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  • Writer's pictureCrest Economics

Bitcoin slumps as China Clamps down on Cryptocurrency- July 2021

Cryptocurrency has promised to revolutionise the financial system and replace the use of conventional money with assets beyond the control of governments and central banks. Despite its volatility to fluctuate, even with a single tweet, cryptocurrencies such as bitcoin has now become an asset class. El Salvador has become the first country to adopt bitcoin as legal tender, whilst other countries, such as China, are closing the door on it.

Cryptocurrency prices have fluctuated wildly in recent weeks as China intensifies a crackdown on trading and mining operations. Bitcoin slumped more than 20% to $31,000USD last week as Beijing clamped down on the massive mines of Sichuan province. Bitcoin's 50-day trend line has just fallen below the 200-day moving average, resulting in a death cross. The ‘death cross’ depicts where a short-term moving average trend crosses below a long-term average trend line which indicates a dramatic loss in the momentum of an asset price. The last death cross on the bitcoin chart occurred in March 2020 after the cryptocurrency had plunged nearly 60% over a six-day period before starting a historic rally of more than 1000% growth over the next year.

Chinese authorities have outlawed the trading of cryptocurrency given the ‘financial risks’ it poses. Bitcoin, the world’s largest digital currency and other cryptocurrencies cannot be traced by a country’s central bank, making them especially difficult to regulate. Analysts prompt that China fears the proliferation of illicit investments and underhand forms of fundraising, given their increasingly strict rules around the outflow of capital.

China’s bitcoin data centres power nearly 80% of global cryptocurrency trade and relies on a particularly polluting type of coal, lignite, to fuel its mining operations. According to Cambridge University’s Bitcoin Electricity Consumption Index, crypto-mining is expected to use 0.6% of the world’s total electricity production in 2021. The national State Council directive last month to clamp down on Bitcoin mining have been put in place due to the cryptocurrencies’ enormous power demands and environmentally destructive potential, the resulting surge in illicit coal extraction has threatened to undermine Beijing’s ambitious climate goals.

This paves the way for China to introduce its own digital currency, allowing the central government to monitor transactions. Its aim is to grant Beijing autonomy to conduct transactions in its own currency, reducing dependency on the dollar and keeping it competitive internationally.

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