Vestigo Volatility Score: 40%
On Sept. 24, the Chinese government criminalized several activities related to cryptocurrencies, including making it illegal for crypto exchanges to provide services to Chinese users. The move is the latest in a widescale regulatory exercise in a number of major sectors in the country. Crypto platforms have already started banning Chinese users following the announcement. Like other currencies, the price of digital coins is highly contingent on supply and demand. It did not take long for panic bells to ring, with many fearing that Chinese producers and buyers would put their crypto ambitions to bed. Nevertheless, the Chinese government fell short of an outright ban on bitcoin and similar assets and still allows Chinese citizens to own the digital coins. In addition, the decentralized nature of cryptocurrency will guarantee digital currency trading continues in China in the years ahead. By just considering the recent global legitimization of cryptocurrencies, Chinese regulation will unlikely have the devaluing impact that many analysts fear.
Constraints to consider
- China already previously banned domestic financial establishments from supporting crypto transactions from May 2021
- China has attempted to curtail bitcoin mining operations for years
- After initially dropping 8 percent in price following the Chinese announcement, the price of Bitcoin recovered after only three days
What has driven China’s bitcoin restrictions?
China, with a population of over one billion, has been a pivotal driver of crypto markets, particularly through its bitcoin “mining” operations. However, China has seen a clampdown on bitcoin mining for years, and particularly since the start of 2021, in what analysts have linked to government efforts to meet pollution targets. Officials have justified their suppression because bitcoin mining consumes such large amounts of electricity to generate the mathematical computations necessary to produce it. The fact that this clampdown has occurred for some time already, appears to have somewhat mitigated the likelihood of a severe and lasting crash in the value of major cryptocurrencies following the latest Chinese announcement.
In addition to environmental concerns, China is piloting its own digital coin known as the Digital Chinese Yuan. Unlike bitcoin or other crypto assets, the Digital Yuan is directly controlled by the Chinese state. By essentially banning other tradable cryptocurrencies, China has sidelined the competition. The idea of a decentralized and unregulated digital asset like bitcoin runs counter to the vision of the Chinese Communist Party. The pessimist might then even argue that the latest announcement was inevitable and expected. What likely shocked most investors was its suddenness.
Cryptocurrency adoption will continue to proliferate globally
The likeliest outcome from criminalization efforts will see most Chinese cryptocurrency operations transferred from China to countries with lax regulations. FTX, a large cryptocurrency exchange, already relocated its headquarters from Hong Kong to the Bahamas due to governance concerns. El Salvador, meanwhile, has legitimized cryptocurrencies to the extent that the government has accepted bitcoin as legal tender since June. Paraguay, following in El Salvador’s tracks, has become the second country to propose a bill to make the digital coin legal tender.
Many international exchanges had previously banned US citizens from trading on their platforms due to American regulation. As has happened when US regulation has disrupted markets, China’s ban will doubtless produce agitation, most notably for cryptocurrency holders inside China. But even then, trends indicate crypto trading will unlikely falter completely, even if the legal risks begin to mount.
Cryptocurrency prices are, and have always been, notoriously volatile. Any regulatory announcement is likely to produce dramatic, but temporary, swings in prices. Notably, international crypto markets have been recently cushioned from efforts to regulate and devalue digital coins. The crypto landscape has been emboldened by the increasing legitimization of cryptocurrencies in countries, and even financial institutions, across the globe. The fact that bitcoin prices recovered so promptly, after only three days of China’s regulatory announcement, highlights the temporary effects of such efforts, even when administered by such a potent player.
We base the percentage of our Volatility Score on the material constraints that determine the potential of a global event becoming a long-term global disruptor. We think that anything above the 75% mark should be studied with particular interest.