Is China behind the August crypto rally?

So here we are in the first half of August, and the price of bitcoin is starting to rise again. It is always tricky to come up with explanations for why the price of crypto suddenly changes, because at any given time there are always many different things going on in the world, and just because two things happen at the same time doesn't mean they are connected. But sometimes, there's just so much of a timing coincidence that it is hard to not see the connection between the two events.

I remember on Monday morning on the 26th of July Hong Kong time looking at the price of crypto and seeing it suddenly spike up the moment the Hong Kong stock market opened. My immediate reaction was "well this is interesting, wonder what is going on here." About five minutes later, my wife walks in and mentions that everyone in her chat group was talking about the Hang Seng dropping. That also happened the next day and this drop in the Hong Kong markets was also connected with a rise in crypto.

One explanation of what happened was that people were pulling a lot of the money out of the market in China, and as people moved out of stocks, they moved into crypto which caused the price of crypto to spike. The thing about crypto markets is that they are much smaller than the stock markets, so even a tiny amount of movement from Chinese stocks to crypto would have caused prices to spike up.

Now as for what caused the Hang Seng market to drop suddenly, it happened when the Chinese government issued new regulations on for-profit educational companies as well as issued new rules on licensing of music by Tencent. The new policy requires for-profit tutoring companies to convert themselves to non-profits when tutoring required subjects. This new policy killed stock prices for a lot of for-profit educational companies, and caused a sharp drop in stock prices on Monday and Tuesday. The total drop was around 10 percent over two days, and it was amusing to me that a 5 percent drop in the stock markets causes panic, whereas a 5 percent drop or rise in the crypto markets is a usual day.

There are two things that I find interesting in this chain of events.

The first is that it was all unintentional. No one in the Chinese government seems to have considered the impact of the new educational regulations on the stock market and by Wednesday, the Chinese government was talking about moving to stabilize the markets. What's more, no one anywhere could have likely guessed that announcing new regulations on educational non-profits would have caused the price of bitcoin to spike.

The second thing that I find interesting is that no one in the bitcoin media linked the announcement on educational regulations to the rise in bitcoin prices. All of the explanations for why bitcoin has been rising had to do with things which do not likely to move prices very much. Even if it turns out that the drop of the Hong Kong markets at the same moment crypto went up was some sort of freak coincidence, it's fascinating to me that no one seemed to have offered that as a theory. You see all sorts of crazy theories and explanations on the internet, so curiously no one mentioned this one.

There are reasons for this. The first is what's called availability bias, which is that you look for explanations based on things that you see. So the fact that the Hong Kong markets dropped so much was something that everyone in here noticed, but it's not something you would have noticed somewhere like in London or New York.

But the second issue is that reporters and readers are expecting certain stories, and are looking for simple stories. China bans bitcoin is a simple story. However, a story that talks about Chinese educational policy and bitcoin is not something that you can summarize in one short sentence. A story in which the Chinese government just wants to get rid of bitcoin is nice, easy, and dramatic. A story that talks about Chinese regulatory policy is long, dry, and can be boring.

The other thing is that reporters and newspapers expect that people have short memories. For example, China bans bitcoin mining was trumpeted very loudly in the news a few weeks ago, but everyone has forgotten about it, and if you look at the bitcoin hash rates, it's obvious that while bitcoin mining in China has gone down, it hasn't stopped. However, a story that "China bans bitcoin mining" is easy to write. A story that says "well China has restricted bitcoin mining, and some mines are going out of business but others have managed to survive" requires a lot more work.

What does this all mean for the price of bitcoin over the next few months? First of all, it shows that bitcoin is subject to random events, and these events may be unforeseen by everyone.

However, because bitcoin has some inherent value, any random event is likely to affect the price for a week or two and then be forgotten. Basically what you should do depends on whether you think that bitcoin has fundamental value.

As far as the Chinese government, we need to look at basic Chinese government policy, and then understand that many Chinese government actions that affect bitcoin prices are unintentional.

However, the good news is that the focus of the Chinese government is to make people in China rich, and the Chinese government also wants to make sure that anyone and anything that helps people in China get rich is also heavily rewarded. Since I happen to think that bitcoin helps the Chinese economy, I happen to believe that long term the government will be favorable to bitcoin, despite short-term crackdowns.

As far as what could cause another crackdown, we can look at the goals of the Chinese government. What the Chinese government is worried about is a bubble in which a lot of Chinese put their money into cryptocurrencies (or anything else) and then lose their money. Therefore, what is likely to happen is that if the price of bitcoin rises in a slow and orderly manner that appears sustainable, the government is likely to keep hands-off, and if things are stable the government will quietly loosen restrictions. However, if the price of bitcoin rises suddenly and it looks like we are moving into a bubble the Chinese government is likely to try to pop the bubble.

Note that it may not be necessary for the government to do anything substantive, they might announce something and see if it pops the bubble. However, if a mere announcement doesn't cause the bubble to pop, then they'll take some measures to limit crypto trading and mining.

All of this will as always cause a bit of short-term noise. However, because I think that bitcoin is useful and that it will end up making people in China rich, I'm bullish long-term about crypto in China. However, it's going to be a very bumpy ride.

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