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Bitcoin vs yuan: why the Chinese authorities' actions led to the collapse of the cryptocurrency market
Short link19 May 2021, 14:22Vladimir Tsegoev, Ksenia Chemodanova
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At the trading on May 19 bitcoin rate fell more than 14% and for the first time since the beginning of February went below $40 thousand. According to experts, actions of Chinese government became the main reason of collapse. On the eve, China's central bank banned financial institutions and companies from providing services related to cryptocurrency. Experts do not rule out the possibility that China is trying to minimize the impact of bitcoin on the market and free up a niche for the digital yuan. As early as 2022, the Asian republic plans to launch its electronic currency into broad circulation. Meanwhile, Beijing's initiative will not affect bitcoin's long-term prospects, analysts said.
Bitcoin vs yuan: Why China's moves have caused a collapse in the cryptocurrency market
Reuters © Dado Ruvic/File
Bitcoin collapsed sharply in international trading on Wednesday, May 19. At the beginning of the day, the digital coin was cheapening by almost 14.5% to $38,700. The last time a similar figure could be seen was back in the first half of February. This is evidenced by data from CoinMarketCap.
Following bitcoin, rates of other digital assets traditionally began to decline. For example, at the beginning of trading quotations of etherium fell by 19% (to $2.84), while ripa - by 15% (to $1.37). At the same time, the total value of all cryptocurrencies fell by more than $300bn to $1.81 trillion.
"A highlight for the market was the announcement of new cryptocurrency bans in China. China is now home to the majority of bitcoin mining capacity. Against this backdrop, any restrictions from one of the world's largest economies are keenly perceived by the market," Vitaly Kirpichev, TradingView's director of development in Russia, explained to RT.
On May 18, the People's Bank of China announced a ban for financial institutions and companies to provide services related to cryptocurrency transactions, as well as to use digital assets as a means of payment. In addition, the regulator warned investors of the possible risks of trading in digital currencies.
"Cryptocurrency prices have fluctuated extremely sharply recently. Speculation has resumed, seriously undermining the security of public assets and disrupting the economic and financial order," the Chinese central bank said in a WeChat messenger message.
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As noted by experts, the ban on cryptocurrency transactions in China has provoked panic among investors. As a result, market participants began to actively withdraw money from digital assets, which led to a drop in the value of bitcoin and its counterparts.
"The new information turns upside down existing perceptions of the Chinese authorities' stance. Back in April, the People's Bank of China said that digital currencies could have value and in the future, the government may think about changing the regulation of the electronic money market," ICB Fund investment manager Aaron Chomsky said in a conversation with RT.
As a reminder, back in 2017, China's financial authorities began imposing strict regulation on cryptocurrencies in the country. For example, China's central bank has officially banned ICOs (initial public offerings of cryptocurrencies).
Meanwhile, the continuation of the restrictive policy may be motivated not only by the Chinese leadership's desire to protect people from cryptocurrency risks, but also by the strategic goals of the country's financial authorities. Yuri Pripachkin, president of the Russian Cryptoindustry and Blockchain Association, expressed this view in an interview with RT.
"In principle, the Chinese regulator's statements about new restrictions are easy to explain. In this way, China is trying to clear a niche for its digital yuan, the release of which is just around the corner," Pripachkin explained.
The first tests of the digital yuan began in China back in 2020. At that time, the Shenzhen and Suzhou cities introduced the electronic currency in experimental mode.
In February 2021, the third phase of the experiment took place in the country. About 50,000 Beijing residents used a lottery to get 200 digital yuan (about $31) each in virtual envelopes. During the week-long celebration of the Lunar New Year, participants in the initiative were able to spend the money received on purchases at online shops and physical retail outlets.
The new payment method will be widely used by the beginning of the 2022 Winter Olympics in Beijing. The Chinese authorities intend to provide access to the digital yuan not only to nationals, but also to foreigners. This was announced in April by Li Bo, deputy governor of the People's Bank of China.
However, the expected launch of its own digital currency by China and a number of other countries, including Russia, will not lead to a full withdrawal.