Chinese liquidity could spark the next bull run; but it won’t happen soon
In August, Hong Kong issued its first licenses for institutional crypto. However despite this bullish news, China’s recent economic data shows slow growth due to huge debt and a troubled property market.
China’s GDP growth since the 1980s has averaged a rate of 8.95%, reaching an all-time high of 18.70% in Q1 of 2021.
China’s biggest property developer , Evergrande, filed for bankruptcy just weeks ago. . And with multiple headlines reporting that the country’s economy has run out of steam, the crypto community shouldn’t count on that eastern liquidity entering the market too soon.
Crypto has been on the minds of the Chinese for some time. We see prominent projects and plenty of activity from this nation, but it can be argued it is not a meritocratic system.
Only selected traders and organizations can access crypto trading and investing, unlike the West where it is open for everyone with basic understanding a secure internet connection.
In our latest Medium post, we explore China’s relationship with cryptocurrency and how, although recent developments could trigger the eagerly awaited next bull run, it probably won’t happen this year.
Is China for or against cryptocurrency?
The recent months have brought significant developments to the crypto world. Let’s start by examining activity from China and their overall position on digital assets.
Cryptocurrencies have gained partial approval from the Chinese government..
However, over the years, crypto mining and trading have faced scrutiny due to environmental concerns and opportunities for money laundering.
In June, Hong Kong legalized institutional crypto investments. And in August Hong Kong issued its first licenses to digital asset exchanges for retail crypto.
While many individual investors still lack access, the on-ramps for substantial liquidity to flow into the markets are being created. .
If crypto becomes more accessible in the East, this could be a major catalyst for the next bull run. China, with its population of over a billion people, has also made its mark in blockchain and web3 with popular projects like Filecoin, Conflux, and Alchemy Pay emerging over the years.
What lies ahead? Well, we may witness an influx of stablecoins originating from Eastern nations. Stablecoins, backed by currencies like the Chinese Yuan, offer significant utility for large corporations looking to integrate into the blockchain.
Stablecoins often represent a crypto-based, dollar-backed asset. Due to their stability, they provide a safer way to hold substantial capital, potentially injecting more liquidity into the markets if a Chinese Yuan stablecoin emerges.
Despite all the controversy and regulatory changes, it’s worth noting that some of the world’s largest crypto exchanges are based in China.
China’s economy has really seen better days!
In February 2023, the Chinese government injected an impressive $90 billion into broader markets, with many speculating that this sizable sum was directed toward the crypto markets due to Bitcoin’s price surge during that period.
This recent capital infusion has the potential to reposition this global powerhouse to its pre-COVID status.
Previously, China had implemented the “zero COVID” policy, which effectively placed the country in a lockdown similar to what Western countries experienced in 2020.
Business activities were halted, and the public’s day-to-day lives were significantly restricted. However, all of this is expected to change in the coming months.
As we observe, the backend of their economy is now open but needs to catch up to fully recover from the effects of the lockdowns and pandemic.
- What’s been happening in the East?
China was borrowing, borrowing and doing a little more borrowing for many years to help build up their country and economy. This proved amazing at first, as they were able curate cities and give people homes.
Recently though this has come to a halt due to decreases in public spending and less need for buying property by the general population. Now China has a substantial amount of debt that now needs paying back.
Property markets have also been severely affected, largely due to the troubles of Evergrande, one of the country’s largest property investment firms.
Evergrande has been making headlines for several reasons. In 2021, they faced a staggering $300 billion in liabilities that they couldn’t meet, causing widespread panic among the general public.
Things took a turn for the worse in 2023 when Evergrande reported colossal revenue losses, amounting to $81 billion. To put this in perspective, this loss is equivalent to the 2022 profits of both Microsoft and Google combined, making it a substantial setback.
Adding to the woes, housing prices have also declined.
Initially, reports indicated a modest drop in new home prices by only 2.4% from their peak in August 2021, while older homes saw a 6% decrease. However, it has become evident that data accuracy in China is questionable due to government involvement.
Recent reports have suggested that the figures were misleading. Rather than a 2–6% decline, the actual numbers are thought to be closer to a 15% drop, particularly in desirable areas like Shanghai and Shenzhen.
The United States seems to be going back and forth with DeFi
China’s growing acceptance of cryptocurrency and its injection of capital do seem to coincide with a different approach than that of the USA. This shift could indeed be a response to the tense and strained international relations between these two superpowers.
The Security and Exchange Commission (SEC) in the USA has taken some strict measures in the cryptocurrency space. They recently banned staking products within the country, which had a significant impact on the industry. Additionally, exchanges like Binance and Coinbase have faced legal challenges from the SEC regarding their platform activities.
While the United States is tightening its stance on cryptocurrencies, China appears to be adopting a more lenient approach. Binance was originally founded in China, and has become one of the major global exchanges for investors. This situation could potentially lead to legal battles between the two countries given the market share and influence of these platforms.
The FTX incident in late 2022 may have played a role in the SEC’s actions.
With over $10 billion in user funds stolen and market liquidation causing a drop below $1 trillion, it was inevitable that lawmakers would take a closer look at other actors in the cryptocurrency space and unveil concerning information in the process.
Furthermore U.S investment titans, BlackRock and Fidelity have been attempting to release their own Bitcoin Exchange Traded Fund (ETF). Although these products have hugely bullish potential, the SEC has already delayed their decision on them once.
China’s new stance on crypto may work out for them and their institutional investors. The scalability for businesses via the blockchain is immense and could really put them back in the driving seat for economic growth.
So what will cause the bull run?
Bear markets are indeed a part of the cryptocurrency experience, but anticipation of a bull market is always high among investors. To see a significant shift in the crypto market driven by China, several key factors may need to occur:
- Legalization of crypto: Crypto would need to become fully legal for both investment and trading in China. This would open the doors for significant liquidity to enter the market and potentially drive the price upward, at the moment only certified investors and institutions can access them.
- Housing market stability: The state of the housing market is crucial, as it often represents the primary store of wealth for many individuals. If the housing market experiences a collapse, people may be more inclined to turn to crypto as an alternative, provided it’s legally accessible.
- Regulatory clarity: The current crypto bear market has been marked by regulatory uncertainty, particularly with the SEC’s actions in the United States. Clear and favorable regulatory changes in China could boost investor confidence and lead to market growth.
- Low inflation rate: China’s low inflation rate and its efforts to reduce reliance on the U.S. dollar can contribute to a favorable economic environment for crypto. It can hedge against inflation and provide an alternative to traditional currencies.
- Public sentiment: Public opinion plays a significant role in cryptocurrency adoption and market dynamics. Changes in public sentiment, as seen during the previous lockdown, can lead to market surges.
- Bitcoin halving: This only happens every 4 years and it’s coming up fast! So what does this mean for a potential Chinese fuelled bullrun? The overall supply of Bitcoin goes down to help with the general economics of the asset. This can cause people to buy, causing prices to rise both before and after the event because of its increased scarcity!
The crypto landscape is continually evolving, and the interplay between countries, regulations, and market sentiment will continue to impact its trajectory.
It is clear that the Chinese are altering their takes on cryptocurrency, but with how the data is looking along with the laws, there is still a long way to go for them to truly be the catalyst for the next bull run.
What are your thoughts on China and crypto? Leave a comment below and let us know.
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