What could happen if China lifts its Bitcoin ban?

bu Eloisa Marchesoni

Last week, it was rumoured that: “Bitcoin (BTC) is now recognized as a legal asset to be owned, transferred and utilized as a medium of payment for goods and services in China as decreed by the Shenzhen Court of International Arbitration after ordering the Bitcoin ban in 2017.”

A lot of hype had already started building around this possibility, which was then found to be untrue. The question is: why so much amazement? Even if it had been true, it really should have been no shock.

Anyone following the digital currency market should already had noticed that China’s ban on Bitcoin appears to be a way to take time and warm up before coming back on the scene with a tight regulatory system. In fact, on 28 May 2018, President Xi Jinping stated: “The new generation of information technology represented by artificial intelligence, quantum information, mobile communication, internet of things, and blockchain is accelerating breakthroughs in its range of applications.” Also, in June 2018, CCTV, the country’s leading state-run broadcaster, further endorsed the blockchain technology.

Of course, during the period of the Bitcoin ban, OTC markets have been fueling China’s crypto craze to the point that the Bitcoin address ranked as sixth-richest and having accumulated more than 93,947 BTC during a two-month period between 25 March and 27 May 2018 belonged to an Asian “big whale”, which, during that same time frame, turned to Huobi OTC and other minor addresses for what seemed to be a sell-off operation. But, why OTC? Large-scale buyers and sellers prefer these trading platforms because OTC orders are not recorded and, thus, do not affect market prices when they are placed. In such a way, wild fluctuations in price are avoided. This rise in activity in the Bitcoin OTC market, brought investors who could no longer trade within the Chinese market to start exploring peer-to-peer alternatives to invest in the asset class, such as Telegram and even WeChat. This brought the most government-affiliated companies, including the famous Alipay and WeChat itself, to formally place a censorship on cryptocurrency trading.

Though, had you taken into consideration that, at that point, China had already spent more than $3 billion in funding blockchain projects? Clearly, the ban is likely to be lifted soon and, when it is lifted, the market should be expecting a rise in price of the Bitcoin, removing the risky volatility that we have been seeing lately, and OTC markets might play a big role in determining the magnitude of such a change.

We all know that, when trading OTC, one of the golden rules is to avoid times when the market is highly volatile and rather wait for prices to stabilize before trying to execute the trade. Given the expected reduction in price fluctuations, in favor of a bullish Bitcoin market, the “big whales” might want to make a fast move to benefit from the good news. Problem is that, if the sellers are dried up due to previous OTC buyers, the next one might not want to waste valuable time waiting for more OTC sellers. The buyer might want to act very soon after having heard that the ban has been lifted, even if it means taking on the risks of going through a regulated exchange, and, if the cash at hand is enough, the player will move his order to the market, heavily impacting the price in a procyclical way.

Keep an eye on those who try to go unnoticed!