It was Short-term Holders who Panic Sold their Bitcoin During The China Debacle
While Inner Mongolia escalated its campaign against crypto mining this week, it has been nothing new, unlike the State Council meeting calling the crackdown. However, the expert says the govt. is just coming up with “regulations to better manage the market.”
The situation in China around cryptocurrency trading and mining remains unclear still. But the anticipation and fear among the market for the same haven’t changed after it pushed the prices of Bitcoin, Ether, and the entire crypto market to crash, wiping out all the gains made this year.
On Tuesday, China's northern region of Inner Mongolia escalated a campaign against crypto mining, publishing draft rules as per which telecommunications companies and internet firms engaged in crypto mining will have their business licenses revoked by regulators.
But the biggest issue was Chinese Vice Premier Liu He vowing to crack down on bitcoin mining and trading.
While China had a long history of crypto regulation, this was the first known instance that Bitcoin mining was bought up at a State Council meeting.
Regulations to better manage the market
Citing a Beijing expert, Matthew Graham, CEO of Sino Global Capital, shared on Twitter that “this is all about Party legitimacy.” According to the unnamed source, just like Beijing micro-manages the RMB, forex, and capital controls, they will be doing the same with digital currency.
“The meeting was also routine and not something that was focused on any specific issue or bitcoin in general.”
“The statement is more of a top-down message instructing the regulators (PBOC, CBIRC, MOF) to review the issues and possibly come up with guidelines or regulations to better manage the market.”
While it is good for Bitcoin in the long-term, it decreases China’s dominance and pushes mining towards greener goals; it is definitely bearish for the prices in the short term.
In response to the news, some Chinese miners sold their BTC, which is reflected in the highest spike in the amount of bitcoin transferred out by miners since March 2020. Much of this selling happened through OTC desks as a big spike wasn’t seen inflows from miner wallets directly to exchanges.
The estimated hash rate (7-day average) also dropped by about 21% over the last ten days supporting that Chinese miners are being forced offline, but it has been slowly going up since this weekend.
Miners’ panic selling then led investors to sell their coins as well. Based on BTC net inflow to exchanges, leading crypto exchange Binance accounted for the largest portion while China-based Huobi had a relatively large net outflow lining up with the reports that exchanges in the country may be under threat of investigation.
Interestingly, these Bitcoin sellers bought their crypto assets between December 2020 and May, with a large amount bought after February, as per Coin Metrics.
While HODL waves and the supply age suggested that most sellers last week were short-term holders, some selling was also seen from the 1-year to 2-year old supply.
The crypto market is making a recovery this week, but it’s too soon to say if it’s over for the bears yet as the situation in China is still unfolding. If there are more severe crackdowns, we could see another round of sell-off, but if things turn out to be not as bad, the worst may be behind us.