Editorial: Will China drive the next bull run?

Editorial: Will China drive the next bull run?

As crypto asset players hodl tight amid the most brutal wait-and-see phase of the bear market, there are increasing signs that point to China as a sleeping giant that could soon wake up to become the next driving force in the bull run.

Despite recent surges in cryptocurrency prices, there has been no consensus about the timing of the next rally. For example, Forbes reported that crypto may not recover until 2026, citing crypto investment manager Grayscale Investments. On the other hand, more optimistic outlooks from analysts polled by CoinDesk said the recent price and on-chain data suggest that Bitcoin could be in the later stages of a bear market, after suffering a price crash last year.

“This is the toughest part of the bear market. This will be the year you work long days and ship great products, only to see your key metrics go down day after day. Your friends will leave. Your coworkers will leave. You’ll question every assumption you had about crypto,” said Blockworks founder Jason Yanowitz.

Bloomberg reported that the industry needs the blustery tailwind of a hot narrative. This is evident in the spike of prices in January on the back of the idea that the Federal Reserve will slow the pace of interest-rate hikes. “But restless buyers of ersatz money are hunting for the next story and some are turning, unexpectedly, toward China,” it said.

Why is crypto trading banned in China, anyway?

All cryptocurrency transactions have been banned in China since September 2021. In banning crypto transactions, the People’s Bank of China (PBOC) cited the role of crypto assets in facilitating financial crime and its highly speculative nature that poses risk to China’s financial system.

The World Economic Forum (WEF) however reported that one other possible reason behind the cryptocurrency ban is an attempt to combat capital flight from China.

“As China has an outsized presence in East Asian cryptocurrency exchanges, Chainalysis staff believe that much of this net outflow of cryptocurrency was actually capital flight from China. Although Chainalysis does not have a definitive figure for how much capital fled China between 2019 and 2020, they estimate that it could be as high as $50 billion,” WEF reported.

Signs of reversal

Regardless of China’s real reason for banning crypto transactions, when we look at regulations, the key market player moves, and insider information in the mainland, we could see increasing signs of a reversal of its policies toward crypto.

Developments in mainland regulations

Early in February, China approved the establishment of a blockchain research center called the National Blockchain Technology Innovation Center. Back in December 2022, Chinese authorities have begun imposing a flat 20% tax on cryptocurrency transactions. Justin Sun, the founder of TRON DAO, said that the move is a clear indication that the Chinese government recognizes cryptocurrencies as a legitimate form of wealth. Meanwhile, Huang Yiping, a former member of the Monetary Policy Committee at the PBoC has also urged a reversal of the crypto ban saying that while the ban is beneficial in the short term, big opportunities could be missed in the long run.

Regulation shifts in China's crypto proxy, Hong Kong

On Wednesday, 15th February, BTC shot up back to USD 24,000 levels and tested 25,000 to the greenback on positive sentiment towards Hong Kong’s regulations on crypto. Blockworks report noted that regional bitcoin flows from North America to Eastern Asia rose to $7.7 million over a seven-day average, indicating some traders had begun to move assets from region to region. Towards the end of 2022, the island city pressed on with a new regulatory regime that would make the city more crypto-friendly. For instance, authorities unveiled its new approach to crypto assets and permitted the listing of its first crypto-based exchange-traded funds that have since raised over $80 million. From June this year, it is expected that retail investors would be able to trade “highly liquid” digital assets. In an interview with Bloomberg, Justin Sun said Chinese regulators are using Hong Kong as a policy test for the mainland, and Hong Kong’s embrace of cryptocurrencies suggests an “opening up overall [of] crypto policy in China”.

Big crypto players ready for China’s crypto stance reversal

Big names started to signify their interest to move to Hong Kong. On February 15th, interactive Brokers signaled their intent to offer BTC and ETH trading to professional investors and institutions. “Investor demand for digital assets continues to grow in Hong Kong and around the world, and we are pleased to introduce cryptocurrency to address the trading objectives of clients in this important market,” said David Friedland, Head of APAC at Interactive Brokers in a press release. Samsung Asset Management indicated that it could consider starting a spot Bitcoin exchange-traded fund in the island city if such products are allowed under its vision to be the Asia-Pacific center for crypto. Sebastian Paredes, chief executive of DBS Bank Hong Kong, said DBS Group Holdings plans to apply for a license that allows it to offer crypto trading services to Hong Kong. Before this, Sun announced his commitment to move to Hong Kong. If he does, he would be the first high-profile Chinese crypto personality to relocate to the Chinese territory.

Crypto companies actually legally exist in China

China allows ownership of cryptocurrencies and NFTs, it is still legal and legally protected. State-owned China Academy for Information and Communications Technology even revealed in a whitepaper that more than 1,400 blockchain firms are currently based in mainland China. On top of this, a group of public and private companies is launching China’s first state-backed non-fungible token (NFT) marketplace. The marketplace would be run by China Technology Exchange and Art Exhibitions China, and Huban Digital. China has been developing a digital yuan back in 2014 to be one of the most advanced central bank digital currencies (CBDC). The mainland even pushed the adoption of e-CNY with heavy subsidies and added benefits for usage, during its 2023 Chinese new year celebration. To date, China recorded more than 360 million transactions across 5.6 million merchants worth 100 billion yuan (US$13.9 billion). Zhao Changpeng, founder and chief executive officer of Binance noted that CBDCs are not a threat to other crypto assets as CBDCs would validate blockchain technology and build trust among skeptics.

The nagging question - When will this crypto bull run begin?

There is a likelihood that China’s reopening from three years of isolation due to Covid curbs could lead to a change in its crypto policy stance, according to a report from Bloomberg. This, as Chinese President Xi Jinping’s administration, has taken other market-friendly steps to speed up economic activities like easing up on tech giants and boosting the property sector. It is possible that China could allow loopholes such as the developments in Hong Kong.

As early as October last year, BitMEX CEO Arthur Hayes already highlighted China as having all the ingredients necessary to become the epicenter of crypto trading volumes and related innovations. “When Choyna (sic) loves crypto, the bull market will come back,” Hayes noted.

The US Fed, which kept raising interest rates in 2022 to curb inflation, is also seen as a catalyst for the run this year. “If and when the Fed pauses its rate hikes early this year, it could be very bullish for crypto. But if the Fed does keep its rates high, it will make assets like U.S. government debt attractive to investors due to the high-interest rates they would offer. This could limit the money going into risk assets like crypto,” reported BeInCrypto.

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