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Bobby Lee, head of BTC China, before the crash. (Peter Parks/AFP / December 18, 2013)

Following our post a couple of weeks ago on what we termed the "bitcoin crash of 2013" -- the virtual currency had lost half its value in a day -- we started receiving daily updates from bitcoin believers documenting its climb back to $1,000-plus from its lows in the $600 range.

We haven't heard much from those people in the last few hours. The reason, presumably, is that bitcoins experienced another crash overnight, and for the same reason as the last time: The Chinese government moved against them. 

This time China has shifted from rhetoric to action, forcing the country's largest bitcoin exchange to stop accepting yuan deposits. The exchange, BTC China, accounted for a stunning one-third of all bitcoin transactions in the world. As Tyler Cowen of Marginal Revolution predicted last month, if Beijing shuts down BTC China, "the value of bitcoin very likely will fall. A lot."

And so it has. On the Mt. Gox exchange, bitcoins fell as low as $455 before recovering somewhat to $581 (as of this writing). The daily range was $455-$750.

The point we've consistently made in our posts about bitcoins is that they're poorly understood by fans who think of them as either investment vehicles or alternative, government-proof currencies. And people who expect to speculate their way to bitcoin wealth are even more misguided.

Where bitcoins have shown their utility, up to now, is as transactional instruments capable of circumventing bank fees and capital controls--facilitating global transfers with minimal friction. But that was always based on the assumption that governments and their central banks would find it hard to get their arms around bitcoin-facilitated capital flows.

China has now shown that the assumption is wrong. In doing so, Beijing has knocked a leg out from under the transaction trade.

"The Bitcoin bubble has burst and China was the pin that popped it," writes Mark Williams of Boston University. "The latest move by China puts into question the viability of Bitcoin as a currency alternative and as a liquid and safe commodity."

Smart users always understood that if you're using bitcoins to move money from one place to another, you best get in and out of the things as quickly as possible to minimize your exposure to their extreme volatility. Now that China has provoked two bitcoin crashes in the space of weeks, it seems that there may be no way of minimizing that exposure.  

We won't know for some time whether this spells an end to bitcoins' popularity. But it certainly will remind users that bitcoins are anything but risk-free. Money traders are going to need a new transaction device, very soon.

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