noon. But it now appeared
that the problem wouldn’t
end with Tencent. Bobby
learned that all the payment
processors had been called to
the
People’s
Bank
on
Monday to discuss the issue.
The Monday meeting did
not generate any official
change in policy or new
documents. But the real-time
reports from the meeting that
Bobby’s team was receiving
revealed that the payment
processors were all being
encouraged to reconsider any
business
with
Bitcoin
companies. As the rumors
began to leak, the price
dropped, falling to around
$600 on Western exchanges.
Two days later, when Bobby
officially confirmed that his
company would stop taking
new deposits, a new sell-off
began, taking the price down
to $430 on Bitstamp and
2,100 yuan on BTC China, or
less than a third of what it had
been at the high just two
weeks
earlier.
Whereas
100,000 Bitcoins had been
trading hands daily on BTC
China a few weeks earlier,
now the trading volumes
were less than a tenth of that.
Bobby was in back-to-
back meetings with his staff
contemplating ways to stay
alive without the payment
processors. One of the other
Chinese exchanges, Huobi,
began taking in customers’
money through the personal
bank
account
of
the
company’s
CEO.
The
December guidance from the
Chinese central bank seemed
to bar banks from working
with Bitcoin, but Bobby was
surprised to see that the banks
eagerly took the business
from
his
competitors.
Bobby’s Chinese deputies
explained that the banks were
doing this because, unlike the
payment processors, they had
not been called into a meeting
and warned not to work with
Bitcoin. Whereas in the
United States, banks were
unwilling to do work unless
they were explicitly given a
green light by regulators—
and sometimes not even then
—in the Wild West of China,
the banks would try just about
anything until they were
explicitly told it was not
allowed.
Bobby,
though,
had
worked most of his adult life
for American companies and
he
was
uncomfortable
skirting the rules. The best
alternative seemed to be some
sort of voucher system, in
which third-party vendors
would sell credit for BTC
China, similar to the way
vendors sell cards with cell
phone minutes. But as his
staff rushed to get this set up,
Bobby watched customers
flock to the competitors who
had set up bank accounts. In
China,
scrupulously
following the rules seemed to
be
a
recipe
for
losing
business.
EACH NEW RUN-UP in the price
had drawn new and more
sophisticated scrutiny of the
principles underlying Bitcoin,
and the December rise and
fall were no different. This
time, the people training their
sights on Bitcoin were some
of
the
highest-profile
economists in the United
States—including
Paul
Krugman, the progressive
Nobel Prize winner; and
Tyler Cowen, the prolific
libertarian-leaning
blogger.
Few of them had much good
to say.
Krugman focused largely
on Bitcoin’s claim to be a
currency, given the difficulty
it seemed to have fulfilling
one of the basic roles of
money: serving as a reliable
store of value. Why would
people store their wealth in
Bitcoin if they knew the value
was going to fluctuate so
violently? Krugman asked.
Cowen,
meanwhile,
argued that Bitcoin was going
to have difficulty sustaining
its value as new and better-
designed
cryptocurrencies
came along and drew users
away from it. Some people
were,
indeed,
already
choosing to hold Litecoin,
Charlie Lee’s creation, and a
hip, younger cryptocurrency,
Dogecoin.
But
a
deeper
strain
lurking
beneath
these
critiques was an awareness
that one of the fundamental
premises that had driven
Bitcoin’s popularity seemed,
increasingly, to have been
disproved.
Many
early
Bitcoiners, particularly in the
libertarian
camp,
had
believed that the Federal
Reserve’s efforts to stimulate
the economy in the wake of
the
financial
crisis,
by
pumping lots of new money
into banks, would devalue the
dollar and lead to high
inflation, similar to what had
happened in Argentina.
This idea made a scarce
asset like Bitcoin or gold look
like a safer bet than holding
dollars. But in late 2013 none
of the fears about inflation
had been borne out. In fact,
the
problem
facing
the
American economy was not
inflation,
but
deflation,
because banks were holding
much of the new money,
rather than putting it out into
the economy. The Fed’s
stimulus program had been
successful enough that the
European
and
Japanese
central banks were now
copying it. This was a living
economics experiment and it
didn’t seem to be going the
way libertarians expected. At
the same time, the scarcity of
Bitcoins still had the effect
that early critics had warned
about: it was encouraging
people to hoard Bitcoins
rather than actually use them.
Perhaps the most stinging
criticism came from a well-
known British science fiction
writer, Charlie Stross, who
wrote out a long list of
Bitcoin’s
potentially
damaging effects, of which
some were intended by the
Cypherpunks (for example,
tax evasion and weakening
government
social-welfare
programs) and some were
not. Stross noted that in the
latter category, the hoarding
encouraged
by
Bitcoins’
scarcity was leading to a vast
inequality in the holdings of
Bitcoins, “to an extent that
makes a sub-Saharan African
kleptocracy
look
like
a
socialist utopia.” Indeed, a
few Bitcoin holders, like
Roger
Ver
and
Wences
Casares, owned a material
proportion
of
all
the
outstanding coins. This was
unlikely to sit well with the
Occupy Wall Street crowd,
who objected to the undue
power of the wealthiest 1
percent of the population.
The Bitcoiners had their
ready responses to all these
critiques and voiced them
loudly. Bitcoin’s volatility
would go away as it matured,
the believers said, and Bitcoin