Every week, IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry.
On-Chain Analysis of China’s Crypto Crackdown
Crypto markets have experienced a highly volatile month, even by crypto’s standards. Following last week’s FUD from Elon Musk, the past seven days have been filled with panic from retail traders, arising mostly from China taking measures in crypto.
Despite the despair from traders seeing crypto prices crash, the reality is most of this "news" from China was simply reiterations of China’s stance since 2017, as covered by The Block. The only new measures discussed come from inner Mongolia making a proposal to restrict mining and mitigate energy consumption in the Chinese autonomous region.
A mix of these news and some rumors ignited a crash across crypto markets, taking as much as $1 trillion from the total crypto market cap. While most crypto-assets dropped over 30% within a week, they remain for the most part with double- or triple-digit returns year-to-date.
The regulatory uncertainty in China has certainly taken a hit on crypto. However, this may not seem as negative as it seems at first glance. For one, the high allocation of hash rate in China has been seen by many as a centralization risk for Bitcoin over the past few years. As well, the use of coal power plants to mine Bitcoin has been criticized, notably with Tesla no longer accepting Bitcoin payments due to their alleged environmental impact.
The recent measures from the Chinese government, though they may cause headwinds short-term, would potentially reduce both of these issues. In other words, Bitcoin mining could end up being more decentralized and environmentally friendly as a result of this so-called "crack-down."
Another point of concern that has been mentioned recently is that existing miners may be looking to sell as a result of these measures. The reality is, though, that while some miners do have decently-sized Bitcoin holdings, the amount they accrue on a daily basis is negligible relative to the total amount of Bitcoin traded.
The graph above displays the percentage that daily mining rewards represent out of the total on-chain volume. As evidenced from this graph, the volume share pertaining to miners has constantly declined, sitting currently around 0.03% out of the total Bitcoin blockchain volume.
While miners that have held Bitcoin for years may still be able to impact Bitcoin’s price, the data shows that the marginal effect that they can have by selling has decreased significantly.
As the share of volume attributed to miners decreased, the amount trading in centralized exchanges continues to grow. For this reason, a full crackdown on Chinese centralized exchanges is likely to have a higher impact than banning mining.
This trend may have started as OKEx and Huobi began limiting service to Chinese users, citing “recent dynamic changes in the market.” These measures directly impacted on-chain activity with Bitcoin outflows from these exchanges hitting new yearly highs.
The increase in outflows from OKEx and Huobi point to users withdrawing significant amounts of Bitcoin. This could be the result of people anticipating stronger measures from the Chinese government, and may lead to some short-term panic.
The past couple of weeks have served to show that China may be taking serious measures in the crypto space. While many of these have simply been reiterations of previous statements, there does seem to be some action as shown with the proposal to restrict mining in inner Mongolia or the measures taken by centralized exchanges.
Even though this has created near-term uncertainty, these may end up being beneficial long-term for Bitcoin and crypto in general. A Chinese crackdown on mining results in broader, more decentralized dispersion of hash rate, while also removing some of the players that consume the most coal in the process.
Despite this, the spotlight remains on both Chinese miners and exchanges, but more so with the latter. Ultimately, though the markets have settled down so far, they await clarity before heading higher.