The price of Bitcoin fell 29% on Wednesday after the China Banking Association warned member banks of the risks associated with digital currencies. Other digital currencies have also suffered sharp declines.

Bitcoin’s volatility was on full display: the drop had narrowed to less than 10% by early afternoon. Bitcoin has lost around 40% of its value since April 13, when it peaked at over $ 64,606 per coin.

Prior to Wednesday, Tesla’s decision not to accept digital currency as a payment method for cars, along with concerns about tighter regulation of digital currencies, were major factors in the decline. The price is still up around 31% in 2021 and almost 300% from a year ago.

Here is an overview of Bitcoin and digital currencies in general:

How does Bitcoin work?

Bitcoin is a digital currency that is not linked to a bank or government and allows users to spend money anonymously. Coins are created by users who mine them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange.

Coins can also be bought and sold on exchanges with US dollars and other currencies. Some companies take Bitcoin as a form of payment, and a number of financial institutions allow it in their customers’ wallets, but general general acceptance is still limited.

Bitcoins are basically lines of computer code that are digitally signed whenever they travel from owner to owner. Transactions can be done anonymously, making the currency popular with libertarians as well as tech enthusiasts, speculators and criminals.

Bitcoins must be stored in a digital wallet, either online through an exchange like Coinbase, or offline on a hard drive using specialized software. According to Coinbase, there are around 18.7 million Bitcoins in circulation and only 21 million will ever exist. The reason is not clear, and where all the Bitcoins are located is a guess.

What happened to the price?

A statement on the China Banking Association website on Wednesday said that financial institutions should resolutely refrain “from providing services using digital currencies due to their volatility.”

Virtually all cryptocurrencies fell after the industry group’s statement.

At 1:10 p.m. EST on Wednesday, Bitcoin was down more than 7% to around $ 40,310 per coin. Most cryptocurrencies lost between 7% and 22% of their value and Coinbase shares fell 5.4%.

The value of Bitcoin can change thousands of dollars in a short period of time. On the last trading day of 2020, Bitcoin closed just under $ 30,000. In mid-April, he flirted with $ 65,000. The price rebounded after that, with some notable swings, before taking a decidedly negative turn last week.

Doesn’t Elon Musk have a role here?

Yes, and quite big. Musk announced in February that his electric car company Tesla had invested $ 1.5 billion in Bitcoin. In March, Tesla started accepting Bitcoin as a payment method. These actions contributed to the skyrocketing price of Bitcoin, and Musk also promoted the digital currency Dogecoin, which also soared in value.

However, Musk turned the tide in no time, claiming last week that Tesla would stop accepting Bitcoin due to the potential environmental damage that could result from mining Bitcoin. The announcement sent Bitcoin below $ 50,000 and set the tone for the big pullback for most cryptocurrencies.

A number of Bitcoin fans have rebuffed Musks’ reasoning. Billionaire Mark Cuban has said that mining for gold is much more damaging to the environment than mining for Bitcoin.

A 2019 study by the Technical University of Munich and the Massachusetts Institute of Technology found that the Bitcoin network generates an amount of CO2 similar to that of a large western city or an entire developing country like Sri Lanka. . But a University of Cambridge study last year estimated that on average, 39% of the proof-of-work crypto-mine was powered by renewable energy, mostly hydropower.

But do some companies use Bitcoin?

Digital payment firm Square and its CEO Jack Dorsey who is also CEO of Twitter have been big supporters of Bitcoin. Overstock.com also accepts Bitcoin, and in February BNY Mellon, the oldest bank in the United States, said it would include digital currencies in the services it provides to customers. And Mastercard has said it will start supporting some cryptocurrencies on its network.

Bitcoin has become popular enough that more than 300,000 transactions typically occur in an average day, according to the Bitcoin wallet site blockchain.info. Yet its popularity is low compared to cash and credit cards.

Is there skepticism around Bitcoin?

Yes, in abundance. It’s obviously easier to follow the price of Bitcoin than it is to try to determine its value, which is why so many institutions, experts, and traders are skeptical about it and cryptocurrency in general. Digital currencies were seen as replacements for paper money, but that hasn’t happened until now. Federal Reserve Chairman Jerome Powell said the central bank prefers to call cryptocurrencies crypto assets because their volatility compromises their ability to store value, a basic function of a currency.

While some banks and financial services companies engage in it, others remain on the sidelines.

Could a digital currency sale cause widespread damage?

Regulators are not very worried about a possible digital currency crash dragging the rest of the financial system or the economy.

Even with the recent sale, digital currencies have a market value of around $ 1.5 trillion, according to the coinmarketcap.com website. But that’s paltry compared to the $ 46.9 trillion stock market, the $ 41.3 trillion residential real estate market, and the nearly $ 21 trillion treasury market at the start of the year.

The European Central Bank said on Wednesday that the risk of cryptocurrencies affecting the stability of the financial system appears to be limited at this time. In large part, this is because they are still not widely used for payments and institutions under its purview still have little exposure to crypto-related instruments.

Earlier this month, the Federal Reserve said a survey of market contacts found that about one in five people cite cryptocurrencies as a potential shock to the system over the next 12-18 months. . This is a turnaround from the fall, when a similar survey found no mention of cryptocurrencies.

What oversight is there?

Washington officials are talking more about regulating digital currencies and fears of a heavier hand have played a role in the recent price swoon.

Gary Gensler, who took over as chair of the Securities and Exchange Commission last month, said cryptocurrency markets would benefit from increased scrutiny to protect investors.

In a hearing before the House Financial Services Committee earlier this month, Gensler said that neither the SEC nor the Commodity Futures Trading Commission, which he previously headed, yet had a regulatory framework to trading on cryptocurrency exchanges. He said he thought Congress should ultimately tackle it because “there really is no protection against fraud or manipulation.

How did Bitcoin come about?

It’s a mystery. Bitcoin was started in 2009 by a person or a group of people operating as Satoshi Nakamoto. Bitcoin was then adopted by a small handful of enthusiasts. Nakamoto fell off the map as bitcoin began to gain wide attention. But proponents say it doesn’t matter: currency obeys its own internal logic.

In 2016, an Australian entrepreneur stepped forward and claimed to be the founder of Bitcoin, only to say days later that he hadn’t had the courage to publish proof that he was. No one has claimed credit for the currency since.