Could China still influence Bitcoin prices before the next halving?

Bitcoin has been relatively flat this year, stuck between bull and bear rallies, but trading within a range. While far from COVID-19 highs, it is nowhere near the lows when bitcoin touched just over $16,000 USD per 1 BTC after the fallout of cryptocurrency exchange FTX failed.

The halving is traditionally a price-boosting event for bitcoin. Halving is when the reward for miners is cut in half, so less bitcoin is available. This happens in programmed intervals based on the number of mined bitcoin blocks. The next bitcoin halving will happen around April 24, 2024, when block number 840,000 is mined. It is the living embodiment of bitcoin’s creed that the price for a scarce asset will rise as you reduce its supply.

Bitcoin’s programmed deflation is the opposite of the inflation that accompanies growing fiat monetary supply, as with the US dollar. For example, a year after the 2020 halving, bitcoin’s price was at one point 533% higher.

Will the same thing happen again? Or will this halving cycle be ushered in with another cycle of bad news, such as the enactment of China’s proposed cryptocurrency mining ban that sent prices plummeting soon after in 2021? These are questions I have dealt with significantly as part of my research on China and bitcoin.

Perhaps no country has affected bitcoin’s price history more than China, but there are several reasons to believe that China’s actions may be more neutral for the market until at least the next halving.

The Present State

China cracked down on bitcoin mining through a State Council decree and banned most forms of bitcoin transactions on exchanges. The State Council is China’s highest administrative state organ. The American system and the Chinese system are difficult to compare. However, one way to think about the State Council is that it is a “super-executive branch”, reporting to the Premier, who is the number 2 in the Chinese power system behind the General Secretary (currently Xi Jinping) and widely seen becomes the head of the administrative state – and responsible for the regulation and development of economic growth.

When the State Council speaks on a topic, other branches of the Chinese government quickly fall into line. Provinces like Sichuan and Inner Mongolia that had previously dragged their feet and given bitcoin miners more time to gradually phase out their operations – rolled out stricter plans to end bitcoin mining within the province once the State Council weighed in.

The vice premier who chaired the committee that implemented the effective bitcoin mining ban, Liu He resigned from the Politburo. Although he still informally consults on economic matters, bitcoin is unlikely to return to a Politburo-level event as Xi’s state administration and Liu He both focus on a battle of systems and investment flows and “trade and economic affairs” with the West .

Bitcoin is also recognized by some Chinese courts as virtual property and a defensible virtual commodity – this has been the case in the Chinese court system for years. China’s regulations on cryptocurrencies are known as the “Key Prohibition Rules”: it is illegal to act as a central counterparty for exchanging cryptocurrencies for legal tender or each other, and it is illegal to raise funding through ICOs.

So no bitcoin exchange exists at scale with its headquarters in China. There is also a strict ban on the use of cryptocurrencies as legal tender or circulating currency. However, the right for Chinese citizens to hold bitcoin as a virtual commodity has been upheld by several courts.

The Chinese party state is unlikely to go after people who own bitcoin and are Chinese citizens due to the mix of virtual property protections and bans focused on the use of bitcoin as legal tender, but implemented at the application rather than network level. This means that centralized businesses such as exchanges and bitcoin miners are targeted. But individuals who hold bitcoin, and perhaps run a bitcoin node, still aren’t.

China has so far not taken the most extreme measures to eradicate bitcoin as a result. While those who want to do bitcoin mining should be careful, as bitcoin miners have been seized for power use, there have not been widespread seizures of bitcoin from Chinese citizens or a Great Firewall level ban on the protocol ports.

While the Chinese government has made it difficult to buy bitcoin with Yuan, the use and purchase of Tether is still an open secret for OTC exchanges. The likely disruption here will come if more exchanges or a major stablecoin fails rather than the actions of the Chinese state. The Chinese party-state may have to respond if this is the case – but there are likely to be very few actions it will proactively take at the moment, as no announcements are on the horizon (while the Chinese party-state has warned against bitcoin mining for years long banned).

Hong Kong and Shanghai

Two pieces of “bullish” Chinese bitcoin news came out recently.

First is the Shanghai court ruling, which, while a little more nuanced about Bitcoin being separate from cryptocurrencies, follows more or less the same trend line of Chinese courts recognizing that bitcoin and other digital assets are commodities and worthy of against seizure under China’s civil code.

In Hong Kong, there are signs that a need for capital inflows has led Hong Kong to accept cryptocurrency exchanges. It is perhaps a way of promoting the idea that it is “business as usual” in Hong Kong after protests calling for universal suffrage brought the city to a standstill.

However, there are early signs of trouble as Hong Kong-based JPEX failed. JPEX is an unlicensed cryptocurrency exchange and not one that has gone through the new proposed regulatory structure.

Still, it’s likely a reason for Hong Kong’s executive branch to get involved — which probably doesn’t bode well for the licensing regime, which securities regulators and the central bank have mostly pushed forward.

Export Philosophy

An underrated aspect of how China can influence bitcoin prices is the export of its ideology. China was one of the first states to try to limit bitcoin, partly because of its sensitivity to capital controls in a closed system and also because of the large amount of bitcoin mining activity within its borders.

The same arguments about proof-of-work bitcoin being energy-wasting are already emerging in individual states of the United States, such as New York state’s temporary ban on certain bitcoin mining activities and European legislation. Other states may soon follow in China’s footsteps, which will have the effect of moving bitcoin’s price, as those differences will be newer than China is likely to do now.

The next halving

Usually, a halving event would increase bitcoin’s price – however, this time it is more uncertain whether that will be the case. This will be the first halving for China since the bitcoin mining ban took effect.

While Chinese social media used to light up with each bitcoin halving due to the large amount of bitcoin miners present in China, it is possible that 2024 will be a bit more dull. Major Chinese political events are unlikely to shape bitcoin prices until then, although there may be more demand for bitcoin as capital flight takes hold across the country.