China Bans Crypto... Again

Key Takeaways

• Crypto markets sell-off following regulatory news out of China, as the PBoC released a document laying out its intentions for stricter regulation and enforcement measures on crypto.
• This is not the first time China has “banned” crypto (and probably won’t be the last). Historical price movement post-ban is mixed.
• This news might serve as an alternate explanation for some of the outsized volume from Asian exchanges earlier in the week.
• $38,000 appears to be a critical support level based on on-chain data.
• A similar ban in 2017 preceded a run to all-time highs for BTC and ETH.
• The Bottom Line: We continue to monitor underlying market data for indications of sustained weakness, but for now we continue to buy into any selling as we maintain that a risk-on equities market could still result in a run to all-time highs for BTC and ETH.

Crypto markets once again suffered an overnight blow from regulatory news out of China, as the PBOC released a document laying out its intentions for stricter regulation and enforcement measures on crypto. The document stated that all fiat-to-crypto and crypto-to-crypto transactions are deemed illegal and that there will be a cross-functional effort among most major Chinese state authorities, including the PBoC, the Cyberspace Administration of China, and the Ministry of Public Security to curb illicit transactions. Per the announcement:

While we witnessed an immediate sell-off bringing the overall market down 6% and Bitcoin down to nearly $40,000, there does appear to be buying support for both BTC and ETH coming online as market participants digest the information.

This is not the first time such an announcement has come out of China, as the country had enacted similar punitive measures in 2013 and then again in 2017, following the ICO craze. Further, if we broaden our definition of “ban,” then we can pinpoint seven dates, including today, in which we witnessed some semblance of a crypto crackdown coming from the CCP. The most recent of which, happened this spring when China cut off centralized crypto exchanges from the banking system in China and forced its miners to completely shut down operations.

Below, we outline price action following each of these dates.

Below is a graphical representation of price action before and after the Chinese government bans on crypto. We would like to thank Jon Geenty (@geenty) from Coin Metrics for putting this one together.

The lesson here is that if you invest in crypto long enough, you start to develop a circadian-like rhythm in which you find yourself unsurprised by panic-selling initiated by seemingly routine “FUD” released by the Chinese government. The more this happens to you, the more you realize that buying into this selling pressure is the best long-term solution.

That said, we realize that some of our clients have near-term liquidity needs so we will continue to monitor the underlying data for any short-term structural weakness in the market. We will note that, based on the chart below in which each bar shows the number of existing bitcoins that last moved within that specified price bucket, $38,000 seems to be a critical level of price support.

In short, the data continues to lean bullish. Long-term holders (the “smart money”) are buying into this weakness and the supply dynamics for both BTC and ETH continue to demonstrate an environment conducive for a near-term run. Therefore, despite today’s volatility we still think that a broader risk-on equities market will give us the momentum to bring us through all-time highs this fall/winter.

In our Crypto Weekly, published Wednesday we noted an increasing number of bitcoins flowing onto the popular Chinese exchange Binance – indicating heightened selling activity out of China. At the time, an Evergrande-driven flight to liquidity was a likely explanation. However, this release may serve as an alternative explanation for the divergence in selling behavior between Chinese and non-Chinese crypto investors observed earlier this week.

The last thing we will leave you with is the image below, which is a headline published by CNBC in September of 2017, the last time China enacted a ban as comprehensive as the one it issued today. Price would fall in the near term as the FUD shook out many of the new traders in the market, only to increase to all-time highs a mere three months later.