By now, we have all accepted the news that China has banned all ICO’s, and shut down all cryptocurrency exchanges. Although they did this as a way of preventing Chinese citizens from incurring any financial losses, they should be wary of causing a Cobra Effect.
So, what is the Cobra Effect?
Simply put, the Cobra Effect will occur when an attempted solution to a problem actually makes the problem worse. This results in an unintended consequence.
The term originated as an interesting anecdote about the British rule of India. The British government was worried about the large number of highly venomous cobras in the city of Delhi, India, and came up with a brilliant idea that they would offer a reward for every dead cobra. Because a reward was being offered, it resulted in people killing the cobras in order to claim the reward, which soon resulted in unforeseen problems for the British government. Instead of dealing with the already large numbers of cobras that were already in the city, many actually begin to breed cobras, just to kill them to claim the rewards. Once the British government realised that this was happening, they soon put a stop to the rewards, but what this actually resulted in was an increased cobra population, as they were just being released into the wild.
So, what actually started as an idea to solve the problem, actually ended up making the situation far, far worse.
So, why could this be a problem?
Failing to consider the secondary effects of something, can result in unplanned surprises. Because most cryptocurrency trades take place at exchanges, the Chinese government may have thought that by shutting down all of the exchanges, it will decrease the number of people investing in cryptocurrencies; but in reality, what it might result in is the Chinese population finding illegal ways of investing in these cryptocurrencies, which could have a much more negative effect than they first thought.
Is there a solution?
The motivation for the Chinese government to ban ICO’s and shut down cryptocurrency exchanges is simple – they are attempting to make it more difficult for ordinary citizens to buy cryptocurrencies, making it less popular.
In the short term; this has worked. There has been a temporary blip in the number of people trading in Bitcoin, which has seen the price fall, but it is near impossible to say how long this will last, and, in fact, the price of Bitcoin has already started to climb again.
It is possible though that taking the decision to shut down all cryptocurrency exchanges will result in those who wish to buy Bitcoins to enter into PTP trades. These are actually far riskier and come with a much higher risk of fraud, which could have a much more detrimental effect on the Chinese financial sector.
References and Further Reading:
- The CoinTelegraph; Chinese Meddling With Bitcoin Exchanges and ICOs Likely To Trigger “Cobra Effect”.