Historically, China’s been a powerhouse for Bitcoin and cryptocurrencies. The Chinese people have been showing a lot of interest in the crypto-world since the beginning. Sadly, the communist government doesn’t share this interest. More than that, they see cryptocurrencies as a kind of menace to their economical domain. That’s why China banned all activities related to cryptocurrency this year.
This is no great news for cryptocurrency investors based in mainland China. However, can the bad effects spread beyond those borders? Of course, we have some factors to consider about it. Especially because we can’t talk about China like we talked about Turkey (which also banned crypto payments this year), for example.
Until some months ago, China was the undisputed leader in Bitcoin mining, with over 65% of the total hash rate. Besides, according to the analytics firm Chainalysis, “East Asia [and mostly China and Japan] is (was) the world’s largest cryptocurrency market, accounting for 31% of all cryptocurrency transacted in the last 12 months ”. China was in fourth place of global adoption in 2020… and now it’s not.
That’s a huge bite from the global cryptocurrency market, which can’t go on without some consequences. Let’s explore this topic a bit more.
China’s cryptocurrency ban history
China has a love-hate story with cryptocurrencies. Years ago, when the Initial Coin Offerings ( ICOs) and exchanges were allowed in the country (around 2015), 80% of Bitcoin volume was exchanged into and out of Chinese yuan (CNY). However, their laws were never exactly crypto-friendly.
The hostilities started as early as 2013. Their central bank, the People’s Bank of China (PBOC), banned all financial institutions from handling Bitcoin transactions. In 2014, they assured that the disobedient institutions would be penalized. Three years later, the crypto-world endured something more meaningful.
Since 2017, ICOs and cryptocurrency exchanges are banned in the territory. Other crypto-related activities (like mining) remained legal, but not for so long. This same year, another huge blow would come from this country. Since May, China banned payment services with cryptocurrency for financial institutions. Besides, they started the process to ban Bitcoin mining in several provinces -and, eventually, in the whole country.
September would come with a nasty surprise. According to a new announcement, virtual currencies and related activities (such as trading, mining, or services) are officially illegal inside the country. These activities include exchanges, financing (Initial Coin Offerings), sales, crypto-mining, any form of trading (futures or derivatives), and even information and pricing services.
Besides, “the provision of services by overseas virtual currency exchanges to Chinese residents through the Internet is also an illegal financial activity”. This means that the overseas exchanges can’t provide services to Chinese investors either. And more than that, individual users are also banned from using cryptocurrencies, and they could be investigated for it. China is, obviously, not a good place to hold cryptocurrencies now.
We already saw immediate consequences. Bitcoin (BTC) became bearish after the announcement, losing around 13% on those dates. Also, the whole cryptocurrency market capitalization fell by over 11% [CoinMarketCap]. But, as we can see now, that was something temporary. Since those lows, Bitcoin has risen by over 56%. The whole market followed, with an increase of over 38%.
The situation with the hash rate (Bitcoin mining power) has taken a bit more to recover. Since the cryptocurrency mining ban within China in May, even 65% of the total power disappeared from the network by the end of July [ BitInfoCharts]. It came as low as 68 exahashes per second (EH/s) from 197 EH/s in mid-May. Currently is at 145 EH/s. Not as high as before the ban, but closer.
That’s because of another immediate consequence: the miners’ exodus from China. Not all Chinese miners had the possibility to migrate to other crypto-friendlier countries. But we can say for sure that most of them did it. According to the last Bitcoin Mining Map by Cambridge (August 2021), the new leader in Bitcoin Mining is the United States, with 35.4% of the total hash rate. It’s followed by Kazakhstan (13.8%) and Russia (11.9%).
China doesn’t have any share anymore, but some clandestine mining operations could have survived. According to BitNodes, there are still at least 137 Bitcoin nodes in China. This, even though overseas cryptocurrency companies are already banning Chinese citizens from their platforms. The list includes Binance, Huobi, OKEx, and TokenPocket. Bitmain, the biggest mining-rig maker, won’t sell any more machines to Chinese customers.
Meanwhile, the said Chinese customers are still trading in P2P groups and Over-The-Counter (OTC) markets. To avoid problems, they’re even renaming the crypto-related WeChat groups and using special slang to talk about this online.
China’s cryptocurrency ban in the long term
It’s hard to say what will bring the future for cryptos after this ban, but we can say for sure that it’s very far to be “the end”. First of all, it’s probable that OTC cryptocurrency markets also ban citizens from China sooner or later, as Bobby Lee (Ballet CEO) affirmed recently. The adoption there is on the decline.
As we mentioned before, China was in fourth place in global adoption in 2020. In the new Global Crypto Adoption Index Top 20 by Chainalysis, the country fell to 13th place. Curiously enough, is still ahead of Russia, which is in 18th place. And it’s happening something interesting on the margins. The Chinese cryptocurrency users seem to be moving to the Decentralized Finance (DeFi) sector.
As indicated by the new Global DeFi Adoption Index Top 20 by Chainalysis, China is the fourth place, only after the United States, Vietnam, and Thailand. Will this be, then, the target of the Chinese government in the next years? We can only guess from this point. But it’s very likely.
On the other hand, the countries that are receiving the Chinese Bitcoin miners (and some average users too, for sure) are starting to think about how to deal with them (legally). For example, Kazakhstan authorities are already preparing new taxation rules for Bitcoin mining, starting in 2022. In Russia, the energy fees for miners could increase soon as well, since they’d be significantly impacting the country’s energy supply.
Contrary to those countries, the United States, El Salvador, and other regions have been very welcoming to the crypto-miners. China’s ban on cryptocurrencies isn’t destroying the crypto markets, that’s for sure. And since the news didn’t represent a blow especially big against the crypto market, we can take the guess that the investors, like the miners, just decided to move/hide from China and/or change the fiat currency; without completely abandoning the market.
Actually, this can also be good news for Bitcoin and cryptocurrencies. Previously, we could say that China had a larger portion of the market. Therefore, if they’d wanted to do it, there was the possibility to manipulate or interfere in the network somehow. Bitcoin was kind of “centralized” in China, and that wasn’t good. Decentralization (more nodes in more locations) means more liberty, fewer possibilities of censorship, and full financial independence.
Yes, the cryptocurrency market lost a huge portion of users and potential talents. But, at least, it’s winning even more all over the world. And who knows? China could learn from its mistakes in the future.
Don’t let the doubts stopping you! You can legally trade Bitcoin and other tokens on Alfacash. And don’t forget we’re talking about this and a lot of other things on our social media.
Originally published at https://blog.alfa.cash on October 17, 2021.