China Cryptocurrency Ban Rocks Markets

VYSYN Ventures Weekly Insights #68 - Bitcoin miners and investors hit simultaneously as Chinese government intensifies crackdown

On September 24th, the People’s Bank of China (PBoC) dropped a bombshell on the cryptocurrency markets by declaring all crypto transactions illegal. The latest move is one of many that the country has made since cryptocurrencies hit the mainstream. The markets reacted violently as exchanges and miners were caught in the aftershock.

In the latest VYSYN Release, we examine this incident and detail the fallout from the PBoC’s move. We also look at how the market recovered and the clues it offered investors.



Cryptocurrencies declared illegal in China

The latest announcement from the PBoC declared every cryptocurrency transaction illegal. The regulator categorically stated that Bitcoin, Ethereum, Tether, and other major coins would be prohibited from circulating in the market. It also declared all business activities related to cryptocurrencies illegal.

As the news broke, the cryptocurrency markets responded violently. Bitcoin fell by 5% within a few hours, while Ethereum and other altcoins also posted significant drops in price. The FUD (Fear, Uncertainty, and Doubt) created by this news threatened to erase the recovery made since the Evergrande selloff last week.

(Source: TradingView.com)

(Source: TradingView.com)

The tokens most affected by this news belonged to the Huobi and OKEx cryptocurrency exchanges. Less than an hour after the announcement, Huobi’s token (HT), and OKEx’s token (OKB) both plunged by over 15%. Given both exchanges’ close ties to the Chinese mainland and their user demographic, this fall was expected.

(Source: TradingView.com)

(Source: TradingView.com)

Chinese cryptocurrency exchanges react

Cryptocurrency exchanges bore the brunt of the fallout from the announcement. Huobi Global was the first exchange to terminate its services in the country. New registrations with mainland China mobile numbers are no longer possible on the Huobi platform. However, users from Hong Kong are not affected by this latest restriction. It remains to be seen how long this situation will last.

For existing Chinese customers, Huobi plans a smooth exit within the coming months. The co-founder of Huobi Group, Du Jun, explained that users will be able to transfer their assets to other exchanges prior to December 31st, 2021, the deadline that the platform has earmarked to shut down services to Chinese customers. He also explained that Huobi is working to protect its customers during this period, giving the frenzied communication that will likely arise thanks to the ban.

Binance also took steps to block Chinese users from its platform. A spokesperson explained that while the exchange doesn’t have operations in China at the moment, IP addresses attempting to access the platform from China will be blocked. “Binance takes its compliance obligations very seriously and is committed to following local regulator requirements wherever we operate'', he said. Other cryptocurrency exchanges that have joined the exodus out of China include BitMart, Feixiaohao, and Biki, with each outlining their exit timetables and procedures.

Cryptocurrency miners and hardware suppliers not spared

Following the announcement, a wave of existing cryptocurrency service providers and startups left the country for more supportive regions. This move seems to have been precipitated by the zeal with which Chinese officials have enforced the ban. Reports suggest that regulators have begun proactively enforcing rules that have put many mining operations in danger.

For instance, a few days after the ban was announced, over 10,000 cryptocurrency mining rigs were seized in Inner Mongolia. Regulators reportedly received a tip-off regarding suspicious activity in a warehouse within the region. The National Development and Reform Commission (NDRC), the agency responsible for the enforcement operation, swung into action and seized 10,100 cryptocurrency mining machines.

This incident sent shockwaves across the mining community and affected remote services with Chinese links, such as mining pools. Sparkpool, one of the world’s largest Ethereum mining pools based in Hangzhou, is planning to suspend services to miners based in mainland China. Sparkpool is responsible for up to 20% of the total hashrate of Ethereum, and the impact on ETH’s price is expected to be significant. This was one among several mining operations that have either relocated out of China or shut down completely. In turn, this affected the mining hardware market as equipment suppliers felt the pinch.

Leading cryptocurrency mining hardware producer Bitmain announced a halt in hardware sales to the Chinese market. Anonymous sources familiar with the company’s plans revealed that the rig manufacturer plans to move its production hub out of Shenzhen.

Also joining the large reactionary wave the PBoC pronouncement created was the Chinese e-commerce giant, Alibaba. The company has released a statement that beginning October 8, 2021, it will no longer allow the sales of cryptocurrency mining equipment on its platform. The company cited “the instability of laws and regulations on virtual currencies and relevant products in various international markets” as the main reason for this move. Also, the platform announced the suspension of transactions involving any virtual currency like Bitcoin, Ethereum, and Litecoin.

Cryptocurrency markets offer silver lining

As the aftereffects of the Chinese ban continue to unfold, the crypto markets displayed a surprising degree of resilience. The crash in prices was not as deep as anticipated, indicating that investors are becoming accustomed to such developments. For instance, BTC quickly recovered after the crash and currently trades at roughly $48k.

(Source: Tradingview.com)

These moves are surprising because investors have long feared the cryptocurrency market’s significant Chinese concentration. These relatively small price reactions indicate the market is moving away from the semi-centralized concentration, towards a truly decentralized marketplace. As such, this is a sign of a maturing market and investors will undoubtedly have greater confidence moving forward. 

About VYSYN Ventures

VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown to USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocations, versatile marketing support, and tech assistance.