A Fundamental Analysis of Crypto Markets in Early 2022: China Soon To Stop Selling Bitcoin?

21e6 Capital AG
Published in
11 min readFeb 11, 2022


Goldman Sachs predicts Bitcoin to hit $100,000 USD this year, blockchain VC investments in 2021 reached dizzying heights, the crypto job market is growing at break-neck speed. Despite a continued wave of good news regarding crypto adoption on both an institutional and retail level, market movements have been far from how everyone imagined them to be, ever since December 2021. We believe that this is due to a continued sell-off and downward price pressure from China, with the true effects of the Chinese crypto-ban only showing towards the final month of 2021. In this article, we detail how we arrive at this conclusion and dare to make a vague prediction for crypto-markets in 2022, considering the continued buying action from US and EU markets despite the Chinese sell-off.

Authors: Maximilian Bruckner, Prof. Dr. Philipp Sandner

Crypto prices have been stagnating for months despite good news

Most of 2021 can be seen as a very positive year for crypto. There was a constant barrage of good news regarding rising institutional and mainstream adoption, even more so in the final months of the year. Bullish news continued coming in the first two months of 2022 as well. For example, Goldman Sachs predicts that Bitcoin will hit $100k in 2022. Some recent rumors indicate that BlackRock is planning to offer crypto trading through its Aladdin investment platform. Reports show an all-time-high in VC investments in the blockchain space, toppling $25bn USD (CB Insights, 2022). Crypto job offers on LinkedIn grew by almost 400%, according to a LinkedIn report. All of these examples point toward one thing: rapidly rising acceptance and adoption of crypto, on both a large institutional and small retail level. Nonetheless, crypto prices have been stagnating, to say the least, since the beginning of Q4 2021. January 2022 was a particularly bloody affair.

There are a number of plausible explanations for the disappointing price movement of recent months. First, the pandemic continues to cast its shadow, and the omicron surges certainly did their part. Second, and more significantly, rising tensions around the Russian-Ukrainian border have global markets holding their breath. Uncertainty and anxiety are the dominant emotions. Couple this with an ongoing concern about inflation and confusing (sometimes contradictory) statements from central banks regarding rate hikes, and it doesn’t take a genius to see that global markets (hence also crypto markets) are not in great shape. However, we believe that there is a fourth, sometimes overlooked but major, factor pressuring crypto prices downward since late summer or autumn 2021. This factor does not have an impact on equity markets, but is unique to crypto. We believe that the true effects of China’s crypto ban are still unfolding. But this might stop soon.

China has been selling Bitcoin since the ban in May 2021

Due to the still very present correlation between Bitcoin price movements and the rest of the crypto market, we find it adequate to base our following analysis on Bitcoin. Price movement here should translate to the rest of the market, as we have seen numerous times in the past.

To begin our analysis, it’s essential to first review the crypto ban in China. As you may remember, the ban was introduced not all at once, but spread out over the year in three distinct phases:

  • Phase 1, May 2021: China prohibits all its financial institutions from engaging in any crypto transactions.
  • Phase 2, June 2021: The Chinese government imposes a ban on all domestic crypto mining.
  • Phase 3, September 2021: all cryptocurrencies are completely outlawed in China, with no room for interpretation.

Every one of these phases individually had a direct impact on crypto markets, something we will analyze a bit later in this article. For now, we would like to focus on the effect we are still seeing today. One can observe a steady sell-off of Bitcoin from China, beginning in May and becoming even stronger toward the closing months of last year. The sell-off was not a sudden dump, but instead is advancing at a much more controlled pace. The rationale is pretty clear: Imagine your country cracks down on crypto assets and starts to enforce such new rules. If this were the case, any holder of crypto assets in such a country would at least think of selling some assets to avoid confrontation with their government. As an example, figure 1 focuses on the percentage of total circulating Bitcoin supply held by exchanges. Huobi is in the spotlight here, as the largest crypto exchange in China (they are moving out, in order to be able to continue their operations).

BTC Exchange balance (percent)
Figure 1: BTC Exchange Balance in % of total circulating BTC supply. Source: glassnode.com

We can observe here that there was a sudden drop-off once in May 2021 (phase 1) after which we see a rather rapid recovery. However, balances have been steadily declining since this recovery, suggesting some sort of sell-off by large exchanges. This is supported further by the oncoming convergence of the two illustrated curves. While one (gray) shows the total exchange balance, the other (orange) shows the exchange balance excluding Huobi. As we approach January 2022 towards the right side of the graph, we can see the curves close to full convergence. This is in line with reports from Huobi that they are shutting down Chinese operations, only allowing existing clients to withdraw funds during a transitory period of up to two years. Several other Chinese exchanges are reported to be following a similar strategy. Assuming that most of Huobi’s clients are Chinese (which means they all have to withdraw), it makes sense that their Bitcoin balance is declining due to excess supply. But the “inventories” of Chinese crypto exchanges cannot fall below zero. So, this selling pressure should halt.

Asian markets negatively impact bitcoin price

The sentiment that there is a sell-off happening in China is further emphasized by the following graph (figure 2). It displays the change in Bitcoin price during Asian working hours — hence, the times during which these markets are most active. Since China is by far the largest Asian cryptomarket, we will use this graph as a proxy for the activity we see in China.

Asia MoM change in Bitcoin price
Figure 2: MoM change in Bitcoin price during Asian working hours. Source: glassnode.com

Firstly, we can see small spikes in selling pressure throughout 2021, in time with the phases of the Chinese crypto ban. Phase 1 resulted in negative price change during Asian working hours throughout May, and phase 2 prompted more sell-offs at the end of June all the way into August. Interestingly, the outright ban in September had no immediate impact. Instead, a delayed reaction begins around December 2021. Huobi, along with other exchanges, announced its plans to shut Chinese business in the beginning of December. The sell-off kicked into gear around the same time. Now, although slightly delayed, this reaction is much more forceful than the reaction to previous phases of the ban. This makes sense, because phase 1 and 2 were “mellower” and had no immediate effect on the large exchanges.

The data for the US and EU markets paint a different picture

In contrast to the Asian markets, US and EU markets reacted more strongly to phase 1 and 2 in May and June respectively, while the final ban in September had little to no effect.

For instance, figure 3 shows the change in Bitcoin price during US working hours. May and June 2021 are deep in the red. Figure 4 shows that the same is true for Europe. However, the US and EU show no reaction to the final ban, and we can actually observe a positive price change during their respective working hours from December 2021 to now.

MoM change in Bitcoin price during US working hours.
Figure 3: MoM change in Bitcoin price during US working hours. Source: glassnode.com

A reason for a stronger immediate effect may be pre-existing FUD (Fear-Uncertainty-Doubt) in the US and EU crypto-communities about a coming Chinese ban. Such an outright ban may have already been factored in during phase 1 and 2, hence leaving phase 3 with much less shock value and weight.

MoM change in Bitcoin price during EU working hours
Figure 4: MoM change in Bitcoin price during EU working hours. Source: glassnode.com

While Asian markets are selling off more than ever since November, US and EU markets are relentlessly buying. Although this was not enough to balance out the downward price pressure from Asian selling, it should only be a matter of time until this will show its positive effects. We believe that once the Asian sell-off ends, considering the data presented here, buying pressure from US and EU markets should be overwhelming. As the steady stream of Bitcoin leaving China dries up (which should be fairly soon, considering figure 1), prices should react accordingly to the upward pressure exerted from the EU and US. We see no reason for this buying sentiment to subside in European and American markets, granted that we continue on this wave of increasing adoption detailed earlier.

Bitcoin HODL army growth may turbocharge upward price action

Ever since the third halving, circulating Bitcoin supply has been growing an avg. of 902 BTC/Day. In contrast, the amount of Bitcoin HODLed (and hence illiquid) grows by about 1702 BTC/Day — almost double the growth of liquid supply. Figure 5 illustrates this data. We can read from it, that fresh Bitcoin supply is slowly but surely decreasing. Keeping in mind that adoption is rising, and more new wallets are registered every day, it is only a matter of time until these two curves converge. The fourth halving is expected in 2024, which will speed this phenomenon up even more — but we may have already reached a critical point before that. To put this in numbers: Right now, ca. 900 Bitcoins are generated per day. ca. 1,700 Bitcoins are moved from the liquid markets over to illiquid supply. The net effect is that — every day — 800 Bitcoins are removed from the liquid supply. All these metrics are “on average” and also change over time.

Bitcoin HOLD army growth
Figure 5: Bitcoin HODL army growth, illiquid supply is catching up to circulating supply. Source: Bitcoin Magazine, Twitter @therationalroot.

The current Chinese sell-off is a major source of excess but temporary liquid Bitcoin supply entering the markets. European and American investors welcome this supply with open arms, buying up plenty. But what happens when this stream of excess supply dries up? What happens when customers of Chinese crypto exchanges have sold most of their assets, represented by a “inventory” approaching a balance of zero? The US and EU could continue to buy on the back of more positive news, as suggested earlier, increasing illiquid supply growth further. Mining rewards will simply not be enough, with demand much higher than available supply. Anyone with some basic understanding of economics can guess what will happen then. And then, the next halving kicks in in 2024.

A prediction for 2022

As the percentage of crypto assets — primarily Bitcoin — held by Chinese exchanges decreases more and more, we expect the Chinese sell-off to be completed within the next weeks or maybe months. Then, ceteris paribus, US and EU markets will continue to buy and ride the wave of positive news. Illiquid supply grows further as more HODLers continue to buy and hold, while no more temporary, significant selling pressure is coming out of China. This could cause upwards price movements. However, for this development to kick in, there are three crucial macroeconomic risks external to crypto that need to be considered. All three of these could make or break such movements. First, we need to see some relaxation in the tensions surrounding the Ukraine crisis. This crisis poses a threat not only to crypto, but to all markets. Secondly, expiration of the bond purchasing program of the ECB and a rate hike could result in less capital flowing into crypto assets. Thirdly, regulatory changes in larger countries such as the USA, Russia, or Turkey might change the market sentiment significantly.

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Please note that this analysis does not represent financial advice, nor is it supposed to be understood or interpreted as solicitation to buy or sell any securities, coins or tokens. Any expression of opinion (which may be subject to change without notice) is personal to the author and the author makes no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied.

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About 21e6 Capital

21e6 Capital is a Swiss investment advisor, connecting professional investors with optimal crypto investment products. 21e6 Capital has analyzed over 1,000 crypto funds across the world and condensed them into a selection that can yield crypto-exposure with minimized downside risk. Backed by a highly experienced team of crypto and finance experts with in-depth knowledge in digital assets and DLT, 21e6 Capital created a unique quantamental strategy that is aimed at achieving crypto-like returns while minimizing risk and volatility to global equity levels. The 21e6 Capital team builds upon strong academic roots with a track record of leading crypto asset and decentralized finance publications and research, ensuring state-of-the-art crypto investment solutions for financial industry professionals.

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About the Authors

Maximilian Bruckner is Head of Marketing & Sales at 21e6 Capital AG. Prior to this, he was engaged as Executive Director of the International Token Standardization Association (ITSA). where he focused on intense research and classification of crypto assets according to the International Token Classification (ITC) framework. He was heavily involved in the creation of the world’s biggest token database for classification data on tokens. Maximilian graduated from the Frankfurt School of Finance and Management and did research onon the „Use Cases of a Token Database“. You can contact Maximilian via e-mail at maximilian.bruckner@21e6.io to request more information on 21e6 Capital AG or ask any questions regarding this article. You can also follow Maximilian on LinkedIn (https://www.linkedin.com/in/max-bruckner/) to stay up to date.

Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was ranked among the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. He has been a member of the FinTech Council and the Digital Finance Forum of the Federal Ministry of Finance in Germany. He is also on the Board of Directors of FiveT Fintech Fund and Blockchain Founders Group — companies active in the field of blockchain startups. The expertise of Prof. Sandner includes crypto assets such as Bitcoin and Ethereum, decentralized finance (DeFi), the digital euro, tokenization of assets, and digital identity. You can contact him via mail (m@philippsandner.de) via LinkedIn or follow him on Twitter (@philippsandner).

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