Bitcoin and ether crashed on Friday, with traders rocked by tough talks from China.
Bitcoin’s price fell nearly 6% to $ 42,124.73, according to Coin Metrics data. Ether, the second largest digital currency, fell 8% to $ 2,894.36.
It comes after the People’s Bank of China said in a Q&A that all crypto-related activity is illegal. Services that offer trading, order matching or derivatives for virtual currencies are strictly prohibited, the PBOC said, while foreign exchanges are also illegal.
Beijing cracked down on crypto this year. The Chinese government has decided to do away with digital currency mining, the energy-intensive process that validates transactions and produces new coins. This caused a sharp drop in Bitcoin’s processing power when the miners unplugged their equipment.
The PBOC banned banks and non-bank payment institutions such as Alibaba subsidiary Ant Group from offering virtual currency-related services. In July, authorities urged a Beijing-based software company to shut down because of its involvement in crypto trading.
Constantine Tsavliris, research director at CryptoCompare, said the harsh rhetoric will likely lead to a “short-term sell-off as negative news pushes investors to take a conservative approach”.
“The latest news from China serves as an extension of previous announcements in May regarding crackdown on cryptocurrency mining and bans on financial and payment institutions from crypto-related services,” Tsavliris told CNBC.
“As a result of the bans, we previously saw a short-term sell-off and a shift in mining away from China, followed by a rapid rebound in July and August,” added.
Vijay Ayyar, head of Asia Pacific at the Luno digital currency exchange, said China’s position on crypto, while not new, is enough to put pressure on the market. Investors have already been unsettled by the fact that the US Securities and Exchange Commission has recently taken a tougher stance on cryptocurrencies, he added.
Coinbase, America’s largest crypto exchange, recently got into a public dispute with the SEC. Regulators threatened to sue the company over a product called Lend, which would have allowed users to earn interest on their holdings. Coinbase recently decided to discontinue Lend.
“Chinese regulators have always been extreme in their views and these comments are not new,” Ayyar told CNBC. “You’ve said these things many times in the past. But the reaction is interesting only because, with recent SEC comments and the general macro-environment with the Evergrande news, we’re in a slightly nervous environment for crypto sell-off anyhow cause.”
Global markets have recently been rocked by fears of a possible collapse of competitive Chinese real estate developer Evergrande.
“Overall, we’ve seen this many times in the past, with such slumps being inorganic and buying up fairly quickly, especially in environments where crypto is in a bull market cycle,” Ayyar said, referring to China’s crackdown. “In terms of price action, as long as we don’t drop below $ 38,000 in a high time frame, we’re still in bullish territory.”