China Locks Down on Cryptocurrency - What Does This Mean for the Market?

While Bitcoin’s (BTC’s) price has increased nearly five-fold overall since exactly one year ago, this inherently volatile asset continues to fluctuate wildly within this range.

Eagle-eyed traders may have noticed a sudden, $2,000 (£1,460) decline in September, for example, when the value of BTC plunged as China announced its decision to classify all cryptocurrencies and associated transactions as illegal.

But what’s the reason behind this, and what does it mean for BTC and the crypto market as a whole?

Why Have China Outlawed Crypto Assets?

According to the People’s Bank of China, “virtual currency-related business activities are illegal financial activities”, with the September announcement defining such transactions as “seriously endangering the safety of people’s assets”.

Obviously, this delivered a short-term blow to the value of BTC and crypto assets as a whole, particularly as China was previously considered to be one of the world’s largest and most lucrative cryptocurrency markets.

Interestingly, this move also represents a continuation of China’s central bank policy on crypto assets, which have been officially banned in the communist state since 2019. However, this didn’t prevent currencies from being traded through foreign exchanges and platforms such as Tickmill, but even this type of activity will now be completely outlawed.

But why is China so keen on outlawing crypto assets, especially when so many countries (such as El Salvador) are continuing to embrace them?

The answer is probably two-fold; with the decentralised nature of cryptocurrency and the underlying blockchain technology problematic for a communist state that likes to retain tight control of the country’s financial levers and monetary flow.

Secondly, it’s well-known that China is launching its own, state-backed digital currency, with more than 40 million renminbi-worth of this token set to be awarded to lucky citizens in the form of a lottery.

What Does it Mean for the Crypto Market?

As we can see, the market took a noticeable hit when the news was announced, with the price of BTC and affiliated altcoins falling sharply in a short space of time.

However, BTC has since seen its value restored, with this increasingly resilient asset shrugging off the setback as it continues its march back towards the $50,000 mark.

Much of this has to do with the global adoption of BTC, with El Salvador having recently become the first country to accept Bitcoin as legal tender.

Announcing its decision at the beginning of September, the nation’s government claimed that the move has been made to aid the country’s unbanked population, who don’t have access to basic financial services or even a rudimentary account.

It’s also thought that trading in cryptocurrency will help the country to save around $400 million in bank fees, highlighting the long-term appeal of BTC and similar assets in nations across the globe.