What Made the December Bitcoin Crash Different?

What Made the December Bitcoin Crash Different?

Dear readers,

Let me tell you a little story.

Once upon a time there was Bitcoin, a virtual currency that many people thought would change the way we think about money. But one day, China forced BTC, one of the biggest Bitcoin exchanges worldwide, to stop accepting new fiat deposits. That was, more or less, the end of Bitcoin. And we lived happily ever after. Or not? Do you have another ending to this story?

The December 2013 Meltdown

Earlier this month, Bitcoin topped out at around $1,200, a move triggered mainly by all the hype that surrounded the recent Congressional hearing on virtual currencies. In a letter addressed to senators, Ben Bernanke gave his cautious blessing to Bitcoin, saying that virtual currencies may hold long-term promise. Instantly, this love-it-or-hate-it digital cash went through the roof.

But when China's central bank scored a bull's eye on the crypto-currency by barring financial institutions and payment companies from handling Bitcoin transactions, a cloud on the horizon appeared. The oldest and largest Bitcoin exchange in the country was forced to stop accepting new yuan deposits. Bitcoin dropped like a rock and lost around 50% of its value.

Frankly, I don't think this meltdown is that big of a deal. As Business Insider contributor Mark Williams aptly points out, "in Bitcoin world, a week can be the equivalent of a decade." I can't enumerate exactly how many times over the past four years Bitcoin took traders on a roller coaster ride by tripling in value, only to plummet a couple of weeks or even days later.

Even so, this time is different because China - a global economic superpower - is standing up to it. And BTC China accounted for nearly one-third of the world's transactions denominated in Bitcoins.

So, is this the beginning of the end for the world's most controversial digital cash?

Bitcoin 'opponents' around the globe

China is not the only country to frown on this decentralized crypto-currency. Regulators in Europe seem very keen on drafting new rules aiming at preventing virtual currencies from making their way into the mainstream.

Last week, the European Banking Authority raised a red flag over the risks that stem from virtual currencies' extreme volatility and urged consumers to steer clear of them.

Authorities in France also took a stand against Bitcoin. In a statement issued at the start of this month, the French central bank warned that Bitcoins "represent a financial risk for those who hold them."

Most recently, Denmark's Financial Supervisory Authority gave Bitcoin a thumbs down, stressing that it "needs to be regulated".Norway joined the Bitcoin fray, as well. Hans Christian Holte, the country's director general of taxation, said the currency "doesn't fall under the usual definition of money." The government decided to treat it as an asset and start charging a capital gains tax.

Impressive doesn't equal sustainable

Bitcoin is definitely exciting to watch. To put it in Krugman's words, it's impressive. But would you honestly consider betting your savings on an investment that could send you to the emergency room for severe stomach cramps?

For Bitcoin to truly flourish and evolve into a viable alternative to today's traditional paper money, it has to lay the groundwork for positive "network externalities" first. In other words, if more people start using it, the more useful and the less volatile it will eventually become.

In order for this to happen, nations around the world need to embrace it or at least leave it alone. However, because monetary authorities can't virtually keep tabs on it, they'll do everything in their power to prevent it from turning into a widely accepted medium of exchange. It's as simple as that.

A more conventional path to riches

It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

The article What Made the December Bitcoin Crash Different? originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published