Can China Hurt Cryptocurrencies?

Can China Hurt Cryptocurrencies?

China’s crackdown on blockchain technology has taken another big step: a ban on cryptocurrency mining and the planned elimination of its world-leading industry.

The proposed ban, announced in April, is the latest move in an escalating campaign to put the brakes on all crypto-related activity in the country, and stop the use of distributed ledger tools as vehicles for capital flight, or the dissemination of banned materials.

Back in 2017 China outlawed cryptocurrency trading, then upped the ante in 2018 by blocking exchanges and participation in ICOs – including foreign platforms – in a bid to quash the market.

The latest announcement would compel the global crypto mining industry to-reorganize and end China’s dominance of the sector. China-based Bitmain, the world’s largest supplier of ASICS hardware, has already suffered a $500 million USD first-quarter loss of the back of the news, and failed in an attempt to become publicly listed.

Beijing’s hardening stance effectively negates digital currencies and all non-approved use of blockchain – while calming the crypto trading boom that had engulfed the country.

Why does China hate cryptocurrencies?

In a speech this past February, Agustin Carstens, general manager of the Bank for International Settlements – called bitcoin a “a bubble, a Ponzi scheme and an environmental disaster”, and argued for a coordinated international effort to control and regulate virtual currencies.

With that kind of rhetoric colouring debate in the West, it is easy to see why Chinese authorities felt empowered to act. Cryptocurrencies offer freedom and anonymity in a country where all financial transactions are tracked and regulated in granular detail.

Dislike and scepticism about virtual currencies is nothing new. They challenge the power of governments and central bankers to tax transactions, make commerce and communication difficult to regulate, and should they achieve mass adoption, could one day undermine the value of fiat currencies.

They also provide a conduit for capital flight, which is a serious concern for market regulators. Given how reliant Chinese authorities are on capital controls, opaque virtual currencies make an easy target.

In 2017 retail investors had set off a crypto frenzy which spurred significant price volatility and incidents of fraud, worrying regulators and party officials concerned about civil unrest.

Beijing wants to eliminate those risks and strengthen perceptions that it is on a path to a sustainable clean energy economy. The government calls resource-intensive crypto-mining polluting and energy-wasting, and its national economic planning body has marked the industry – in which China is the world leader – for elimination.

Can China can really hurt crypto?

While Chinese cryptocurrency exchanges and blockchain startups have clearly suffered under the crackdown, increasing pressure from the state doesn’t seem to have killed off enthusiasm. There is strong evidence that ICO participation and virtual currency trading by Chinese investors continues, just in a different form.

After the closure of domestic exchanges, Chinese investors turned to overseas platforms. Banning local providers simply created opportunities for those based elsewhere.

The US-China trade war has also kept cryptocurrency prices afloat. While mainstream markets wobble, Bitcoin in particular seems to be proving its worth as an uncorrelated, safe-haven asset.

BTC has traded as high as $7,900 USD this year, while U.S. and other major equity markets are arguably headed in the other direction.

It’s obviously worth noting that Bitcoin’s price has gone up since the crackdown began and currently sit as ca. $7000 USD – well above the $3,100 bottom it plumbed at the depths of the crypto bear market last December.

Analysts say its recent spike is partly down to the unintended consequences of the proposed crypto mining ban.

How banning crypto in China could make it stronger

Chinese dominance in crypto mining has put downward pressure on crypto prices. Inexpensive electricity and a virtual monopoly on the necessary hardware meant Chinese miners could operate at a much cheaper rate than the rest of the world.

That has had a centralizing effect on mining activity. Research suggests that 74 percent of Bitcoin’s network hashrate originates from Chinese-managed pools. Pushing mining out of the country will force it ‘out in the open’, broadening participation out to a more globally dispersed group. That will make mining more transparent and less subject to control by a geographically-limited group.

The knock-on impact of that could be strengthening market confidence in Bitcoin, with an upward impact on prices. Bitcoin’s current price is well above the $5000-$6000 USD threshold analysts say is the breakeven point for BTC mining.

A Great Firewall for blockchain?

All of this must be evident to Chinese authorities. In the short term they will have calculated that banning crypto activity will end rampant speculation, reign-in fraud, and minimize unnecessary energy consumption.

But in the long term their likely objective is to exercise more control over the industry, re-booting it into something they have oversight on – similar to what’s happening to domestic Chinese internet access.

China will almost certainly outlaw mining this year. Ironically, the move could make virtual currencies both more global, more resilient, and more valuable.