In Hong Kong they are “mining” it with shipping container-sized, liquid-cooled rooms of computer circuitry. In Wenzhou, the Silicon Valley of Chinese shadow banking, it was an object of fervid speculation. Then the People’s Bank of China stopped financial institutions from handling it. Now, this week, the central bank effectively stopped Chinese citizens from turning their renminbi into it.

“It” is Bitcoin, a cryptographic protocol for financial transactions online, which some like to call a currency. Bitcoin is not a currency – try paying real-world debts or taxes in it. Most of all, Bitcoins are hardly a stable unit of account. The latest Chinese move – which more or less bans new deposits at BTC China, the world’s biggest Bitcoin exchange by volume – sent the price of one Bitcoin outside China down by a third, below $500. That comes after a 900 per cent run-up this year to above $1,200 at the end of November, giving Bitcoin a $13bn market capitalisation. It’s now $9bn.

This sounds like a bubble popped by the ultimate test of government hostility: China’s determination to control the amount of capital that can leave its borders. Actually, the 12m Bitcoins now in circulation had a formidable internal flaw all along. There will only ever be a maximum 21m of them under the original design. The Bitcoin supply will rise gradually until the middle of the next century, but then stop. An attraction for its libertarian fans: governments cannot print more.

But the problem then lies in the process of creating (mining) new Bitcoins. This is done by verifying “blocks”, records of transactions in Bitcoins – cracking a mathematical puzzle within a block, for a reward of 25 Bitcoins. The puzzles will get harder with time – so miners build ever more computing power (as in Hong Kong). This is unsustainable, and is hostage to the volatility in Bitcoin prices. Worse, Bitcoins are mostly hoarded: transaction growth has not kept pace with the market cap. This is a pity: Bitcoin’s public record of transactions is a good idea for finance in general. But first it must survive Bitcoin’s implosion.

Email the Lex team in confidence at lex@ft.com

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