Continued Crypto Market Volatility
The Bitcoin crackdown, call for regulations, and “Cuban Missile Crisis”
Crypto markets have been selling off pretty hard over the last two weeks. Much of the volatility is being attributed to China’s renewed interest in banning Bitcoin and all crypto trading, with a particular focus on cracking down on Bitcoin mining.
Mining is the activity of large computer networks that work to secure the Bitcoin blockchain, and you’ll sometimes hear this as the “Bitcoin hash rate,” which just indicates the amount of computing power focused on securing the Bitcoin network.
Is the sell-off warranted? To answer that question, we must first look at the history of China’s crackdowns.
China has actively launched campaigns to ban Bitcoin in 2013, 2015, 2017, 2020, and now here in 2021. They seem to launch their bans into bull markets for crypto, and the intended effect, slowing down crypto, does seem to offer results, in the short-term. In the long term, crypto has come back stronger each time, and we believe this time will be no different.
However, there is an interesting twist to this most recent “ban” in that they are cutting power to the huge mining facilities in two provinces inside China (Xinjiang and Sichuan). These two provinces control a massive amount of the Bitcoin hash rate, and a sudden shutdown, as we are seeing right now, will have obvious downward pressure on the price of Bitcoin. The last time the Bitcoin hash rate reached this level was back in October of 2020, when Bitcoin was around $12k, which obviously represented an excellent buying opportunity, as the hash rate bounced back over the following months, even to surpass its previous high level.
The China crackdown was sudden and extreme, and many miners were forced to sell their saved Bitcoin into the open market, effectively dumping it to the waiting hands of large whales and institutions, who have been actively accumulating Bitcoin and crypto at these levels.
Bitcoin was designed to absorb these sudden changes in hash rate, but there is a bit of a delay of around 2 weeks, when the algorithm resets itself for the hash rate changes, making the computing algorithm easier, which allows lesser-powered computers to join the hash rate, and thus bumping back up the hash rate, at which time the algorithm gets harder, in an ever adjusting cycle. It is a very clever system design element, created this way to ensure the security of the network, no matter the hash rate changes.
Now, if we step back a little, we can conclude a few things. First, the dumping of Bitcoin into the market is a one-time event, and the smart money buying at these levels from distressed sellers has very strong hands, which can be seen from the buy and hold strategy that is reflected in their wallets (we can see into the wallets of large holders, but we do not know who they are, so we say they are pseudo-anonymous). We can also conclude that these China miners, who have massive investments in their computer gear, personnel, and expertise, are not going to go out of business, but rather will relocate to other, more crypto-friendly, countries.
Interestingly, US cities such as Miami and Austin are actively recruiting these miners to come set up their shops in their regions, offering lucrative incentives. It is estimated that Texas could garner 50% of the lost China hash rate, due to its low-cost energy and high percentage renewables (supporting the emerging trend of “green” Bitcoin).
We will see what happens, but it is safe to say that China’s long-time dominance over the Bitcoin hash rate is ending, and that is good for the whole crypto market. Bitcoin’s promise of being decentralized is not congruent with China controlling 45–70% of Bitcoin’s hash rate, and you can see why by the actions this week from China’s central government. China has recently launched its digital Yuan, their central bank digital currency (CBDC). They would like no competitors to exercise their absolute control over their own internal markets and people.
China has been a big component of the recent downward volatility, but not the only factor. US political figures have seen high-profile comments calling for more crypto regulation, and this uncertainty has spooked the markets. We see this as a net positive, although another reason for the selling pressure. A regulated market will bring in significantly more capital from large institutions. Indeed, it would be hard to miss the daily moves happening with Goldman Sachs, JP Morgan, and other top-tier banks and hedge funds, all launching their crypto offerings into the market.
Blockchain technology is still in the early stages of development, and as the estimated 10 trillion dollars of new investment flows into this small market (World Economic Forum estimate by 2030), we will see global adoption on a scale that will be breathtaking, similar to the adoption of the internet itself.
Lastly, the “Cuban Missile Crisis” jokes have been circulating on social media platforms. This is referring to Mark Cuban getting scammed in one of his crypto investments. There is a lot of graft in crypto, and even a seasoned investor with extensive research resources like Cuban can get taken to the cleaners. Stories like this frighten off potential investors and serve to increase the volume of talk of regulation. We have always known it is a “buyer beware” time as the crypto markets develop in their early days. It is important to protect your assets and information from fraudulent attacks by doing your own research before investing.
New technology is bound to face pushback and market volatility. The recent events have created large dips within the crypto market, but historically, crypto has bounced back to new highs and levels that many didn’t believe were possible.
