China has introduced strict regulations regarding cryptocurrencies, and this is the cause of the plummeting values. Even though Bitcoin has slightly recovered, investors are worried that the crypto market will plummet further and cause huge losses.
Earlier on, China had instructed financial firms in the country to shun the use of cryptocurrencies. This announcement came just after Musk’s tweet that Tesla would stop accepting Bitcoin payments causing a huge market wipeout. After the tumble, China stated that investors should shy away from crypto investing because cryptocurrencies pose a great risk to economic stability.
Tumbling Crypto Mining Activities
Shortly after the first announcement, the Chinese Vice Premier, Lie He, also announced that there would be a crackdown on cryptocurrency mining and trading. The announcement was made on May 21, and Bitcoin crashed again to around $34,000.
The crackdown also led to major crypto mining companies in China stopping their operations in the country. Huobi Mall, BTC.TOP are some mining firms that cited regulatory risks in the country as the main cause of their decision. The firms are looking into overseas markets such as North America and Europe as their main base of operations. China accounts for almost 70% of the global mining activities, and hence banning the activity will remove the country from the global crypto map.
If China continues with this trend, it may deny the region its position as a hub for cryptocurrency activities. The firm has already lost the race in crypto trading after the country’s regulator banned crypto exchanges from operating in the country since 2017.
Reasons for crackdown
The Chinese crackdown on cryptocurrencies is a great concern to investors. This is because it is causing a major turmoil in the market that has investors speculating that it will stop when BTC is below $30,000.
However, even with the devastating effects of the crackdown, there must be reasons why the Chinese government is imposing the regulations. Past events also show that the regulators will follow through with the proposals.
One of the reasons behind the regulations is to limit the high level of risk associated with cryptocurrencies as an investment instrument. According to the Chinese government, the volatility of cryptocurrencies poses a great risk to the economy, especially when the assets are used as a means of payment.
The second reason is to protect investors from suffering great losses. New investors in the crypto market are at great risk of losses, especially when they do not have the right experience.
It is worth noting that even seasoned investors are at risk of incurring unprecedented losses amid the current wave of crypto regulations. However, not all investors shy away from risk in this market because some are still buying the dip, causing a temporary price stabilization.
China may be cracking down on crypto mining because of the high energy consumption from mining activities. It is worth noting that two-thirds of the energy used in Bitcoin mining is gotten from environmental-damaging coal. Bitcoin mining energy levels go contrary to the environmental conservation goals set in Beijing. China adhering to the global environmental goals is paramount in improving the country’s relations with the US.
Chinese Monetary Policy
The third most possible cause for the crackdown is to protect China’s foreign reserves. Buying Bitcoin may pause a capital flight risk for the Chinese economy, and curbing Bitcoin transactions may help achieve a balance of trade following a decline in capital outflows from 2014 to 2016. The country has since been looking into ways of protecting its monetary system.
The above are very strong cases as to why China is restricting crypto transactions. However, the country has not entirely abandoned blockchain technology, given that it is proposing to introduce a digital yuan. The Central Bank Digital Currency will be revolutionary as China is steps ahead of other jurisdictions.
The Broader Picture
China is not the only country that is struggling with ways to regulate cryptocurrencies. The US has also been closely monitoring the market to figure out the ways of regulating it. According to the US Treasury, cryptocurrencies pose a great risk to financial stability, and this called for stringent regulatory measures that will control this market.
However, things are not all bad for cryptocurrencies, as some researchers argue that increased regulations will legitimize this market. If decentralized finance were as regulated as centralized finance, it would make the market appear more legit to governments and new traders. This would make the market more robust to withstand any future changes in technology and financial markets. It would also boost popularity.