Chinas Ban on Cryptocurrency

The recent ban on cryptocurrency in China has roped the former lucrative, coin markets into disastrous bear trends whose ramifications are approaching almost $1 trillion being wiped of the market capitalization of the cryptocurrency market as a whole. With individual traders losing millions from their portfolio, it raises the question: why are cryptocurrencies’ value weakly derived, and therefore interdependent, on China, why have they decided to ban coin trading and what does this new legislation mean for the future of the coin market?

Last week, China announced its ban on financial entities and payment companies from offering payment channels or providing services related to cryptocurrency transactions. Under the ban, financial institutions “must not offer clients any service involving cryptocurrency, such as registration, trading, clearing and settlement.” Their justification for such a regulation being “speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order.” Albeit sounding prevailingly heedful of the volatile nature of cryptocurrencies, speculators believe this course of action by China was to advocate its own digital currency renminbi which prior to the ban had been infringed by the market power of cryptocurrencies. Furthermore, China’s deliberately undervalued currency, the yen, has reached an all-time low which has come from the expansion of citizens diversifying their portfolios into cryptocurrencies as an instrument to maintain and possibly increase their purchasing power overseas. Inadvertently, this has alleviated demand on the local currency causing market forces to shift the market price lower, roping its value down towards the lows we are witnessing today.

Cryptocurrency’s value is weakly derived from China because of China’s responsibility as the leading centre for cryptocurrency mining and trading. Before Bitcoin’s ban in 2017, China was responsible for almost 70% of all Bitcoin trades that were occurring at the time. By losing a large player in the market, the supply for cryptocurrency in the market is going to dwindle swinging prices into a downtrend. However, this depreciation in the value of coins can’t come into play immediately after the new regulations have been announced. Therefore, although this implies the long-term future for currencies, the current plummet in price must have been caused by something different. The factor I personally believe has caused the lows we see in the markets is described in John Keynes’s idea of animal spirits and confidence. The cryptocurrency market is driven by news on the market hindering news about cryptocurrencies tend to have pernicious effects on the markets as a whole. For example, Tesla’s announcement of no longer accepting bitcoin as a transaction channel due to its environmental impacts lead to $365 billion being wiped off the cryptocurrency market. Moreover, psychology nestles itself into the volatility of markets as the slightest signs of a bear market in BTC lead to decreased confidence in other coins which they hold positions in, leading to them liquidating them. A cumulative effect of these reasons can somewhat rationalise the clawing back of coin’s prices as a result of the new regulations.

The regulation implies China requisites control over financial systems in the country, opting to exile decentralised finance as a means to monitor all transactions and payment channels in the country. Although China’s dynamic economy will quickly adapt to such changes, this logic can’t be replicated for other economies who are more dependent on cryptocurrencies. Formerly, China owned 75% of all Bitcoin in circulation and once the regulations have cut down on the remaining currencies still in circulation in the country, the markets will lose one of the largest market forces in its arsenal. However, the regulation will extend demand for the local currency projecting its price back towards its former price. Despite this, I question whether the regulation may be too severe and possibly the local currency may surpass its target and continue to rise in power which isn’t optimal for China who have deliberately undervalued their currency as a vehicle to incentivise FDI, investment and exporting from China.

As Chinese regulators crack down on the use of these coins in China, this raises the question on what is the future of the cryptocurrency market? I believe we can split this into 2 possible scenarios:

1) Similar to how maximum price regulations, the ban on cryptocurrency may stimulate the shadow economy of China leading to payment channels and trading of cryptocurrencies occurring on the black market. Unless China has the facilities to crack down on possible trading channels being materialised on the black market, the cryptocurrency market should be able to recover from such a change.

2) The second scenario relies on the fact that China is unable to participate in cryptocurrency trading after the regulation. If this were to be the case, then although we will experience temporary short term swing lows in the market prices of coins, I believe the reduced supply resulting from the drop in bitcoin price will have a prevailing effect over the fall in demand that we may experience. As a result, in the long term (so once the market has consolidated), I believe the markets will recover.

That being said, the timeframes for each scenario are variable- the first scenario possibly could transpire in days while the second could only begin to fabricate in a few months. Because of these new regulations, the price projections of BTC reaching an ATH of $100,000 is beginning to be questioned by many traders and this uncertainty will continue to plague us until some form of consolidation is seen in the market, but until those signals are documented in the markets, we are going to have to live in precariousness on the welfare of cryptocurrency.

Source: https://medium.com/swlh/chinas-ban-on-cryptocurrency-c84372782f4d?source=rss——-8—————–cryptocurrency