Cryptowatchers were on edge this week after a crackdown on Bitcoin in China sent prices for a ride that could lead to further drops down the line.
Bitcoin's valuation fell below $30,000 (€25,137) briefly on Tuesday, undoing the cryptocurrency's 2021 gains. The world's largest cryptocurrency fell as much as 12% to $28,824, nor far away from its closing price at the end of 2020. It climbed back up above $32,000 a few hours later.
Bitcoin had been trading at a record high of nearly $65,000 in mid-April.
The $30,000-mark is considered a benchmark of Bitcoin's short-term health. Many have speculated that a dip below that could trigger a steeper sell-off.
Farther to fall?
"Any meaningful break below $30,000 is going to make a lot of momentum players to throw in the towel," Matt Maley, chief market strategist for Miller Tabak + Co, told Bloomberg. "Therefore, even if Bitcoin is going to change the world over the long term, it does not mean it cannot fall back into the teens over the short term."
"Cryptomarkets are cyclical. We are in a crypto bear market and we do not expect a quick bounce from here," Joseph Edwards, head of research at the crypto brokerage Enigma Securities, told DW, emphasizing that he was bullish on Bitcoin in the long term. "Our general view is that we will probably see at least 50% losses from here across the board at some point over the next two quarters."
Moves against Bitcoin in China in recent days helped trigger the fall.
China's central bank on Monday said it had called together officials from the country's largest banks as well as Jack Ma's Alipay to emphasize its ban on Chinese financial institutions providing cryptocurrency services. Banks in China have been barred from trading in Bitcoin since 2013, though individuals are still able to trade on over-the-counter platforms and offshore exchanges.
The meeting came just days after China expanded its ban of cryptocurrency mining to include the southwest province of Sichuan. More than half of global Bitcoin production comes out of China, according to Reuters, with Sichuan being its second-largest mining province.
In May, the country said it would clamp down on Bitcoin mining and trading to avoid financial risk. Others have criticized Bitcoin mining for being energy-intensive and causing pollution.
Greater than Bitcoin
According to Edwards, the latest actions in China aren't materially any different than what the country had already established.
"However, there's of course a difference to having a regulatory briefing in a cabinet somewhere and shouting it from the rooftops."
Anti-Bitcoin posturing in China is less significant today than it might have been in the past. Trading has made a significant shift from East to West in recent years, and mining is following suit.
"That being said, there absolutely is more downside to come from here for Bitcoin and other cryptocurrencies, and the flow of negative headlines out of China will play its role in that," says Edwards.
Moves against crypto in China can be better understood within the context of a greater crackdown on the tech sector. In April, Chinese regulators came down on dozens of major tech companies, pushing them to curb anti-competitive practices. This came in the wake of the regulators hitting Alibaba with a record $2.8 billion fine.
"It's a display of power, and to be clear, it's not entirely about crypto," says Edwards. "There's a broader show of force against the tech sector going on here."
Many of the problems for regulators, he adds, are tied to issues of social order, like cryptocurrency Ponzi schemes and the uncontrolled flow of stablecoins based on the US dollar into China.
The short vs. long game
Bitcoin's massive gains over the last 18 months — its value increased fourfold in 2020 — had done a lot to promote its reputation as a dependable store of value in uncertain economic times, a quality touted by cryptocurrency advocates. This led to previously unseen levels of institutional interest, which helped fuel its rise in the first half of this year.
But the crackdown in China and continued criticism of the environmental cost of Bitcoin mining, including by Tesla's Elon Musk, has chipped away at those gains. Signs of recovery in the global economy and the prospect of government stimulus slowing down could also have people souring on riskier assets like cryptocurrencies.
But volatility is common for Bitcoin, and its newfound institutional acceptance will be harder to undo than its price. For Edwards it feels "like an 'end of the beginning' scenario more than anything else."