China has recently moved to tighten its laws on cryptocurrencies by banning crypto mining operations and ordering banks not to transact with any company offering crypto-related services. This is the latest move in a series of changing crypto-related regulations.
As the leading crypto-mining zone with over 60% of all Bitcoin mining activities, the change of mining regulations in the country impacts the whole crypto market.
Here is all you need to know about the impact of China crypto crackdowns on the crypto industry.
China’s Bitcoin relations history
The current cryptocurrency lockdown in China is nothing new. The country has had shifting crypto relations throughout the years. The first of the crypto regulations in China was in 2013 when the People’s Bank of China banned financial institutions from handling Bitcoin transactions.
In 2017, the bank banned ICOs and domestic crypto exchanges. The bank felt ICOs are a means of raining money through the public without the government’s approval, hence illegal under Chinese law. Bitcoin mining, however, had remained legal with the government more interested in global geopolitical sanctions and exportation implications.
Even with these proclamations, China still maintained its place as the leading Bitcoin mining location. The miners in the country take advantage of the advanced computers and accessible energy from coal and other sources for mining. Also, the blanket China ban crypto did less to combat crypto access within the country. Most of the Chinese citizens opted to use foreign trading platforms and websites.
If the past Chinese crypto relations is anything to go by, then crypto use would not fully end in China. Instead, the users will operate more on foreign platforms. The government can also still change the rules. In China, changing the law takes time, it’s the application of the existing rules that shifts. So when cryptos become more stable then the country can still actively take it up.
Why is China cracking down on Bitcoin?
After so much success driven by China’s population interest in Bitcoin, you might wonder why the sudden china crypto ban. Well, there are various explanations.
The first of the possible reasons is the Bitcoin mining impact on the environment. Bitcoin mining has been criticised in several quarters due to its impact on the environment. The mining process involves multiple computers working to solve arithmetic puzzles.
These computers used in mining consume so much energy leading to increasing the carbon footprint in the environment. Studies established Bitcoin mining takes up more energy than the annual consumption of some countries like Sweden, Argentina and Malaysia with millions of populations. This high energy consumption goes against the Chinese President’s goal of China becoming carbon neutral by 2060.
Even though the mining industry has tried to look for alternative energy means, it is only possible during the summer months due to the heavy. Any other time, the industry must look for other alternatives as solar and wind farms are less reliable. They end up burning too much coal for their power needs.
The other reason for China banning crypto is to protect the consumers from the crypto market’s instability. As a decentralised currency, cryptos do not have any government or other asset backing. Instead, it depends on the free market forces for the value. As a young market entrant, the volatility of the cryptos makes it a high risk for investors. Since its launch, Bitcoin has experienced so much market movement, unlike any other asset.
The instability is not only a risk to the investors but also the country’s economy. Once the coin becomes mainstream it would impact the various economic transactions. Therefore any change in Bitcoin’s value will reflect on the wider economy. If the current volatility is anything to go by, then that would mean economic and financial instability. As one of the world’s strongest economies, China cannot risk any form of instability.
China’s first ban on crypto was in 2013 when it prohibited its banks from using Bitcoin due to the possible country’s financial instability from the coin’s speculative nature. Through the years the government has kept on watching out for the possibility of the economy getting affected by the Bitcoin price changes like the ones from the past year. Within the year, Bitcoin grew from less than $10,000 in April 2020 to hit over $60,000 in April 2021. It has since gone back to around $35,000.
Even though all the other reasons seem valid for China bans crypto exchanges, the major issue remains the crypto threat to China’s monetary sovereignty.
Bitcoin was launched to act as an alternative to government-issued fiat currencies. The decentralised currency thus eliminates the central bank powers to control the supply, value and use of currencies. At the same, the government loses its grip on the economy and taxes. A government without control has no real power and China would not risk that. That is why it has been wary of the use of crypto as a currency more than anything else.
By banning Bitcoin, it is taking control of the economy before it even loses it. However, China is also alive to the future of money as digital. That is why it is already in the advanced stages of creating a digital national currency.
What does the crackdown mean to the crypto industry?
As one of the world’s leading Bitcoin mining and exchange locations, China banning cryptocurrencies impacts the whole crypto market. Here are some of the aftermath of the China Bitcoin crackdown.
Ease of mining
As one of the leading Bitcoin mining locations, China exiting crypto mining would seem detrimental to crypto mining. However, that is not exactly the case. The country is not a monopoly of Bitcoin mining. Instead, there are several miners spread all over the continent. These other miners can have an upturn in mining prospects.
Bitcoin mining works such that its difficulty increases with an increase in the computers engaged in the network. The proof-of-work mining relies on various computers competing to solve arithmetic puzzles to introduce new blocks in the network and approve transactions. The more computers in the system, the lesser the chances of any other computer solving the puzzle decreases.
It means with the multiple Chinese companies exiting Bitcoin, the mining difficulty adjusts to become easier with less competition. The higher margins from mining will encourage others to join the market leading to a market correction.
Growing mining pools in other countries
The other way Bitcoin gains from China exiting the mining industry is Bitcoin mining upturn in the other countries. First, given the environmental impact of Bitcoin mining, the reduction of the largest pools would mean fewer impacts on the environment. The miners in the other country can then take up Bitcoin mining without too much backlash.
The other way China’s crypto exit would develop mining in other countries is when the moving mining companies set up locations in the other countries. These companies are finding new homes in the USA and Europe where the countries are more welcoming to crypto mining.
For example, one of the leading Bitcoin miners, Bit Mining, a publicly listed Bitcoin mining company, has relocated 2,600 mining rigs to Kazakhstan. The company is also setting up operations in Texas. The locations welcoming Bitcoin miners are likely to have a mining boom.
Decentralisation
Decentralisation remains one of the selling points for cryptocurrencies. The lack of government control makes it an alternative to fiat currencies. However, Bitcoin has of late become less decentralised due to the government influence. With most countries forming regulations to control Bitcoin use, it begins to look like any other traditional stock.
Already several people have avoided trading Bitcoin or sold off their assets due to China’s possible control. By exiting the market, the prospects of China’s hold on Bitcoin reduces. It then becomes that original decentralised asset devoid of central control authority. This in turn improves user confidence, hence more Bitcoin uptake and trading in the world.
China crypto crackdown FAQs
What does China’s crypto crackdown mean for the value of Bitcoin?
As one of the leading Bitcoin mining zones, China’s crypto crackdown has had a massive impact on the short term market movements. The Crypto market reacts to various news and developments. That is why the market plunged to almost half the values in the aftermath of China’s declaration of its stance on cryptocurrencies.
However, cryptocurrency is not a one country show. The market undergoes correction after some time and will bounce. Once China’s exit from crypto becomes normal, traders will find other avenues of crypto trading and more people will buy cryptos leading to a market upturn.
Is there a positive impact from China’s crypto crackdown?
China’s crypto crackdown is both positive and negative to the crypto market depending on your view; either short term or long term. The short term effects are generally negative. The news of China’s crackdown sends the market tumbling as several traders exit the market.
However, the positives set in in the long run. Amidst the difficulty lies opportunities. The miners from other countries will find it easier to join and gain from Bitcoin mining. Bitcoin also becomes more decentralised hence again attracting more users leading to market balance.
Will China change its approach to cryptocurrencies?
Nothing is promised when it comes to cryptocurrencies in China. China has had a changing relationship with cryptocurrencies over the years. At the moment it is hard to tell whether the country will change its stance on cryptocurrencies. However, from history, there is a likelihood of the country accepting cryptos again.
With time cryptocurrencies would become more integral in the world economies. By failing to embrace cryptos China would miss out on the economic control it so craves.
