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China's Crypto Crackdown And Bitcoin Plunge Reflect Nervous Market

China’s Crypto Crackdown And Bitcoin Plunge Reflect Nervous Market

May 19, 2021 at 03:56PM
by PYMNTS

What goes up must come down, it is said — and the wild ride of crypto speaks to just how fragile things can be, when speculation runs rampant and tweets drive sentiment.

And, of course, when governments and associations crack down on cryptos, the hopes of those who say bitcoin and altcoins will sidestep the central banking system are dashed, at least for a time.

Bitcoin and other offerings have plunged in the wake of news that the China Banking Association, a nonprofit, self-regulating association of financial services firms, the National Internet Financial Association of China, and the Payment and Clearing Association of China warned the industry to “resolutely refrain from conducting or participating in any business activities related to virtual currencies.”

The warning is stark: “Financial institutions, payment institutions and other member units must earnestly strengthen their social responsibilities. They must not use virtual currency to price products and services, underwrite insurance businesses related to virtual currencies or include virtual currencies in the scope of insurance liability, and must not directly or indirectly provide customers with other services.”

To which we say: There ain’t a lot left that one can use cryptos for.

At this writing, bitcoin is trading at roughly $32,000, down roughly 50 percent from its all-time high of more than $64,000 in mid-April. In market terminology, we might say this is a bear market, which is typically defined as a decline of at least 20 percent. Coinbase, the crypto exchange that went public only a few weeks ago, is trading at $219 in the pre-market, down 9 percent, and well below the $328+ levels seen a month ago. Dogecoin, the joke coin, is down more than 40 percent in 24 hours. Ethereum is down 36 percent on the day.

Bear markets aside, the precipitous plunges show just how brittle sentiment is, and how the “disruptor” argument can turn on a dime. Tesla was opening its arms to bitcoin as currency; now it’s stepped back from that embrace.

Crypto as spendable currency, at least for anyone who doesn’t have the stomach to withstand 25 percent swings in daily purchasing power — has almost certainly been delayed a bit.

The Bigger Picture 

The bigger picture may be more ominous for bitcoin et al. The statement from the trio of Chinese industry associations represents a breathtakingly coordinated movement to corner crypto, essentially guaranteeing that it is shunted off to unofficial channels — and thus cannot gain traction in mainstream commerce. That paves the way for digital yuan, of course, to become a mainstay in financial services and beyond, where crypto might have (were it not for the ban) taken flight.

There are other rumblings in another giant on the world economic stage — that would be the U.S. — that the regulatory pressures surrounding bitcoin might become, well, more pressuring.

As noted in this space earlier in the year, U.S. Treasury Secretary Janet Yellen said that a digital dollar, overseen by the Federal Reserve might promote “faster, safer and cheaper payments.” She’s also been on record as having stated that bitcoin has limited appeal.

“I don’t think that bitcoin is widely used as a transaction mechanism. It’s an extremely inefficient way of conduction transactions and the amount of energy that’s consumed in processing those transactions is staggering,” she said, and has also pointed to fraud risks that are hallmarks of crypto.

The current selloff across crypto-land, hitting bitcoin, altcoins, exchanges — all corners, in other words — shows just how fragile sentiment truly is.

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