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China has become a key centre for cryptocurrencies. More than half of bitcoin miners are based in the country, and it also manufactures most cryptocurrency mining equipment. Effective bitcoin mining requires very powerful hardware and software, and this can quickly rack up huge energy bills. So, China’s relatively low electricity prices are a boon for mining groups.
China has also seen a rash of initial coin offerings of late. It’s the equivalent of initial public offerings for new stock listings. In an ICO, investors, or supporters in this case, exchange their money for the prescribed tokens. The crossing of a minimum funding level will see the cryptocurrency initiated, and if the minimum isn’t met then supporters get a refund.
However, China’s government has now declared that ICOs are illegal, part of an attempt to curb risks from unregulated parts of the financial system in the country. The Chinese authorities, led by the central bank, cited (amongst other reasons) illegal fundraising, illegal securities issuance, financial fraud and criminal activities for the ICO ban. More new rules are expected to follow, threatening more turbulence for the fledgling cryptocurrency market.
The impact of China’s ICO ban
Bitcoin, the most popular cryptocurrency, tumbled from about $4900 to below $4200 within a day of China’s announcement, due to fears over what are perceived to be the toughest regulations on the cryptocurrency market thus far. Prices of other cryptocurrencies like ether also tumbled.
However, the impact was short-lived. For bitcoin, which had surged more than 390% since the start of 2017, the 10% drop certainly seemed like a very brief interlude in the incredible price rise. Within two days of the announcement, prices had returned to above $4600, suggesting that the market had brushed off the likelihood of a regulation-triggered tumble in prices.
A good portion of the market appears to lean towards the perception that the Chinese authorities are interested in clamping down on illegal activities without intending to hamper financial technology innovations. Not being able to prevent the former, the government seems to have opted to take ICOs offline. But the threat of further cryptocurrency regulation hangs over those involved in the market. The expected attempts to regulate a market that may be almost impossible to regulate would only pile onto the amount of volatility we have seen thus far. Risk management is obviously recommended.
Looking on the bright side, the dampening of ICOs could make existing cryptocurrencies more valuable as there will be smaller influx of alternatives to dilute the pool in the longer term. The crackdown on fraudulent activities could also reinforce supporters’ sentiment. Whether it is a bubble or not, cryptocurrencies like bitcoin have made their mark and are here to stay.