is backed by a country’s economy, GDP and, as a result, by the confidence of investors. According to Zhang, Bitcoin has guarantees of its value too.
"It is backed by mining and processing assets and blockchain technology, which is regarded as reliable. Demand for Bitcoin is huge now. Of course, the market is volatile and a crash in the market is possible, but only a short-time one. The question is what will happen after all 21 million Bitcoins are mined? For now, we should assume that this could result in a spike in Bitcoin’s value due to its shortage," the analyst concluded.
