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How the China Scare About ICO Regulations Unravelled

“From the date of release of this Notice, fundraising through coin offering shall be banned immediately.”

This is the sentence that caused havoc on the cryptocurrency market in early September. It came from a public notice published by The People’s Bank of China (in collaboration with six other regulatory institutions), titled Preventing Risks of Fundraising through Coin Offering.

The notice further outlined the ban on cryptocurrency exchanges, ordering them to cease operations immediately.

The aftermath was quite severe.

At the beginning of September, Bitcoin traded at around $5,000 with a market cap of over $80 billion.

In the wake of the ban, by mid-September, Bitcoin traded below $3,000 with a market cap of $50 billion. Within two weeks, the value fell by 40%, wiping $30 billion of the market cap.

(Source: coimarketcap.com)

Naturally, investors worldwide started to panic a bit.

And the fall for Ethereum was even bigger.

Ether traded close to $400 at the beginning of September with a market cap of $36 billion. After the news, the price dropped 50% to $200, with $18 billion vanishing into thin air.

Furthermore, one of China’s biggest and oldest cryptocurrency exchanges, BTCChina had to shut its doors, with two more, OKCoin and Huobi, set to follow.

 

So why was the effect so wide-felt?

 

Biggest Bitcoin mining pools (Source: https://blockchain.info/pools)

For a concept that’s based on decentralization and vehemently against central governance, a single entity having such a big effect on the market is counterintuitive.

Nonetheless, it would seem that China did, in fact, have a big influence over the price of Bitcoin and cryptocurrency market as a whole. There are three distinct reasons for this:

  • Accounting for 15% of the daily trading volume, China was one of the biggest Bitcoin markets. However, this halved when the ban was announced.
  • Due to China’s low cost of electricity, Bitcoin mining has been centralized in China, controlling over 80% of the network’s hash rate.
  • China manufactures most of the cryptocurrency mining equipment that’s on the market today. The fear was that a crackdown on cryptocurrencies would have a residual effect on this complimentary market.

Where are we now?

Surprisingly, the market seems to be better off than before the China ICO ban was announced

The impact of the news was very short-lived and the fears of a big crash never materialized.

By the end of September, both the price of Bitcoin and Ether had already recovered, trading well above $4,000 and $300 respectively.

The market just went from strength to strength after that, with Bitcoin breaking through $7,000 in November.

Even more baffling, in the weeks after the ban was announced, the local Bitcoin volume in China was higher than it’s ever been.

(Source: Coin Dance)

China also did a semi U-turn on their initial ban on cryptocurrency exchanges. It is now thought that the country will resume trading of digital coins by licensing Bitcoin exchanges.

It makes sense as well.

There are great economic benefits to be derived from the trade in cryptocurrencies. It’s a multi-billion dollar market and China is a country that prides itself on its strong economy.

They would, therefore, look to benefit from it as much as possible.

If they completely ban it with inside its borders, the market will just move elsewhere where they can’t exert any control.

The inherent nature of the industry also means there’s no way of completely preventing the trade in cryptocurrencies. It’s not a movement you can just shut down, unless you possess a switch that kills the internet, of course. So, if you can’t beat them, join them.

The overall perception is that the Chinese authorities are looking to clamp down on illegal activities rather than ban cryptocurrencies altogether. They are doing this by imputing regulations on the only part of the market that they can actually control, which is the exchanges.

The big lesson learned here is that the cryptocurrency industry as a whole can sometimes be volatile, but overall, it’s a robust market that is growing rapidly. Despite the many challenges it has had to face (Hard Forks, Chain Splits, bans, etc.), it always seems to come out stronger on the other side.