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Volatile, Unregulated, and Now Banned: The Future of Cryptocurrencies?

by Tavaga Invest

China, in its attempt to blot out the illegal activities and banning crypto mining nationwide, augmented the crackdown on cryptocurrency on September 24th 2021. People’s Bank of China (“PBOC”) announced that a stringent ban will be enforced on financial institutions, payment companies, and internet platforms from facilitating cryptocurrency trading. 

With expanding monitoring activities and creating mechanisms for early warning, along with stopping ‘hype’ in crypto trading and mining activities, China has inflicted its strongest stance against cryptocurrencies. Though the rationale behind such a drastic stance is multifarious, one thing was made repeatedly very clear by authorities: cryptocurrency’s wild price moves are a threat to the nation’s economic and financial stability.

This step had a stumbling effect on all cryptocurrencies, with Bitcoin falling nearly 5% and other smaller cryptos that follow Bitcoin’s trends such as Ether and XRP are also tumbling.  

The Chinese tryst with Crypto:

The Chinese ban on cryptocurrency does not come as a surprise, the Chinese government has been working towards it for some time now. To understand the Communist Party’s stance on cryptocurrency and how it will impact the Chinese as they move ahead, it becomes important to understand how the cryptocurrency market has evolved in China.

2008 – 2014

Cryptocurrencies began to gain traction in China. In 2011 BTCChina, the first Chinese Bitcoin was established. Furthermore, many developments took place in China. In 2013, Huboi Crypto Exchange was established in China, moreover, Bitman, which went on to become the largest manufacturer of chips to mine Bitcoin in 2018. 

Baidu and Taobao started accepting Bitcoin as a form of payment and this catapulted BTCChina to become the largest Crypto Exchange in the world by volume. Following this, the Bitcoin prices soared 800% from a mere $50, as it indicated a growing acceptance of cryptocurrencies. This monumental growth was shattered when the Chinese Government declared cryptocurrencies as illegal tender.

2014 – Present

Despite the ban on cryptocurrencies as a legal tender, its mining and trading were still not under scrutiny. Low electricity and manufacturing costs and highly efficient hardware cultivated a good bitcoin mining environment in China. By mid-2015 Chinese mining pools accounted for half of all the mining operations, China is still the world’s largest mining country. Furthermore, the world’s largest crypto exchanges were set up in China during this period. Initial Coin Offerings (“ICO”) emerged in this period.

The ICO marked the end of the beginning of Chinese glory in the market of Cryptocurrencies. By September 2017 ICO raised over $400 Million, mimicking the Stock IPOs and this prompted the Chinese Govt to ban the ICOs. Furthermore, crypto-fiat exchanges were banned from taking the Chinese Yuan out of the picture. Crypto –  Crypto exchange was still an option, which was also banned in 2018. 

Following this many Chinese Crypto-Exchanges shut down, companies like Bitman started moving their operations out of China. International Exchanges were still an option and people in China still held and Traded cryptocurrencies, but the norms only got stricter. In May 2021, the PBOC banned the Financial Institutions from performing any crypto-related transaction for its clients. In furtherance to that, another ban had been imposed on September 24.

Which countries have banned cryptocurrencies?

Starting off with India, it has had a cryptographic stance towards the regulation of cryptocurrency. With a complete ban on cryptocurrency in 2018, followed by the Supreme Court’s opposing stance revoking the ban, and a relatively softer stance of government thereafter, an evolving but confused stance towards virtual currencies has been noticed. However, some countries have been lucid towards their approach to cryptocurrencies by putting a blanket ban on them. 

Countries such as Egypt, Morocco, Russia, Bangladesh etc. have either banned its use or are totally against regulating cryptos. However, the most surprising stance was taken by El Salvador which has accepted cryptocurrency as a legal tender.  

Differing opinions by differing economies: El Salvador v. China

At one end of the spectrum lies China which is becoming increasingly stringent towards cryptocurrency; on the other end of the spectrum comes El Salvador which has accepted cryptocurrency as a legal tender. With these two conflicting schools of thought, the obvious next question arises as to which stance is better for the status quo.

The liberalized stance of  El Salvador by legalizing cryptocurrency, making separate wallets for cryptos (“Chivo”) and opening up crypto ATMs has been seen in a sceptical light. Cryptocurrency’s notorious volatility, its potential impact on price inflation in a country with high poverty and unemployment, and lackadaisical protection for users are some of the concerns stated by experts. World Bank denied assisting El Salvador in its bid to adopt Bitcoin as a currency, citing “environmental and transparency shortcomings.” 

The widespread concerns stated above were the same reasons stated by China to ban cryptocurrency. However, it must be noted that China is one of the world’s largest cryptocurrency markets and even after various steps taken earlier by China to dissuade its use, cryptocurrency is still prevalent there. 

Concluding Remarks

Thus, what can be said without a doubt is that the future of cryptocurrency is hazy and ambiguous. Cryptos are a very high-risk instrument to park your money in. Tavaga maintains its stance that Cryptos like Bitcoin, Ether or Dogecoin, etc. are high-risk and they still have to establish themselves. Digital currencies have no intrinsic value and have no underlying value to derive their value. They are highly speculative and retail investors must consider staying away from these cryptocurrencies unless they’re regulated in India.

Disclaimer: This write up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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