Wide Angle Shot: Cryptos under pressure - China gets serious, ECB a little

The crypto market is not getting off the ground and has been under pressure for several weeks. Negative newsflow dominates. The fact that China is now actually pulling the plug does not make the situation any better in the short term — but in our view it creates long-term potential. Plans for a digital euro (or retail digital currencies issued by other central banks) should sharpen crypto assets even more clearly as such and shall constrain their "currency status".

Bitcoin in USD
Refinitiv, RBI/Raiffeisen Research

China has no mercy

So now it has actually happened. China is getting serious. According to the AFP news agency, citing statements from local Bitcoin miners, Chinese authorities have ordered the shut down of 26 mining centers in Sichuan. Energy providers have been asked to stop supplying power to the miners.

Bitcoin mining is the process by which computing power is provided to the bitcoin network. This is for transaction processing, security, and synchronization of all users. The process has fallen into disrepute due to its high energy consumption. The research platform Digiconomist currently puts the energy needs at around 130 TWh per year — which is higher than Argentina's consumption. If the Bitcoin network is interpreted as a state in its own right, this would mean 29th place behind Sweden in the country ranking.

If Bitcoin Was a Country...
BitcoinEnergyConsumption.com, RBI/Raiffeisen Research
per 12.07.2021

However, the massive power consumption alone would not be so much of a problem if most mining facilities were not located in regions like China and their activities were highly dependent on coal-based electricity. Bitcoin's poor energy balance has been a thorn in China's side for some time — along with many other factors that a decentralized monetary system entails. Already a few months ago, therefore, the shut down of various mining companies in the provinces of Inner Mongolia and Qinghai was ordered. Citizens were even asked to report illegal miners.

The now sanctioned region of Sichuan, however, is an exception. It is the dam region that a few miners like to use as a location because of renewable energy. The Sichuan miners, who rely on hydroelectric power, account for slightly less than 10% of all Chinese miners, according to the University of Cambridge. Until the very end, there were hopes of mercy from the Communist Party because of the better energy balance. Not a chance. China's concern about losing control of the money market is too big. In mid-June, the Chinese central bank declared: cryptocurrencies and related transactions are a disturbance for the normal economic and financial order. However, all this is actually not new. Already a few weeks ago, the associations of the Chinese financial industry published the ban of their members for transactions with Bitcoin & Co. Even then, this had caused decent turbulence on the crypto markets in connection with the cryptic tweets of Elon Musk. Yet it is surprising how surprised market participants keep showing up in this agenda.

China's Relationship With Bitcoin - It's Complicated

After all, China's critical stance is not a new phenomenon, but already took its course in 2013. At that time, Chinese banks and financial service providers were prohibited from using and handling Bitcoin. This was mainly to put a stop to transactions, while ownership remained legal. Finally, in 2017, a ban on crypto IPOs, so-called Initial Coin Offerings (ICOs), took place. This was also accompanied by an order to shut down all Chinese crypto exchanges, which accounted for around 90% of global crypto trading at the time, according to Reuters. However, crypto fans always found ways to trade Bitcoin & Co. anyway — among other reasons because some Chinese exchanges circumvented the bans by changing their location.

The fact that state authorities are now once again putting on the brakes should therefore not come as too much of a surprise. The ban on providing services related to cryptocurrency transactions and the ambition to stop mining only highlights the Communist Party's claim to control over the money market once again. China has been extremely restrictive so far and will remain so.

Computing Power "Made in China" is outsourced

The fact that China is now getting serious is evident from the depressed sentiment on the one hand, but can also be read in the raw numbers on the other. Until just over half a year ago, around 2/3 of all mining companies were based in China. This is not only reflected in the above-mentioned ESG debate, but also repeatedly led to discussions with regard to the so-called hash rate. To put it simply, the hash rate indicates the computing power. The higher it is, the higher the competition among the miners when validating new blocks. A higher hash rate therefore also means higher security. However, with around 65% of the hash rate, Chinese mining companies had a dominant position here.

Shares of Global Hashrate Over Time
Cambridge Centre for Alternative Finance, RBI/Raiffeisen Research

The high share of computing power does not automatically imply that China controls the market. Nevertheless, the high dependency does not correspond to the ideal of decentralization and could, at least theoretically, cause problems. Until today, however, there is no consensus in the crypto community as to what influence the hash rate actually has on the price. Supporters of the "Price Follows Hash Rate" theory argue that a strong change in the computing power with a certain time latency also causes a change in the price. Supporters of the "Hash Rate Follows Price" theory, on the other hand, see the change in the hash rate as a reaction to changing prices. However, reliable empirical studies supporting one or the other thesis are rare. In our research, we could at least observe that in the case of rapid drops in computing power (fall in the hash rate by more than 2 standard deviations, based on the usual range of fluctuation), an increase in the correlation between change in the hash rate and price development can be observed. In our last report, we pointed out that a general mining ban in China would result in just such a drop in the hash rate due to its high weight — with corresponding consequences for cryptocurrencies. And this is exactly what could be observed in the last few weeks. Bitcoin's hash rate has fallen to its lowest level since the beginning of September 2019 due to the closure of the mining centers. Since the high in mid-May, the performance of the Bitcoin network has decreased by more than 50%.

Estimated Number of Terahashes Per Second in 24h
blockchain.com, RBI/Raiffeisen Research

This may be painful in the short term, but we take the view that a relocation of mining activities is to be welcomed in principle. Such a shift is likely because Bitcoin, as an open network, allows its members to move their activities to another geographic location at any time. Of course, this process takes time. However, a closer look shows that China has already consistently lost market share in recent quarters — much to the joy of miners in other countries. The current estimated 46% was compared to 75% in 2019, with an exodus from China mainly towards the US, Russia and Kazakhstan. The criticism that China dominates the bitcoin market could therefore be debunked relatively soon in view of the current developments.

Retail Digital Currencies of Central Banks as Competition for Cryptocurrencies?

Important central banks such as the ECB, the Fed but also the Chinese central bank have intensified their efforts in the area of establishing digital currencies for private end customers (retail customers). According to figures from the Bank for International Settlements (BIS), 86% of all central banks surveyed (65) are currently working on studies and concepts for digital (government) currencies (Ready, steady, go? – Results of the third BIS survey on central bank digital currency). China is currently the frontrunner here. However, central banks like the ECB clearly want to establish their digital currencies or digital euros as a means of payment and transaction (i.e. as "modern cash"), not as a comprehensive value storage and, above all, investment vehicle or digital asset. Thus, there is no direct or immediate competition to private cryptocurrencies or cryptoassets with limited usage as means of payment. Indirectly, however, state digital currencies can partially limit the possibilities of application in the real economy and the financial industry for private cryptocurrencies, and may take some hype out of the crypto "currency market" and counteract the speculation that a private cryptocurrency will really establish itself as a (legal) means of payment. This will push private cryptocurrencies more clearly in the direction of cryptoassets, which we see as a welcomed development. More details on the "Digital Euro" here.


The crypto markets are still in a phase of capitulation. The euphoria was too pronounced. The fantasies about the future were too exuberant. Greed was too great. Whether a new crypto winter is now on the horizon or we will see new highs by the end of the year is something no one can seriously answer. In any case, we assume that the crypto boom will ultimately be more than just a speculative bubble, but that sustainable innovations and technologies will actually emerge from it. However, all this should not justify the past price excesses.

At the same time, the question can be asked whether China's policy really represents such a gamechanger as the price declines imply. We have always held the view that the success and price potential of cryptocurrencies is closely tied to their adoption and potential applications in the real economy and financial industry - and there has been significant progress in these areas recently, especially away from China. What these are, what role Elon Musk played in them, what became of a social media giant's plans, and whether bitcoin might lose dominance - all of this can be found in our in-depth Q2 2021 Crypto Update.

This was an update and summary of our recent crypto longread. For the full text with more details and comprehensive explanations, please click on the link above.

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As an equity markets strategist, Manuel Schleifer analyses the global capital markets and derives specific investment ideas from them. In addition, his focus as a sector analyst is on consumer staples. He is a licensed stock trader as well as a graduate in business administration and economics and is active in the field of new media and digital currencies. Before joining RBI in 2018, Manuel worked as an asset manager at a start-up in the field of digital asset management.

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Gunter Deuber is heading the Economics and Financial Analysis division (Raiffeisen Research) at Raiffeisen Bank International (RBI) since 1 January 2021. Since 2011, Gunter Deuber has held leading positions in RBI's Economic and CEE Research and has continuously expanded the cooperation with his research colleagues in RBI’s subsidiary banks in CEE. Since the early 2000s, he has been analysing economies, banking sectors and market topics with a focus on CEE and EU/euro area topics for RBI in Vienna, but also in the international (investment) banking context in Frankfurt. He regularly presents the views of Raiffeisen Research and his research team at meetings with investors and clients. He is a well sought-after speaker at landmark events in the finance and banking industry and a guest lecturer at several universities/teaching institutions. In 2019, he was nominated for the US State Department's IVLP (International Visitor Leadership Program). Gunter has published several edited volumes on Euro/EU crisis issues and published various articles in professional journals and industry magazines. Outside the office, Gunter enjoys travelling with his family and long-distance running.