The Chinese media recently reported the country was tightening control over cryptocurrency exchanges and bitcoin mining. That statement sent the BTC down 15%, to $31,000 for the first time since February.
On May 21, China’s Financial Stability and Development Committee announced the government was introducing new measures to regulate cryptocurrencies. The statement also criticized the use of cryptocurrencies, in particular bitcoin.
The regulator highlighted the risks of cryptocurrency trading, saying virtual currencies “are not supported by real value,” their exchange rates are easily manipulated, and crypto trading contracts are not protected by Chinese law.
The BTC rate tumbled down hours after the statement was circulated. This is not the first time China dictates cryptocurrencies’ trajectory. Similar news had caused quite a stir before. So, why does the world of cryptocurrencies depend on China so much?
China banned cryptocurrency trading in 2019; at the same time, the country accounts for most of the world’s bitcoin mining. China produces cheap electricity and ASIC miners — the combination seems to naturally concentrate the computing power in that market.
Crypto traders closely follow the news from China. Any new ban or regulation can influence investor decisions to buy or sell their digital assets. If bitcoin mining is banned in China, the mining hashrate will decrease significantly, weakening all the top cryptocurrencies.
Last month, power outages in Xinjiang Province caused by a coal mine disruption forced 80% of China’s miners to remain temporarily idle. That led to a panic in the cryptocurrency market and a 10% drop in the BTC rate — because too many bitcoin farms depended on one country.
The recent clampdown on cryptocurrency trading will most likely discourage miners from basing their farms in China. They are looking at moving to South Asia, where electricity is also dirt-cheap but governments do not interfere with cryptocurrencies so much.
Once miners are distributed more or less evenly around the world, China will lose its power over the market, or at the very least, its influence will decrease. I am inclined to believe bitcoin and other top cryptocurrencies will skyrocket once most mining farms move to other countries.
Chinese regulatory changes along with Elon Musk’s recent announcement that Tesla will stop accepting bitcoin for car purchases have reduced the total cryptocurrency capitalization by $500 billion.
The cryptocurrency market is down now, but it won’t be long. Along with the miners, China is losing any levers of pressure it used to have to influence cryptocurrencies. This means we will hear fewer news involving China, while the cryptocurrency market’s capitalization will, if anything, grow.
By Roman Vybornov,Chief Business Development Officer at Bitexfin Crypto Platform and Bitexcard Project