Since China further stepped up its crackdown on crypto last week, the cryptocurrency market has been tanking under soured mood with brutal institutional selloff leaving retail traders to hold the bag.
This cannot be called anything but a precursor to another crash – the one that happened in April.
The market-wide plunge has wiped off long (buy) positions worth over US $10 billion – one of the largest liquidation of the past weeks.
The total market value of cryptocurrencies has dwindled to less than half of what it was near $2.5 trillion mark in April.
The total market cap of Bitcoin plunged below US $600 billion on Monday, just half of its once whopping US $1.2 trillion value.
With bitcoin and many altcoins losing 20-30% from their recent levels, you might be wondering if this is a tantrum, a crash or simply a sell-off.
Massive selloff volumes are still persisting as traders and speculators with highly leveraged positions has been selling off on the worry that falling prices amid the soured mood and prevailing negative outlook will further accelerate the reversal, adding to a long list of challenges facing digital asset holders in the trillion dollar plus market.
Why is the market crashing now?
The renewed crisis is mostly attributed to China, although there are other factors in play too, which are fundamental to the future of the market.
Every single time China makes news about cryptocurrencies, the entire market plunges. This is not without a reason. China is one of the biggest participators in the cryptocurrency market by both the number of traders and volume of trading but also is one of the most regulating countries in the world.
In addition, Chinese traders and investors had had significant control in mining and staking activities due to low-cost electricity and local availability of huge amounts of money as the government has restriction on the money outflow from the country.
China’s biggest banks are under pressure from the government to refuse to help customers trade Bitcoin and other cryptocurrencies after the central bank said executives were told to step up enforcement of a government ban. Regulators in several Chinese regions have ordered cryptocurrency mining operations to shut down.
Four major state-owned commercial banks and payment service Alipay announced they will identify and block customer accounts used to buy or trade cryptocurrencies.
China’s chilly stance toward cryptocurrency goes back years. The recent crackdown may also be in part to boost China’s state-backed digital yuan initiative which is more like a centralised digital currency. Previously in 2017 China closed down its local cryptocurrency exchanges to root out speculative betting that had then accounted for 90% of global trading in bitcoin.
China is understood to have accounted for around 65-70% of global bitcoin mining last year, and another near 10% is done by Iran which has also started to take tough stance against mining.
China’s recent push is just the implementation of its re-announced ban in May which prevents individuals from holding cryptocurrencies and orders institutions, including banks and online payments channels not to offer clients any service involving cryptocurrency is ver significant.
It is impossible to pin everything on one specific factor – China in this case, it looks like investors and traders are becoming increasingly wary about the prospects of the cryptocurrency market due to many reasons, among them:
lofty valuations, US President Joe Biden’s capital gains tax (CGT) hike, canine movement (dog currencies) and Elon Musk’s tantrums discouraging serious investors, scepticism and reflection whether any cryptocurrency can become a widely accepted currency, leveraged trading (brokers and exchanges tighten margin rules when they brace for “elevated volatility” in events like China news), profit-taking (many have started to realize that they are not going to make the same profit from cryptos they made early this year), seasonality (market activity slows down across most of the world due to summer and holidays).
What is possible to say today is that due to the reason below the currents lows won’t spell the bottom for most cryptos and the worst might come as the selloff runs its course in the coming days.
Persisting selloff on the back of prevailing downtrend may take bitcoin further down to the $20,000 level, dragging down the entire market with proportional percentage-point declines in altcoins.