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Most analysts believe the recent cryptocurrency crash was caused by actions and decisions made in China. These decisions include the banning of mining and transacting in cryptocurrencies.
During the crash, crypto markets lost about $ 1 trillion valuations. Key cryptocurrencies like Bitcoin lost half their value in a few days. This reaction indicates the potential power china holds over the cryptocurrency industry.
China has always been a critical player in this market. It is just that most people are realizing now after the recent decisions. An example is Bitcoin mining.
Last year, 70% of all bitcoin mining globally was done in China. This just shows the level of control China has in cryptocurrency mining.
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It involves using computing power to run algorithms until a certain preset condition is achieved. Once achieved, a cryptocurrency is created.
Without it, there would be no currency supply and hence the industry would be non-existent.
So, how did China get to dominate crypto mining? Several factors attract crypto miners. They include affordable mining costs, availability of the required technology (hardware and software), and favorable government policies.
Cost of power
The biggest cost in crypto mining is power. China is among the biggest electricity-producing countries in the world. This combination of sufficient and affordable power has always been a key attraction for crypto miners.
Being the global leader in manufacturing, it was also easy to access any type of hardware needed to get the job done. Crypto mining requires high-performing, fast and modern hardware. Only a few countries have the capabilities to produce these devices with china taking the lead.
Initially, China’s policies towards the crypto mining industry were favorable or non-existent. This attracted miners from all over the globe as the authorities were welcoming.
A combination of these factors has seen China become the leader in crypto mining. Controlling mining means controlling supply.
Hence, the power to influence the price. In 2017, China shut down cryptocurrency exchanges to control the amount of crypto trading becoming the first time to take action on the Crypto business.
The reason why the crackdown had a big impact this time is due to the magnitude of limitations.
Earlier this month, the Peoples Bank of China (PBOC) directed all backs and mobile payment service providers to restrict trading and settlement of crypto transactions. These limitations combined with the closure of mining firms led to the price crash globally.
Reasons for the ban
China has cited various reasons for the ban. These include effects on the climate, money laundering, and the fact that they are developing a Yuan-supported digital currency.
Climate-related issues have been raised regularly in crypto mining. The process consumes a lot of power some of which come from unclean sources. Though not fully proven, there is a lot of global activism to end crypto mining.
Money laundering through cryptocurrency is not only a Chinese concern. Other governments have raised similar concerns with some restricting specific cryptos from their countries.
Cryptocurrencies have become safe havens for criminals to conduct their transactions due to their anonymous nature.
China is in the process of launching its currency-backed digital currency (digital Yuan). It belongs to the group of Central Bank Digital Currencies (CBDC).
These are digital cryptocurrencies developed and controlled by the individual country’s central banks. They are backed by the country’s fiat currencies in the value ratio of 1:1.
Central bank-controlled digital currencies are different from normal cryptocurrencies. This is because they lack the decentralization characteristic.
This being said, they are becoming very popular. Currently, most countries are either developing or researching their deployment.
China sees the normal cryptocurrencies as competitors to its digital Yuan and hence the motivation to ban them. The Peoples Bank of China has already rolled out the digital yuan on a trial basis.
The currency is introduced to the market through a lottery process where winners are credited on their wallets with a specific amount of digital yuan.
Once they have received these tokens, they can utilize them on specific merchants authorized to accept transactions.
As a market leader in the development and deployment of a central bank-controlled cryptocurrency, China’s success in this deployment will inform global decisions as more countries follow its steps.
This development is an indicator China will continue to play an important role in the crypto industry into the future. Being the biggest manufacturing country, China is the biggest producer and supplier of mining equipment. This is expected to continue.
Even though mining is banned in China, miners across the world depend on china for the hardware and expertise necessary to make mining successful.
As miners move away from China, the ability to control supply and price will diminish over time. Supply disruptions due to mining restrictions might persist in the short term.
However, I believe they will normalize in the long term after mining operations get back to full capacity.
The mining industry has taken years to set up. Although ultimately it will get back to the optimal levels, it will not be soon. Until that happens, issues with supply and pricing will continue to impact the market.
Some of the benefits miners were used to get might also be nonexistent. An example is an affordable power. An increase in the costs of power could end up making the mining process costlier.
This could make it hard to break even resulting in some miners exiting the market.
China will remain a key player in the crypto industry both directly and indirectly. The world will continue watching its actions closely.
As the dawn of central bank-controlled cryptocurrencies starts, China is emerging as the undisputed market leader hence its actions will have implications across the world.
We await to see how these currencies will interact with the traditional cryptocurrencies that are completely decentralized. Currently, there are rumors that China could reverse the ban on mining.
If it happens, I expect supply levels to resume to pre-banning levels sooner.