What was the reasoning behind China’s crypto crackdown and could the ban be a blessing in disguise?

Overview:

Bitcoin broke in the New Year in a particularly powerful way: By breaking the $30,000 price barrier for the first time and by March its price was popping over $60,000. But, as they say, what goes up must come down. Bitcoin dipped under $30,000 for the first time this year, after news that China is getting serious about cracking down on cryptocurrencies. Chinese Vice Premier Liu called for a "severe" crackdown on and punishment of "illegal securities activities," including crypto mining and trading to—as he put it—stem risks and ensure financial stability. The announcement sent cryptocurrency prices tumbling, and it has prompted several crypto mining and cryptocurrency exchanges to halt their operations in China. Social media was awash with observers pointing out that 2021's price gains have for now been neutralized. Bitcoin wasn't the only cryptocurrency that plummeted. Ether, the second biggest cryptocurrency, fell to $1730, its lowest price since the end of March. Dogecoin dropped to 17 cents, under a quarter of its all-time high of 73 cents.

Why it happened:

Since 2013, China has been softly enforcing bans on cryptocurrencies. So why get serious now? The use of private currencies that could be used to evade detection, taxation and overseas capital flows are a foundational risk to Beijing’s sense of control. As China’s Big Tech industry expands into every corner of mainland finance,

it will collect reams of data—and influence—in a nation where the government is used to doing the surveillance. Virtual currency transactions and speculative activity have disrupted the normal order of the economy and financial [system],"the central bank said in one of its statements.

The decentralized nature of cryptocurrency is anathema to the Chinese Communist Party's focus on stability and control. Though shunning Bitcoin, Ethereum and other cryptocurrencies, China is working on rolling out its very own currency, the e-yuan, most likely in the 4th quarter of the year. By banning crypto currency, China is effectively eliminating its competition.

Moreover, even the calendar may play a role in this crackdown. July 1st is the 100th anniversary of the Chinese Communist Party. It is at least plausible that Chinese authorities would send a strong warning to the crypto-industry in the weeks leading up to this big day. Those familiar with China will recognize the tense solemnity that leads up to these kinds of events, which may be accompanied by crackdowns on activity that the government views as a threat to shehui wending, or social stability. Cryptocurrency appears to fit into that category.

The Silver Lining:

As per industry estimates, over 90% of bitcoin mining has now been shut down in China, which once represented an estimated one-third of the global crypto network’s processing power. This may seem like bad news, but let’s take a step back. China has been at the forefront of banning multiple tech innovations, but that hasn’t stopped them from taking over the world we know today. Twitter, Facebook, Google and some of the most used services in the world today have something in common: they have all been banned by China at various times. Actually, China bans have proven to be quite a good buy signal. What this demonstrates is that threats of regulatory interference may have a temporary impact on price, but longer term, the fundamentals driving bitcoin’s and the price of other cryptocurrencies remain largely unaffected.

Bitcoin enthusiasts are comparing the cryptocurrency to Google, whose share price continued to flourish after being banned in the People's Republic in 2010. They say that China neglects cryptocurrencies at its own peril, and that this will be a long-term positive for the US. Dogecoin holders are less tranquil.

Crypto-mining is set to become a whole lot easier (and profitable) for North American crypto miners, thanks to the Chinese government’s aggressive crackdown on the industry. Until recently, China accounted for between 65% and 75% of all Bitcoin mining. Market dominance is expected to shift to North America. This could be highly favourable for U.S. and Canadian crypto miners who (for now) will no longer have to compete with China for precious blocks.