The Crypto Crackdown: Is there a Silver-lining?


The bearish turnout isn’t something new to the crypto enthusiasts neither are the loyalists fazed. Certainly not after the almost complete wipeout of valuation on three separate occasions in the past decade. However, although a national-level resistance and a high-scale crackdown is relatively concerning, the market has persevered through enough in the yesteryears to survive apparently any metaphorical tide: even if it means holding onto the assets while bearing massive losses to reap lasting gains in the long-term.

With bitcoin prices briefly falling below the psychological mark of $30,000 and erasing almost all the gains this year, the crypto market seems to be hanging by a loose thread of hope that managed to push back the flag bearer in the green territory again. Yet with an intensified clampdown by China – hosting 65-75% of the global bitcoin miners – along with additional financial measures introduced to weigh heavy on the cryptocurrencies, the trend is most likely to continue its trajectory downwards in following months. However, some prospects have captivated the existing miners enough to hold inventories instead of cutting their losses. The same elements are fuelling the resistance against the fall: steadying the crash and paving a way for an eventual revival.

Since the crackdown ensued in April, the crypto-cash – including bitcoin, ether, dogecoin, and a smattering of other cryptocurrencies – has plummeted beyond expectation, wiping out an estimated $1.3 trillion off the market valuation in entirety. Bitcoin alone tumbled well over 50% in its valuation, wiping billions of dollars in a month when it fell from the all-time high of $65,000 in mid-April to variate in the bracket of $35,000-$41,000 just a month ahead. As the crackdown intensified and key players, including Tesla’s Elon Musk, cited concerns regarding the spearhead currencies, bitcoin nosedived further by 30% last week, briefly touching as low as $28,814.75 before gaining weight. The People’s Republic high-geared the crackdown when the authorities cited environmental concerns to tackle down the energy-intensive process of mining cryptocurrencies – primarily bitcoin.

The mining process involves a global network of computers to solve complex mathematical problems – called the ‘Hash-functions’ – to verify transactions on the blockchain network hosting the particular cryptocurrency transactions. The miners are subsequently rewarded with certain units of the cryptocurrency for adding each additional block of a verified transaction to the ledger embedded in the blockchain. Bitcoin currently rewards miners a capped amount of a maximum of 6.25 BTC for verifying a block of transaction. The amount is halved every 4 years which takes the number of bitcoins in circulation longer and longer to expand. This is the main reason why despite a limited total supply of 21 million bitcoins, the currency would not maximize its limit till 2040. However, with each halving event, the reward is halved which makes the mining process relatively less attractive to the miners. On the other hand, the blooming number of miners on the blockchain keeps making it more and more onerous to mine each additional block of transaction. These are the main reasons why the process has turned increasingly energy-intensive since miners seek more and more rewards while competing against an exceeding number of miners globally.

The surge of popularity of bitcoin and other cryptocurrencies has flooded the blockchains with more and more miners active to mine each block of transaction. However, the extensive hardware used to solve such hash functions use an enormous amount of processing power – known as the ‘Hash-rate’. Before the collapse last month, the bitcoin’s hash rate was a colossal estimate of 180.7 million tera-hashes per second. Such massive consumption of electricity was comparable and often surpassed the energy consumption of some full-fledged countries like the Netherlands. Such frivolous use of energy and environmentally adverse means of electricity production were cited as the main reasons provoking a harsh crackdown in China.

The Communist regime intensified its curbs recently in the crypto-mining hubs like Sichuan, shutting down mining operations simultaneously expanding a nationwide ban on trading cryptocurrencies. Moreover, China further pushed for inducting de-risking measures in major financial institutions to create more impediments for business dealing with miners overseas. This severe clampdown has led many miners to wind up their operations completely and shift their inventories to North America or Europe to avoid detention. While the crackdown has devastated the market value of bitcoin along with its tailing counterparts, the jolt has created an incentive for many around the world to gain leverage.

A crashing market is surely worrisome yet the recent crackdown has unprecedentedly favored the miners beyond the borders of China. While the bearish sentiment continues to mar the market, the crackdown has led to a significant fall in the number of active miners on blockchain networks. Approximately 90% of China’s mining activity has been subverted, which has led to the modest participants having an easier route and a higher probability to gain mining rewards while the offline miners search for alternative means of access. The Mining/Network difficulty – a metric of how hard it is to solve hash functions – has significantly dropped in the past two months. Evidently making the mining process a lot less tedious and less energy-intensive. Moreover, as major cryptocurrencies corrected in terms of the overly inflated gains accumulated over the past year, the profits could now be predicted and hedged relatively precisely: one of the main reasons motivating the miners to hold inventories despite a crashing market.

While it is forecasted that the cryptocurrencies are to continue down the bearish road for at least the 3rd quarter – bitcoin touted to settle in the $20,000-$27,000 range – it is statistically verified that the crypto market plunges around the halving event of bitcoin, that is, almost every 4-years. The market ends its streak of abnormal gains in a major crash before gradually picking up overtime and pacing in no time. It renditioned in 2013, it proved in 2017, it verified in 2021 and, if data is any indication, it would conquer in the years to follow.

Syed Zain Abbas Rizvi
Syed Zain Abbas Rizvi
The author is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Syed has written extensively on fintech economy, foreign policy, and economic decision making of the Indo-Pacific and Asian region.