China Closes Its Doors on Crypto: Can the Currency Overcome It?
Here's how China's latest restrictions on crypto may impact investors.
In late May, China's financial-industry regulators placed extreme limitations on cryptocurrency in the country. Immediately following the announcement, Bitcoin fell to $30,000 — down 30 percent from where it had been before the announcement. With China being a major player in the global economy, its new restrictions on crypto are sending ripples across the world.
China’s tumultuous history with crypto
Chinese regulators have banned payment companies and financial institutions from offering clients any cryptocurrency-related services. Although citizens can still own cryptocurrencies through crypto exchanges, they can’t do much else with it. The new Chinese regulations require crypto to come with a warning for investors, noting the hazards of speculative crypto trading.
Financial regulators of China have been wary of Bitcoin and other cryptocurrencies since 2013. Although interest steeply rose in 2013 after a fundraising event for a crypto exchange and mining hardware, by December China had banned banks and domestic exchanges from using it in transactions. This was just the beginning of the tumultuous relationship.
In 2016, Bitcoin prices rose in China, but by September of 2017, regulators intervened again, banning initial coin offerings (ICOs) to limit financial risks and protect crypto investors. The committee believed that some ICOs (fundraising platforms) may be pyramid schemes and financial scams. Then, in January of 2018, as China exited the market, there was a 65 percent crash in BTC price — by that July, the ban had resulted in about 85 ICO platforms and 90 virtual-currency-trading platforms leaving the market. Finally, in 2019, the Chinese government recognized the need for blockchain technology, creating plans for its own central-bank digital currency.
Given the history, it’s no surprise that China is yet again cracking down on cryptocurrency. Officials have consistently shared their concern that virtual currencies, like Bitcoin, don’t have the support of any real value. The new regulations seem to be in direct response to the global bull market, as cryptocurrency again jumped in popularity in China. The new mandates provide a more detailed, expanded scope of prohibited services than those set forth in 2017.
How will China’s ban affect the future of Bitcoin?
Bitcoin has had a tough month: First, Elon Musk announced that Tesla would no longer accept it as a form of payment because of environmental concerns, and the cryptocurrency fell 17 percent after the announcement. It rebounded fairly quickly — though not to its former glory. At the time, Bitcoin hovered around the $50,000 mark, but after China’s regulations announcement, it dropped to $30,000 before rising back up to $38,000.
Related: Elon Musk Tweets, Dogecoin Surges
What can we learn? Most importantly, Bitcoin is volatile. However, this is not completely unlike stock investments. When things are going well, everyone wants to invest. Given the slightest sign of trouble, some people panic and sell. This is why people stress the importance of time in the market over market timing. When you’re patient, compounding and investment growth can bring big rewards.
Aside from that, it’s fairly safe to say that Bitcoin will continue to regain what it lost. Bitcoin is the biggest cryptocurrency with the lengthiest history. We can look back at previous big hits to Bitcoin — former regulations from China, bull markets, bear markets, Tesla announcements — and see that the cryptocurrency has rebounded each time.
How will China’s ban affect the future of crypto?
Bitcoin wasn’t the only cryptocurrency affected by China’s new regulations: Ether dropped 40 percent as well. Ether went from $3,400 pre-regulations, then dropped below the $2,000 mark post-announcement. It has since been in recovery mode, hovering around $2,600 at the time of this writing. Dogecoin, which saw success with Tesla’s denouncement of Bitcoin, also saw a more than 40 percent drop.
China is a major global financial player, seeing surges in new investors in the stock market late last year. Without China in the cryptocurrency space, we’re seeing both a loss of their investing power and a hit to the credibility of cryptocurrency. With large, reputable cryptocurrencies like Bitcoin and Ethereum taking hits, it will be even harder for smaller coins. Although their losses aren’t as big, they will face the same hardships. However, we’ve seen the cryptocurrency market recover from Chinese regulations before, and it will likely do so again.
Cryptocurrency is fairly new, especially when compared with traditional forms of payment, like cash and gold. For this reason, critics will continue to argue the intrinsic value of cryptocurrencies. We will likely continue to see ripples in the market every bull cycle. If you’re prepared to deal with some volatility, crypto investments may still bring huge earnings.
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