Finance

Bitcoin plunges after China signals cryptocurrency crackdown

Cryptocurrency markets plummeted in chaotic trading on Wednesday as fears that Chinese regulators would intensify a crackdown on financial institutions using digital tokens alarmed traders.

Bitcoin tumbled $12,000, or almost 30 per cent, to just above $30,000. Other digital coins endured even heavier selling, with ethereum, one of the largest cryptocurrencies, losing about 40 per cent of its value. More than $8bn of positions were liquidated over the past 24 hours, according to data from bybt.com.

The sharp moves came after Chinese financial institutions were warned about accepting cryptocurrencies as payment or offering related services and products. It marks the latest sign that global authorities are beginning to more closely scrutinise the burgeoning market that had remained lightly regulated in many jurisdictions.

Market conditions were highly volatile on Wednesday, with bitcoin’s price swinging in often wide ranges. Binance and Coinbase — two of the best-known cryptocurrency exchanges — both experienced technical problems with their exchanges as users tried to sell their holdings. Other cryptocurrencies also tumbled, including the “joke” dogecoin, which fell 40 per cent.

Virtual currency “is not a real currency” and “should not and cannot be used as currency in the market”, said a joint statement issued late on Tuesday on the People’s Bank of China’s WeChat account, banking and internet industry associations. It referred to a recent surge in prices as “speculation”.

Its stance added to the bearish sentiment that has overtaken the industry in the last month amid concerns about a regulatory crackdown and its impact on the environment.

US securities reliant on cryptocurrency trading and prices also slumped at the open in New York. Coinbase, the exchange, dropped 12 per cent and Microstrategy, the software company turned bitcoin investor, fell 15 per cent.

The development reflected China’s campaign to limit institutional activity in cryptocurrencies as it prepares to launch its own digital currency. Other markets such as the US have remained comparatively open to institutional involvement.

“Part of it is they have their own digital renminbi, part is the lack of control in terms of cash outflows and part of it is trying to make sure people don’t get scammed,” said Paul Haswell, a partner at law firm Pinsent Masons in Hong Kong, of China’s crackdown. 

China’s pressure on cryptocurrencies gained momentum in 2017 when it closed the country’s bitcoin exchanges, which had previously accounted for the majority of global trading.

The government’s plans for a digital renminbi, which would provide the central bank with a record of all currency transactions in real time, could provide a rival cashless payment mechanism to compete with vast online fintech platforms from Ant Group and Tencent.

In the US, regulators have made it easier for retail investors to buy cryptocurrencies and permitted the listing of crypto exchanges on public markets. Large US financial institutions, such as Goldman Sachs and JPMorgan, are exploring offering investments in digital currencies to wealth management clients.

In its latest financial stability review, the European Central Bank said that bitcoin’s price volatility made it risky, as well as flagging its “exorbitant carbon footprint and potential use for illicit purposes”. Financial stability risks to euro area institutions were limited as they had little exposure, it added.

The price of bitcoin has soared 300 per cent over the past 12 months, despite its recent sell-off. The ECB noted the surge in bitcoin prices had eclipsed previous financial bubbles such as “tulip mania” and the South Sea Bubble in the 1600s and 1700s.

“I would not be surprised to see other regulators and policymakers do the same [as the Chinese restrictions] over the coming weeks as they warn investors over the risks of speculative trading or crypto market volatility,” said Henri Arslanian, global head of crypto at consulting company PwC.

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“The reality is that we are seeing the continuous entry of institutional players and institutional investors in this space and that is unlikely to slow down anytime soon.”

Recent volatility in cryptocurrency prices has raised doubts among some institutional investors about their value, with UBS Wealth Management and Pimco expressing reservations about digital currencies’ potential as an asset class.

Cryptocurrencies are largely unregulated in Hong Kong, a semi-autonomous Chinese territory. However, in November, the city’s Financial Services and the Treasury Bureau published proposals that would ban retail investors from trading cryptocurrencies.

“If anything I feel like the market’s growing in Hong Kong in terms of the cryptocurrency industry,” said Haswell.

Additional reporting by Wang Xueqiao in Shanghai

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