China’s Position Regarding Crypto: What Does It Mean for the Market?

The public display of resentment towards cryptocurrencies from China is in a grey area, and as some reports highlight, it is not as extreme as portrayed by media outlets. A BBC article highlights that China has accentuated its active incursion into suppressing cryptocurrency access and services for banks or payment firms.

According to data from Arcane Research, such announcements can unbalance the current market as it sends taunting ripples through the system. The Fear and Green index, which tracks a market sentiment index, has decreased to an April 2020 low, nearing “extreme fear.”

Regulatory actions from Chinese authorities are not a novelty, as the People’s Republic Of China banned financial institutions from handling bitcoin in 2013 and declared ICO’s illegal as of 2017. Is the Chinese approach too aggressive towards cryptocurrencies?

What Does China Actually Intend?

Chinese authorities have deemed cryptocurrencies such as inaccessible due to several determinants. Their severity comes as a result of price volatility and the speculative nature of the asset, which presents an unwanted risk for the Chinese asset holders. Still, despite the heavy crackdown, trading in China continued as normal.

The alarm coming out from China is nothing new. This week, three-state backed organizations reiterated China’s position towards crypto, highlighting the risks associated with crypto investments. ‘Mr. Li’ (who was unwilling to give his real name) highlighted that users in China can still purchase Bitcoin or by sending money to non-Chinese exchanges through the bank.

Chinese regulators have not made owning Bitcoin or other cryptos illegal; still, they are suspicious of money laundering and scams facilitated by Bitcoin or other non-governmental-issued payments. What’s more, China’s adherence to blockchain technology is somewhat divergent from their global perception which shuns crypto. Thus, confusion often arises when discussing cryptocurrencies or blockchain.

In retrospect, the Chinese government is building a regulatory framework to implement blockchain or crypto harmlessly. As a result, in 2020, China launched a Blockchain-Based Service Network (BSN) to grasp the technological advancements in digital currencies. Additionally, crypto is embedded into the Chinese culture, with most of the hashing power deriving from Chinese miners. Reports on mining in China have occurred in the past; however, they were reframed by media outlets as mining migrated to other provinces where green mining was possible, despite a ban in the Inner Mongolia region.

On the Flipside

  • Regulatory actions are demanded to increase institutional trust and decrease Bitcoin’s volatility.
  • Investors are exchanging Bitcoin for gold to protect their assets in the wake of high price volatility.
  • The announcement has never impaired trading crypto, as exchanges still accept the Chinese currency.

The Chinese Message Was Due

A market correction was due to occur after the cryptocurrency market experienced several prolific months in green. Meltem Demirors, from CoinShares highlighted the correction is “healthy,” and a pullback is normal in cryptocurrencies, reiterating the heightened volatility to which investors are already acclimated. The price of Bitcoin plunged below $40,000 as it dipped more than 40% from its all-time high.

Bitcoin’s and altcoins rally formed concerns from regulatory bodies in China and across the world. While the Chinese announcement is understandable given cryptocurrency’s ability to retain relative anonymity, it brings forth new questions regarding regulatory acceptance in the crypto market. Thus, China’s “ban” is nothing but a regulatory measure, which has been experienced previously in the market when Turkey and India denounced the use of cryptocurrencies.

In an article from Business Insider, the author emphasizes that a “ban on crypto” is impossible because cryptocurrencies are a “piece of code”. Although they are perceived as an asset, fundamentally, they have no value nor liquidity. On top of that, regulatory measures are set to protect the existing financial market from a disrupting technology. Elon Musk’s ability to influence the price of Bitcoin or DogeCoin is the exact reason why governments are enacting regulatory measures.

Heightened volatility adds value to Bitcoin and other digital assets as a Bitcoin or cryptocurrency price is dictated by external factors such as news or speculation. Its value is dictated by demand in the market, and regulatory measures aim to mandate its volatility to protect retail investors.

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