Here's why the crackdown on bitcoin in China is 'not a real problem' for the digital currency

On Thursday reports that Chinese regulators would require exchanges to shut down bitcoin trading triggered a sell-off of nearly $1,000, bringing the price of the coin below $3,000 for the first time in over a month. Within hours, however, bitcoin recouped most of those losses.

Since then, some of China's largest cryptocurrency exchanges, including OKCoin and Huobi, have announced they will voluntarily halt trading between bitcoin and yuan and reports of further government intervention have emerged.

Still, bitcoin has nudged up near .72% over the past week, as traders brush off recent headlines as peripheral to the future of the digital coin.

Josh Olszwicz, a bitcoin trader, told Business Insider the markets are ignoring news out of China because it has zero impact on the coin's actual blockchain technology.

"If it doesn't affect the protocol, then it's not a real problem," he told Business Insider."The bitcoin cash shakeup was much more worrisome from my perspective, but even then the core bitcoin protocol remained unaffected."

On August 1, bitcoin forked into two different cryptocurrencies: bitcoin and bitcoin cash.

"Countries can try and ban bitcoin all they want, but people will still use it if they need and want to - the protocol doesn't need government acceptance."

Sebastian Quinn-Watson, of Blockchain Global, a bitcoin exchange operator, said the crackdown is just a temporary reaction to the explosive growth of the cryptocurrency market this year. Initial coin offerings, a fundraising method in which companies issue their own cryptocurrencies to potentially raise millions of dollars, alarmed regulators and forced them to take action to reign in the markets to prevent a possible crash, according to Quinn-Watson. On September 4 regulators deemed ICOs, which have raised over $2 billion this year, illegal.

"By stepping in so dramatically and not allowing what would have been an almost inevitable crash in the crypto market, the regulators acted to ensure that investors did not irrevocably lose trust," he said.

Quinn-Watson, who speaks frequently with regulators, said he expects the regulatory pendulum to swing the other way eventually. Here's Quinn-Watson (emphasis added):

"We do not see this halt as being long term. Innovation is a significant pillar of China's economic growth plan. Fintech as a subset of innovation is a very important part of this pillar. Blockchain is an important part of this mix. The PBOC has teams of developers building out use cases for blockchain."

He told Business Insider regulators are considering to allow companies to run ICOs through a government-supervised pilot program.

Still, not everyone agrees with Quinn-Watson. Jim Stent, author of "China's Banking Transformation" said China's crackdown is permanent, according to reporting by CNBC.

"I see the crackdown on bitcoin as part of this larger multi-agency program to reduce financial sector risk, which will unfold over months and probably years," Stent said."I do not see risk reduction as something temporary, nor do I see the bitcoin crackdown as temporary."

Chinas not as important as it once was

The decline of Chinese dominance over the cryptocurrency market could also be playing into the muted reaction by the markets about recent regulatory news. According to data from CoinDesk, the cryptocurrency news site, bitcoin trading against the Chinese yuan dropped off from a near 90% at the end of 2016 to around 10% to 20% for much of 2017.

"Many traders felt that China is becoming less of a market leader for bitcoin trading," Greg Dwyer, head of business development at BitMEX, a bitcoin mercantile exchange, told Business Insider.

Dwyer said the market is strong, pointing to a recent milestone hit by the firm as proof.

"BitMEX, traded over $1 billion in notional (was actually $1.1 billion) last Friday," he said. "We are the first bitcoin exchange to ever have hit this milestone and it represents the fact that there is an enormous interest in the trading of bitcoin."