China has been the historical center of the crypto industry. Until recently, miners in China have generated more Bitcoin and Ethereum hashrate than miners in any other country.
Many of the world’s largest crypto companies have generated more revenue from China than from any other country, including Bitmain, Canaan, Binance, OKCoin, Tether, Huobi, OKX, Ebang, and countless others. Ethereum has intimate and myriad ties to China.
Over the years, China’s government has intermittently made digital asset business like mining and exchanges difficult. Chinese companies have sold almost all proof-of-work (PoW) machines in existence. Exchanges like Binance famously paused Chinese operations during the government’s periodic “bans.” In mid-October 2021, Chinese miners once went entirely offline to comply with an ostensible ban on PoW from Beijing. Promoters even rebranded NFTs as “digital collectibles” to placate Chinese regulators.
China’s crypto crackdowns had serious effects on crypto’s market cap. A staggering $400 billion was wiped off the market following bans in 2021.
Nevertheless, most crypto companies sneak back into China soon after they leave. Cryptocurrencies have been an irresistibly lucrative way to assist mainland residents with avoiding capital controls.
Crypto can never seem to actually leave China
Like China, Binance often says that its crypto operations are ceasing for mainland residents. Indeed, despite innumerable announcements of its permanent departure from China, Binance still earns roughly one-fifth of its business from the country.
In May 2023 for example, Binance permitted a staggering $90 billion worth of transactions within China. An anonymous source within Binance confirmed that the exchange doesn’t mind helping certain VIP traders evade its Chinese geo-restriction.
Even when crypto exchanges leave China, their unofficial channels of liquidity often continue operating. Almost all exchanges maintain active peer-to-peer (P2P) markets for digital assets for anyone who has difficulty accessing their formal exchange — or who wishes to transact in high volumes. Exchanges execute trades over-the-counter (OTC) via chat messengers, including China’s WeChat.
China is more important to crypto markets than its government wants to admit for a variety of reasons. Its crackdowns have never stopped crypto companies from operating, nor mainland residents from trading digital assets. Even senior Chinese officials played a major role in funding Ethereum through a network of proxies.
China’s economic uncertainty can hurt crypto markets
The preeminence of China in the crypto industry can be enough to stall a bull market whenever China’s economy stalls. Uncertainty about China’s protracted Covid-19 recovery has certainly correlated with a multi-year bear market across all cryptocurrencies.
Chinese investors are concerned that Beijing might institute another crackdown in the future. Negative news about Ant Group’s IPO in New York — halted by Xi Jinping personally — and businesses like Binance fleeing to escape Chinese authorities are certainly not instilling confidence. Opinion writers have warned that China might repeat its Great Recession.
Chinese consumers have also hesitated to spend money in Beijing’s post-‘zero Covid-19 policy’ environment. China spent nearly three years in various forms of pandemic lockdown, forcing factories to close and workers to stay home with very little financial relief from the government.
Many mainland residents exhausted their rainy day funds during the last three years and are preoccupied with work. Residents have little expendable savings for crypto investments anymore. With crypto exchanges still relying on Chinese trading volume, that could hurt worldwide crypto markets.
Finally, China’s collapsing real estate market certainly doesn’t instill confidence. President Xi has called out “reckless” lending and pre-selling of homes that fueled a real estate bubble. He directed the government to cease important funding sources for real estate companies, which had the predictable effect of causing the real estate bubble to begin popping.
Real estate developer Evergrande has already filed for bankruptcy. Another housing developer, Country Garden, asked for an extension to pay off a US bond and is broadly expected to default. Some writers have called Chinese real estate a “Ponzi scheme.” Youth unemployment has become another issue, with a shocking one-fifth of young people unemployed as of June 2023.
In short, when China sneezes, crypto catches a cold. The country remains critical to the still nascent industry. Despite years of repeated claims that crypto has moved on from China, it clearly has not.