China shifts balance of power in $ 1.9 trillion crypto industry
Bloomberg’s Most Read
China’s multi-year crackdown on the crypto industry may have peaked on Friday, cementing a shift in the balance of power in one of the countries that first embraced the digital currency world.
The People’s Bank of China pledged to end illegal mining and prevent offshore exchanges from doing business with its citizens, resulting in a $ 159 billion erasure of the market value of digital currencies from Bitcoin and Solana to XRP.
“This is the last and possibly the last step in the Chinese government’s crackdown on crypto,” said Jehan Chu, founder of Hong Kong-based investment firm Kenetic Capital. “China has been consistent in its desire to get rid of free trade in cryptocurrencies and focus on more controlled projects.”
Once the birthplace of industry, China – under the leadership of the Communist Party – has since pushed crypto to the sidelines with some of the toughest regulations among major economies. After driving out local exchanges, banning crypto services by financial companies, and more recently wiping out miners, the center of crypto power is now the developed markets.
One telltale sign: On the Binance and FTX trading platforms, volumes of popular derivatives known as perpetual futures increase on average at noon in New York or 5 p.m. in London, according to data provider Kaiko.
Bitcoin fell 9% and Ethereum fell 13%, with losses reduced somewhat at 10:32 a.m. in New York.
It comes as countries around the world are tightening the regulatory screw with the United States threatening industry players with lawsuits or cease-and-desist orders. But China’s position is unequivocally uncompromising – consistent with the Chinese Communist Party’s attempt to bring key industries from online gaming and tutoring to high-frequency commerce.
It has been quite a journey. In the first phase of Bitcoin’s boom since its inception in 2009, China was the base for the biggest miners and exchanges as well as a horde of active speculators. There were also signs that people were using digital currencies to bypass a cap on the withdrawal of money from the country, especially when the yuan depreciated.
But the 2017 crackdown on Chinese stock exchanges changed all that. This has prompted some like Huobi, OKEx, and Binance to move their operations overseas, and at present the participation of Chinese onshore traders in centralized exchanges is minimal.
Any remaining activity is difficult to trace because it will likely be conducted through VPNs that obscure the user’s location, says Clara Medalie, research manager at data provider Kaiko. Some also trade on over-the-counter sites.
Yet Friday’s movements represent yet another crackdown on even these alternative channels. Before China banned crypto exchanges in 2017, local investors owned around 7% of the world’s Bitcoin and made up around 80% of the exchanges, according to state media.
“News from China certainly has an impact on the markets as it can shake up market sentiment, but the actual effect of another Chinese ban has minimal impact on the underlying structure of the market at this point.” , said Medalie.
At the same time, the country has remained supportive of the blockchain technology that underlies Bitcoin, as well as – understandably – its own digital yuan, which has been enthusiastically promoted by the People’s Bank of China.
“China may still be laying the groundwork for its own central bank digital currency, and therefore wants to clear the plate for what will be a centrally controlled but blockchain-denominated coin,” Justin of Anethan, Hong Kong-based sales manager at crypto exchange EQUOS, wrote in a post. “Or maybe he’s just trying to actively tackle the flow of capital in times of need.”
At Bequant, a crypto brokerage firm, research chief Martha Reyes said Friday’s sell-off was likely exacerbated by widespread caution after a September 7 plunge as well as options expiring Friday. Funding rates, or the interest paid by bulls to trade futures contracts, fell recently and $ 2.9 billion in outstanding options was due to expire on Friday, according to the Deribit exchange. This is an event that some believe has generally fueled volatility.
A Bitcoin volatility index fell from 80 to 91 during Friday, according to data from Deribit.
Even as the influence of Chinese traders wanes, the country’s attempt to avoid a real estate debt crisis has demonstrated immense influence in global stock and crypto markets this week. The 50-day correlation between the S&P 500 and Bitcoin has been consistently positive this year, reaching its highest level since October recently.
“The feeling was pretty fragile anyway,” Reyes says. “We started the week with China FUD and we end the week with China FUD,” she said, referring to crypto slang for fear, uncertainty and doubt.
Bloomberg Businessweek Most Read
© 2021 Bloomberg LP