In 2019, China banned initial coin offerings. In 2021, according to Reuters, the country stepped up its crackdown on cryptocurrency by banning financial institutions and payment companies from providing cryptocurrency transaction services and warned investors against speculative crypto trading. These were attempts by China to clamp down on the digital trading market. Considering this anti-crypto stance, how can China be influential on cryptocurrency prices? Despite the country's attempts to wean its economy off cryptocurrencies, the nation still exerts significant influence on prices.
A Relationship That Turned Sour?
First, a little bit of history about cryptocurrencies in China because the relationship has been complicated.
Before the government’s volte-face in 2017, China was among the earliest countries to enthusiastically embrace cryptocurrencies. In 2013, a Chinese charity began accepting bitcoin, and a wave of businesses followed suit by accepting cryptocurrencies. Even Baidu, China’s search engine giant, began accepting bitcoin for website security services. Miners set up shop immediately afterward.
Bitcoin’s politics aside, Chinese investors are enamored with cryptocurrencies and their ability to transcend borders. A QZ.com article quoted an engineer at the Chinese Academy of Sciences in Shanghai as saying that the Chinese buy bitcoin because it will increase in value and is a hedge against inflation. An added attraction is that bitcoin transactions are free from government control.
Bobby Lee, founder of the BTC China exchange, said the Chinese don’t care about the political aspects of bitcoin. “What they care about is income—can bitcoin make me money now?” he said. As China’s economic growth engine has slowed, those factors have become important.
Returns from conventional state-backed investments have dwindled. Rich Chinese are reportedly hunting for investment opportunities abroad and exchanging local currency for U.S. dollars. In response, the government had instituted capital controls to prevent yuan outflow and a subsequent drop in its value. Bitcoin and other cryptocurrencies offer protection against a slowing economy and capital controls at home.
Ban? What Ban?
One way in which China exerts an influence on bitcoin prices is through its exchanges. Before instituting a ban against bitcoin trading in 2017, China accounted for over 90% of trading volumes in cryptocurrencies. The exchanges thrived by charging low fees.
In July 2021, the operators of cryptocurrency exchanges Huobi and OKCoin announced that they would close their respective subsidiaries in Beijing amid the latest crackdown on digital currencies.
Beijing Huobi Tianxia Network Technology Co is a mainland Chinese entity of Huobi Group, which runs the world’s second-largest cryptocurrency exchange by volume. Shares of Huobi Technology Holdings, an affiliate, dropped 22% after the announcement. Beijing Lekuda Network Technology Co had already announced in late June that it would liquidate the digital asset trading platform OKCoin’s company in Beijing. Both OKCoin and cryptocurrency exchange operator OKEx were founded by controversial entrepreneur Star Xu Mingming, who was under investigation by Chinese authorities last year.
In May 2021, the State Council’s Financial Stability and Development Committee announced further crackdowns on bitcoin mining in China. In July 2021, Bishijie, an online community for Chinese cryptocurrency investors, terminated its website and app in mainland China, and BCTChina, which once ran the country’s largest cryptocurrency exchange, announced that it had completely exited from bitcoin-related businesses.”
The latest crackdown makes it more difficult for individuals in China to buy cryptocurrencies using various payment channels and could impact miners' business by making it harder for them to exchange cryptocurrencies for yuan.
According to Reuters quoting Winston Ma, NYU Law School adjunct professor and author of the book "The Digital War", China wants to completely cut crypto-related transactions out of China's financial systems.
Bitcoin Mining Operations
Supply plays a significant role in determining a currency’s price. Within the cryptocurrency ecosystem, China controls the supply of prominent cryptocurrencies through mining operations. Approximately 65% of all bitcoin mining operations are based in China despite the crackdowns.
Bitmain, which is responsible for 39% of all mining operations and runs the world’s two largest mining pools, is a Chinese company with operations that spread far beyond its borders, including to places like the United States and Switzerland. It pioneered the ASIC chip, which runs most bitcoin mining systems, and is considered “the most influential company in the bitcoin ecosystem” by some.
Because bitcoin’s supply is tightly controlled, bitcoin mining plays an important role in determining the cryptocurrency’s prices. Bitcoin miners calibrate their coin production and demand by adjusting problem difficulty and transaction fees. Even though there has been much outcry about bitcoin’s energy consumption, Chinese miners are still making a tidy profit due to high prices. It could be argued that this might be the reason why the Chinese government has not set a deadline for the removal of bitcoin mines.
Bitmain’s mines have also been a major driver of prices for bitcoin cash, a bitcoin fork that came into existence in August 2017. Jihan Wu, Bitmain founder, was a signatory of the agreement that brought SegWit2x into existence. That move culminated with the launch of bitcoin cash. The bitcoin mining community was split about transferring their system resources to mine bitcoin cash following its introduction. However, Bitmain provided the necessary firepower to fuel a price increase in the cryptocurrency in November 2017.
China’s influence in mining spreads to other cryptocurrencies as well. For example, consider the battle over Siacoin in 2018. The coin belongs to Sia, a Boston-based platform that enables content distribution over its network. Its founder expressed concern on the platform Reddit for Bitmain’s decision to develop ASIC machines that support the algorithm that runs Sia. The company’s decision is expected to significantly increase the supply of Siacoins in the market and centralize mining operations.
But that is not the end of the story. Halong Mining, another Chinese company, is competing with Bitmain to develop a machine that supports Siacoin’s algorithm. The net effect may be that the coin’s supply may be centralized and controlled by a Chinese company.
The Bottom Line
According to Eminetra, the total market capitalization of the crypto industry is $1.47 trillion, and China accounted for more than 90% of all trading volume prior to the introduction of regulatory measures and restrictions in 2018.
So, China is still a major player in the cryptocurrency ecosystem. The country has several levers through which it controls pricing for cryptocurrencies even as it might seem that it is cracking down on them. Those levers will be useful if and when it begins regulating cryptocurrencies.
Bitcoin and cryptocurrency prices are not totally dependent on China. However, ultimately, China is likely to become the world’s most regulated crypto hub and will definitely have a continuing impact on the demand and price of cryptocurrency.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin.