Bitcoin Crashes 15% as China’s Central Bank Launches On-Site Inspections at Major Exchanges

The price of bitcoin plunged on January 11, 2017, after the People’s Bank of China (PBOC) launched surprise on-site inspections at the country’s largest cryptocurrency exchanges, sending shockwaves through a market that had been riding a historic wave of euphoria just days earlier.

The inspections, conducted at BTCC in Shanghai and Huobi and OKCoin in Beijing, marked a dramatic escalation in Beijing’s scrutiny of the cryptocurrency sector and triggered an immediate sell-off that wiped out billions in market value within hours.

TL;DR

• The PBOC launched on-site inspections at BTCC, Huobi, and OKCoin on January 11, 2017
• Bitcoin’s price fell as much as 15% on the day, landing near $777 after peaking above $1,130 just days earlier
• The crackdown forced exchanges to cease zero-fee margin trading
• China accounted for over 90% of reported bitcoin trades and roughly 70% of global mining at the time
• The inspections were part of a broader effort to curb capital outflows estimated at $530 billion in the first 10 months of 2016

From All-Time Highs to Panic Selling

The mood in the cryptocurrency market had been decidedly bullish as 2017 began. Bitcoin broke through the psychologically important $1,000 barrier on January 1, building on momentum that had seen the digital currency surge 45% from December 21 through the first week of January. By January 5, bitcoin had surpassed its previous all-time high, reaching approximately $1,130 against the dollar.

But the rally proved short-lived. On January 5, the PBOC summoned representatives from major bitcoin exchanges to remind them that bitcoin was not recognized as a currency under Chinese law. The central bank warned about the digital currency’s volatility and risk, and reiterated mandatory know-your-customer and anti-money laundering requirements. That single announcement was enough to trigger a 20% crash in just two hours of frantic trading.

Bitcoin managed a brief recovery over the following days, but the relief was crushed on January 11 when the PBOC escalated from verbal warnings to physical action. Inspection teams from the PBOC Shanghai branch, the Shanghai Municipal Finance Office, the PBOC Beijing branch, and the Beijing Municipal Bureau of Finance arrived at exchange offices. The price dropped another 15% at one point during the session, with bitcoin ending the day near $777, according to CoinMarketCap data.

What the Inspections Uncovered

The inspection teams were not merely ceremonial. According to statements from the exchanges themselves, the regulators conducted thorough reviews of trading operations over the course of a week. OKCoin told customers in a service email that authorities were conducting a one-week long inspection, only to understand the situation here with the stated purpose to maintain financial stability, prevent financial risks, and regulate market trading behavior.

BTCC sought to reassure users with a tweet: All good, just inspections. But the implications were significant. Among the key outcomes, Chinese exchanges were forced to cease zero-fee margin trading, a practice that had drawn criticism for inflating reported volumes and encouraging speculative behavior. BTCC suspended its bitcoin margin loan service entirely, and Huobi and OKCoin quickly followed suit.

The crackdown also intensified a long-simmering debate within the Bitcoin community about whether Chinese exchanges were artificially inflating their trading volumes through wash trading and other manipulative practices enabled by the zero-fee model.

The Bigger Picture: Capital Flight From China

The PBOC’s actions against bitcoin exchanges did not occur in a vacuum. They were part of a broader and increasingly desperate effort by Beijing to stem the tide of capital leaving the country. Capital outflows from China reached an estimated $530 billion in the first 10 months of 2016 alone, and the nation’s foreign exchange reserves had fallen nearly 25% from a peak of just under $4 trillion in early 2014.

The PBOC had spent over $34 billion in November 2016 alone propping up the yuan, and the currency had weakened to near 7 per dollar before the central bank engineered a brutal short squeeze that saw the offshore yuan rally over 2.5% in a single session.

Against this backdrop, bitcoin had become an attractive vehicle for moving money out of China. With the yuan under pressure and new capital controls being imposed including lowering the cash transaction reporting threshold from 200,000 yuan to 50,000 yuan, many Chinese citizens turned to the cryptocurrency as an alternative channel. The correlation between yuan weakness and bitcoin strength had become increasingly pronounced throughout late 2016.

Market Data Reflects the Turmoil

CoinMarketCap’s historical snapshot for January 11 tells the story in numbers. Bitcoin’s market capitalization stood at approximately $12.5 billion, with a 24-hour price decline of 14.53% and a devastating 32.45% drop over the preceding seven days. Ethereum, the second-largest cryptocurrency, was trading at just $9.71 with a market cap of $853 million. The total cryptocurrency market was a fraction of what it would become later in the year.

Exchanges Adapt to Survive

In the days following the inspections, the affected exchanges moved quickly to demonstrate compliance. By January 24, BTCC, Huobi, and OKCoin had all introduced transaction fees, ending the era of zero-fee trading that had defined the Chinese bitcoin market. BTCC stated it was reviewing the operating experience of foreign counterparts and the charging of transaction fees, aiming to further curb speculation and prevent violent price fluctuation.

The introduction of fees had an immediate and dramatic impact on reported trading volumes from Chinese exchanges, which plummeted as the artificial inflation of zero-fee wash trading was eliminated.

Why This Matters

The January 2017 PBOC crackdown was a watershed moment that established a template for China’s relationship with cryptocurrency that would persist for years. It demonstrated that regulatory action from a single country could move global markets by double digits in a matter of hours. The events of January 11 also exposed the fragility of a market still in its early stages, where a handful of exchanges in one jurisdiction controlled the vast majority of trading activity. Yet despite the severity of the crackdown, bitcoin would recover and go on to reach nearly $20,000 by December 2017, proving that even the most aggressive regulatory action could only delay, not stop, the cryptocurrency’s march into the mainstream.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Readers should conduct their own research before making any investment decisions.