China recently announced a ban on Bitcoin and all other cryptos…again.
What does this latest cryptocurrency crackdown mean for the market? Is a looming tidal wave about to crash? Or is it just more froth to surf through? Let’s take a look.
[top_pitch]
What’s the latest Bitcoin news from China?
China’s central bank recently announced that all transactions involving any kind of cryptocurrency are now illegal.
This includes the ever-popular Bitcoin. The move led to an immediate drop in cryptocurrency prices, which have since recovered. That’s the kind of rollercoaster you can expect in these markets!
What was quite interesting was that the news led to a bump in prices for some DeFi (decentralised finance) projects. This was perhaps due to Chinese users moving to exchanges that are outside the control of companies.
What is China’s relationship with Bitcoin?
I guess you could say it’s somewhat of a love/hate relationship. China has always been one of the most outspoken critics of the cryptocurrency industry.
Yet, the country also had one of the biggest trading markets and was home to the majority of Bitcoin miners. But over the years, the government has repeatedly made statements cracking down on cryptocurrency practices.
Trading digital tokens was banned back in 2019. But things ramped up this year when banks were ordered to stop allowing crypto transactions and Bitcoin mining became illegal.
[middle_pitch]
Does this mean a crypto crash is on its way?
Negative press coming from China often results in a short-term price drop followed by a swift recovery. Because Bitcoin and other projects are of global interest, it’s unlikely that issues in China will tank the industry.
However, there are some scenarios that could lead to a crypto crash. An interesting piece from The Economist laid out three conditions that could take the market to zero:
1. A general stock market crash
There’s a lot of leverage (borrowed money) in crypto, and a wide financial or stock market crash could wipe out cryptocurrency holdings, which are usually the riskiest assets investors own.
A general stock market crash could have a domino effect, leading to widespread impact and a real change in regulation.
2. The fall of stablecoins
There are a number of tokens out there pegged to currencies like the US dollar. They are designed to try and make transactions easier and faster.
But big market problems could arise if there was a run on these stablecoins. The companies who control them might not be able to sell enough assets to cover their value. If this happens, then it could make redeeming these coins difficult or even render them worthless.
This would cripple some of the biggest companies in cryptocurrency and result in a catastrophic loss of trust.
3. Straightforward ‘cryptocalypse’
Under this scenario, investors just stop caring about cryptocurrency. A massive shift in sentiment is not beyond possibility.
If interest rates rise, you might want to make less risky investments. This would mean less money pouring into digital currencies.
More people moving out of these markets means that supply might increase, leading to a fall in prices. Without the potentially high returns, is it worth even putting your money into something risky like Bitcoin?
The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets. They carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The post Incoming crypto crash? China bans Bitcoin appeared first on The Motley Fool UK.
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