What just happened to bitcoin? How a Chinese crypto crackdown led to spectacular crash

·2-min read
 (Getty Images)
(Getty Images)

The cryptocurrency market is in freefall, with the value of the market losing almost 25 per cent over the last day.

And while the troubles have many causes, the latest drop is likely to be largely the result of new fears about regulation in China, which have caused anxiety across the market.

They come after a range of other difficulties for the cryptocurrency market. Elon Musk has been the catalyst for many of them, including his announcement last week that Tesla would stop taking bitcoin in return for cars because of the climate impact of cryptocurrency.

All of that follows a run of phenomenal increases in bitcoin and other cryptocurrencies. Even after all of those issues, the price is still up by a third over 2021, demonstrating just how far it had grown.

But that seemed to come to a fairly resolute end this week, when China signalled that a new crackdown on cryptocurrencies was coming.

Three state-backed organisations – which include the China Banking Association – issued a warning that many took as signalling that the country could further regulate cryptocurrencies.

They warned that digital currencies are not “real”, and that they “should not and cannot be used as currency in the market”.

The joint statement warned that the “speculation activities” that have surrounded virtual currencies, which come amid surging and falling prices, were putting people’s property and the “normal order of economy and finance” at risk.

It warned that virtual currency is not real, and cannot be used as such; that financial institutions should not undertake business relating to it; that consumers should be prepared to lose their holdings; and that organisations should prepare for increased regulation and discipline in its use.

The warning is potentially dangerous enough in itself for cryptocurrencies: China is a huge market, and one particularly associated with their use. Any crackdown is likely to reduce both the amount of mining and trading that can happen, and also the likelihood that cryptocurrencies will ever break into the mainstream.

But the effects are also likely to be wider than just China, because it is a signal that countries could crack down on virtual currencies. A number of other regulators – including the UK – have suggested that they are looking more closely at their use and trading, and so the Chinese crackdown could be the first of a number of possible issues for virtual currencies.

All of that together caused major problems for the price of just about every cryptocurrency – all of the largest ones fell on Wednesday, and the market was down substantially over the day. The price and trading of such cryptocurrencies tends to be heavily affected by momentum, and so the impact of any sell-off quickly picks up steam.

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