Bitcoin and ether fell on Friday, as traders were spooked by the harsh criticism made by China.
According to Coin Metrics, the price of bitcoin has dropped 5% to $42,388.06. Ether, the second most valuable digital currency, fell 7% to $2,918.16. It follows the declaration of the People’s Bank of China that all crypto-related operations are prohibited in a Q&A. Trading, order matching, and derivatives for virtual currencies are forbidden, according to the PBOC, and offshore exchanges are likewise prohibited.
This year, Beijing has taken a hard stance against cryptocurrency.
The Chinese government has taken steps to eliminate digital currency mining, an energy-intensive process that confirms transactions and generates new currencies. As miners turned off their equipment, the processing power of bitcoin plummeted.
The PBOC has prohibited banks and non-bank payment organizations, including Alibaba affiliate Ant Group, from providing virtual currency services. Authorities ordered a Beijing-based software business to close down in July due to its participation in cryptocurrency trading.
The strong rhetoric, according to Constantine Tsavliris, head of research at crypto data site CryptoCompare, is expected to result in a “short-term sell-off as unfavorable news drives investors to take a cautious stance.”
“The recent news by China serves as an extension of previous announcements in May regarding a crackdown on cryptocurrency mining and bans on financial and payment institutions from crypto-related services,” says Tsavliris.
“As a result of the bans, we previously saw a short-term sell-off and a shift in mining away from China, followed by a swift recovery throughout July and August,” she added.
While China’s stance on crypto is not new, it is enough to put pressure on the market, according to Vijay Ayyar, head of Asia Pacific at digital currency exchange Luno. He said that the US Securities and Exchange Commission’s recent harsher stance on cryptocurrencies has already alarmed investors.
Coinbase, America’s largest cryptocurrency exchange, has had a public fight with the Securities and Exchange Commission. Regulators threatened to sue the business over the Lend program, which would have enabled customers to earn interest on their investments. Lend was just dropped by Coinbase.
“The Chinese regulators have always been extreme in their views and these comments are not new,” said Ayyar.
“They have said these things many times in the past. But the reaction is interesting purely because we are anyway in a slightly nervous environment for crypto with the recent SEC comments and the overall macro environment with the Evergrande news. So any comments of this nature will cause a sell-off in risky assets.”