China’s sudden, harsh implementation of a ban it once only lightly enforced has driven a price freefall in Bitcoin and other cryptocurrencies. The cryptocurrency started the year by finally breaking above $30,000, a feat that it hadn’t managed to do since its creation in 2010. However, Tuesday, as news of the closure of the largest crypto mine in the world sank in, Bitcoin finally dipped back under that number, erasing all of its 2021 gains.
While crypto investors who sold when the coins were valued at over $60,000 are ecstatic, longtime enthusiasts are frustrated at the news. Some enthusiasts on Twitter shared light-hearted memes meant to alleviate the tension, while others on the Bitcoin subreddit started the day Wednesday by expressing hope that the currency could bounce back from this crash.
2021 Was Supposed to Be the Year of Crypto
If there was ever going to be a year when crypto broke out, it was supposed to be 2021, enthusiasts figured. With much of the world stuck at home, and trust in major financial institutions eroding among some demographics, this year presented a unique opportunity for decentralized finance to take center stage. And, for the first six months of the year, this was the case. In April, Bitcoin was trading over $64,000 per coin, its all-time high.
Particularly notable in this story is the case of GameStop. An unprecedented short squeeze organized by amateur traders on Reddit got more eyes on the world of finance than ever before. Suddenly, the intersection between finance and memes was alive, and discussions about the stock market now have to include the phrase “meme stocks”. For many, interest in crypto is a natural extension of interest in retail trading.
After cresting over $60,000 in April, Bitcoin is now trading closer to $34,000 per coin Wednesday. This is par the course for the volatile currency, as longtime stakeholders could tell you, but it certainly causes alarm for establishment analysts. Many traditional investors simply don’t have the risk tolerance for an asset that can lose half its value in two months.
Ethereum, another popular cryptocurrency, also felt the wild swings: while it was sitting at $4,100 in May, it’s now back under $1,900. Even DogeCoin, the meme cryptocurrency briefly promoted by Elon Musk, has been slipping. While it was once trading at 73 cents earlier in the year, it’s now down to around 20 cents as of the time of this writing.
“When investing in cryptocurrency, it’s important to remember that volatility is the name of the game,” James Royal, an analyst for Bankrate, tells CBS News. “Volatility is magnified, on the upside and downside, by the fact that the price is driven heavily by trader sentiment, and traders can quickly swing from rabid optimism to gloom and doom.”
What Affects the Price of Bitcoin?
Bitcoin is unique, according to analysts, as its value is correlated to nothing more than the sentiment of stakeholders. There is no company that oversees the currency, no central bank that issues it, and no regulatory board to guide it. When Tesla CEO Elon Musk tweets that he likes Bitcoin, the currency surges in value. When his company abruptly stops accepting Bitcoin as payment for a car, the currency falls.
It can be frustrating for some more risk-averse investors to think about the wild swings in cryptocurrency. Some have even pointed out that the premise of a currency that will also function as an investment seems flawed. A good currency keeps its value over time, while a good investment grows in value steadily. Skeptics ask, how can Bitcoin be both of those things simultaneously?
Why Does ban from China Matter?
Some crypto enthusiasts actually feel as though a ban from China isn’t that big a deal. Paul Knight on Twitter points out that Google was banned from China in 2010, yet the company is currently one of the most valuable in the world.
Sylvain Saurel, writing for enthusiast site In Bitcoin We Trust, goes as far as suggesting that this ban will be good for Bitcoin and the US. “…Bitcoin’s opponents have been saying that the Bitcoin Hash Rate is too concentrated in China. This centralization has been a concern and a threat to the future of Bitcoin in their eyes. This problem is now solving itself,” Saurel writes.
Saurel goes on to point out that the miners being forced out of China are likely to resettle in another part of the world with inexpensive energy costs: The US. Areas like Texas and Maryland are the likely destinations of the substantial mining rigs that will be shipped out of China in the coming weeks.
So, does a ban from China matter? Crypto enthusiasts certainly don’t seem to think so. Crypto bears, on the other hand, argue that this ban’s sudden enforcement signals that the world’s government might be done indulging the existence of a decentralized form of currency. Some have even wondered: how much longer will it be until the United States takes similar action? While analysts can debate the likelihood of such a ban, China has set the precedent. The market’s response has not been a good omen for the future of crypto.