Yesterday, the not so shocking news of China banning almost all crypto-related activities turned the market red. Subsequently, Bitcoin fell almost 4% to $42,150 and Ethereum had a steep 8% decline. A vast majority of altcoins had a relatively similar reaction. However, there are some peculiar points to consider regarding the news and the subsequent reaction from the market.
China and Their Excuses
Primarily speaking, the consistency in fraudulent and illegal activities are pointed out as the reason for this ultimate crackdown. In a recent Policy Brief released by the Chinese government, they have clearly declared their position on the cryptocurrency industry.
“Virtual currency trading… activities have risen, disrupting economic and financial order, breeding illegal and criminal activities such as gambling, illegal fund-raising, fraud, pyramid schemes, and money laundering.” According to the document.
In order to deal with the issues stated, they have called cryptocurrencies lost causes that can’t positively change through regulations. In that regard, “Financial institutions and non-bank payment institutions shall not provide services for virtual currency-related business activities.”
Basically, the Chinese people and the financial institutions from now on cannot buy, hold, trade or sell cryptocurrencies.
Market’s mellow Reaction to the News
As the breaking news was out, a sharp price correction occurred across a majority of cryptocurrencies. However, considering Bitcoin’s 4% decrease and Ethereum’s 8%, the decline was less severe than expected. Basically, in a similar case as September 7th plunge, the over leveraged long positions got liquidated and at $42k, the holders did not sell and the buyers provided good support.
This is an indication of a dominating solid holder base and positive outlook for crypto. Perhaps, this unsuccessful FUD stems from continues repetition of China crackdowns. Taking a look at some of the market veterans statements, we see that they have been through this before.
However, the fundamental analysis goes beyond the short-term fear or lack thereof.
Financial Institutions and the Long-Term Effects
One cannot disregard China’s significant role in the cryptocurrency industry. Up until the spring of 2021, a notable majority of the Bitcoin miners were in China. It took some time for the farm owners to relocate and some had to sell their equipment and move on. On the other hand, taking the population of Chinese citizens in consideration, this action limits an enormous number of people and therefore their investments from entering the market. Hence, a decrease in the inflows is definitely happening.
On top of everything, the financial institutions directly or indirectly working with the People’s Republic had a tremendous share in the transactions. Taking advantage of much lower transaction fees, scalability and other advantages, the institutions had a massive role in the growth. We recently talked about how the Chinese Financial institutions favored Solana and other altcoins such as Luna and Avalanche as alternative payment methods. These methods would allow the institutions to save millions in transaction fees. By cutting their access, essentially less fiat based money will circulate in the crypto market.
Yet another alarming factor is the fact that many large institutions held Bitcoin as asset or in some cases provided dollar based bonds for cryptocurrencies. To provide an example, despite Tether’s denial of holding security papers from Evergrande, in best case scenario, a terrifying amount of these security papers are speculated to be from Chinese institutions. And putting the looming economic crisis in the country, those bonds are risky at best.
All in all, the long-term effects must not be undermined.
Cryptocurrencies’ Global Acceptance
On the other hand, a massive movement of crypto adoption is gaining momentum. With El-Salvador leading the way and first-world countries such as Ukraine seriously considering adoption and constructive regulation, there could be a bullish opponent to fight the China issued bears.
At this moment, the United States Federal Government is charging up to make moves regulation cryptocurrencies. We should wait and see how it affects the market for sure.
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