Cryptocurrency Market Crash

Q. Why is this in news? 

The cryptocurrency market saw a big correction with prices of major currencies, including Bitcoin, Ethereum, BNB, and others crashing as much as 30% within 24 hours.  This came in the backdrop of Chinese regulators announcing a crackdown on cryptocurrencies.

Q. What is the Crackdown on Crypto Market? 

• China has barred financial institutions and payment companies from providing any services related to cryptocurrency transactions.
• This means that banks and online payment channels must not offer clients any service involving cryptocurrencies, such as registration, trading, clearing, and settlement.
• China had issued such a ban in 2017 as well, but compared with the previous ban, the new rules have expanded the scope of prohibited services, and surmise that “virtual currencies are not supported by any real value”.

Q. What are other reason behind this crash: The Tesla story? 

• Tesla recently announced that it wouldn’t favor Bitcoin on ‘environmental’ concerns because Bitcoin mining requires electricity which is mostly generated using fossil fuels.
• However, this seems to be motivated and raises a few questions like – didn’t the Tesla management already know about Bitcoin mining before diversifying into it?

Q. What does this fall imply?

• A crackdown by one of the world’s biggest economy notwithstanding, those in the ecosystem has termed this decline as a short-term correction.
• A nearly 40% dip in the bitcoin price from its all-time high looks dramatic but is normal in many volatile markets, including crypto, especially after such a large rally.
• Such corrections are mainly due to short-term traders taking profits.
• Long-term value investors might call these lower prices a buying opportunity.

Q. What are Cryptocurrencies? 

• A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
• It uses strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
• It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
• Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.