Cryptocurrency speculators falling from the bull market

Mining machine business is cooling down

"The mining machine business is no longer possible." On July 11, 2021, a middle-aged man in his forties sighed to his companions at the entrance of SEG Plaza in Huaqiangbei, Shenzhen.

SEG Plaza is the main distribution center for Bitcoin mining machines, graphics cards, and hard drives. SEG Plaza has a total of ten floors, mainly selling computers and electronic parts. Stores selling mining machines and graphics cards are mainly concentrated on the third to fifth floors, totaling more than 20, and most of the store names contain words such as "mining" and "technology".

The policy turning point occurred in May 2021. Inner Mongolia, Xinjiang, Qinghai, Yunnan, Sichuan and many other places have successively issued bans on virtual currency mining.

On May 19, 2021, the People's Bank of China issued an announcement on preventing the risk of virtual currency speculation through its official account, requiring financial and payment institutions not to accept cryptocurrencies as payment and settlement tools, nor to provide services and products related to cryptocurrencies. Subsequently, the Financial Stability and Development Committee of the State Council held a meeting to strengthen the supervision of platform companies' financial activities, crack down on Bitcoin mining and trading, and resolutely prevent individual risks from being transmitted to the social field.

In order to avoid risks, some merchants in SEG Plaza covered the word "mining machine" in their product names with tape.

Compared with Bitcoin mining machines, graphics card mining machines consume less power and are more dispersed. However, the restrictions on mining policies have also affected the price of graphics cards. Several merchants selling graphics cards in the mall told Southern Weekend reporters that the price of graphics cards has dropped by 1/3 compared to the peak a few months ago.

“The coins in the account are decreasing little by little”

Gao Ling, a professional cryptocurrency trader in Beijing, sighed. Her account lost about 70 bitcoins in the past month.

Seven years ago, after graduating from university, she went to work at an Internet company in Beijing, where she gradually came into contact with blockchain and Bitcoin.

In 2019, the price of Bitcoin was rising. Gao Ling and her family had a dispute over buying a house. In a fit of anger, she put the money for buying a house into a cryptocurrency trading account. After making a few profits, she simply resigned from the company and specialized in cryptocurrency trading. "Because the money was earned by myself, my family neither supported nor opposed my resignation."

At its peak on May 12, 2021, the market value of all virtual currencies in Gao Ling’s account was approximately equal to 89 bitcoins.

In addition to buying Bitcoin, she also bought other cryptocurrencies on the trading platform, but ultimately used Bitcoin for pricing. Based on the closing price of $49,000 that day, the account funds were approximately $4.36 million (about RMB 28.21 million).

Now, after experiencing the biggest loss in her cryptocurrency trading career, she only has 21 bitcoins left, worth about $723,000 (about 4.68 million yuan), only one-sixth of her peak.

"It is really scary. You just watch the coins in your account decrease little by little." Gao Ling's tone was a little excited when recalling the plunge. "Compared with the risks brought to me by the decline in coin prices, I was more worried about missing out at the time, so I chose not to sell it because I thought it would still rise."

Gao Ling told the Southern Weekend reporter that her account is mainly configured with various other virtual currencies, with Bitcoin accounting for a relatively low proportion, but during this period, the decline of other virtual currencies is much greater than that of Bitcoin. "The decline of Bitcoin is at most halved, while other platform currencies have fallen by 80% or 90%."

After this round of sharp drop, Gao Ling exchanged most of his other currencies for Bitcoin to increase his ability to resist risks, but did not increase his holdings.

The cryptocurrency market cooled down, and May 19th became a node that affected the development of the industry. The hot cryptocurrency market experienced a Waterloo-style plunge on this day, causing some investors to liquidate their positions or even leave the cryptocurrency market directly.

At 10 o'clock that evening, the cryptocurrency trading platform Coin showed that in the past 24 hours, the market's liquidation amount was approximately US$5.92 billion (approximately RMB 38 billion), and the number of liquidations was nearly 480,000.

"I lost 7 million in half an hour"

On the afternoon of May 19, Zhang Bin was on a business trip. He saw that the price of Bitcoin was falling, so he used his mobile phone to buy at the bottom and increased leverage several times through contract trading. "Half an hour later, the market was panic selling. If I didn't sell at a loss, I would face the risk of liquidation."

The cryptocurrency data website Coinmarket Cap shows that on May 19, the price of Bitcoin fell from US$43,546 to US$30,681, a drop of 29.5%, and the trading volume also hit a nearly three-month high.

In the traditional financial sector, futures contracts are used more to hedge risks. But in virtual currency trading, contract trading is mainly used to amplify leverage. Zhang Bin lamented, "I lost 7 million in half an hour, and I am still lucky. Some people lost tens of millions or even hundreds of millions of yuan on the same day."

Since 2021, the price of Bitcoin has climbed to a historical high of $64,455 on April 14, while the price in the same period last year was only $6,842, an increase of 842%. Compared with Bitcoin's past historical records, the drop on May 19 was not large, but because the market value has increased several times, many investors have suffered heavy losses.

Zhang Bin is a professional player in the cryptocurrency circle. He has been in contact with Bitcoin for seven or eight years. He is a well-known trader in the industry and usually trades every day. Zhang Bin first came into contact with Bitcoin when he was in college. During this period, he also traded in Bitcoin intermittently, but he lost more than he won.

In 2017, Zhang Bin was already working in Shenzhen. He saw the rise in the price of Bitcoin, so he chose to short Bitcoin, but not only did he lose a lot of money, he also owed debts.

Zhang Bin took a risk and borrowed a small loan of 2,000 yuan from the Internet to make a profit through short-term trading. In one night, he made 40,000 yuan. After paying off his debts with 20,000 yuan, he invested the rest of the money in a popular currency at the time and made hundreds of thousands of yuan in two or three days.

In Zhang Bin's opinion, the booming market during that period did not even require investment skills. "If you spend 1 million to buy a coin and hold it for two or three months, it is normal for the market value to increase tenfold."

Through frequent leveraged trading and the boost of the bull market, Zhang Bin quickly made tens of millions in more than a year.

Although facing huge losses this time and the price of Bitcoin is almost halved compared to its highest value this year, Zhang Bin still chooses to continue trading every day.

On May 18, 2021, the Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China jointly issued the "Announcement on Preventing the Risks of Virtual Currency Transaction Speculation" (hereinafter referred to as the "Announcement" of the Three Associations), reminding investors: Virtual currency has no real value support, its price is extremely easy to manipulate, and related speculative trading activities are subject to multiple risks such as false asset risks, business failure risks, and investment speculation risks.

“It has been sideways for a month now.”

The entire cryptocurrency market plummeted, causing panic among virtual currency trading platforms.

Li Jin is a key account manager of a virtual currency exchange, mainly providing information consulting services to customers. He is also a senior virtual currency enthusiast. In 2019, he resigned from a domestic securities firm and joined a virtual currency exchange.

When the price of Bitcoin exceeded US$60,000, Li Jin invested heavily in short selling, setting the stop-profit point at US$35,000 and earning nearly 10 million yuan.

According to Li Jin, although some investors chose to exit the market after suffering heavy losses, there are still investors who consult him whether they can buy in at the bottom after the price plummets.

Yu Jianing, former director of the Industrial Economics Research Institute of the Information Center of the Ministry of Industry and Information Technology, told Southern Weekend that in previous years, if a short-term bubble burst, the market would fall into extreme panic and the development of various crypto asset projects would stagnate. However, in recent weeks, the investment and financing of crypto assets has maintained a scale of 15 transactions per week, totaling about US$400 million.

Late in the evening of May 19, Tuya received a message reminding her that the trading volume on the platform had increased rapidly that day, ten times the usual average. Tuya is the chief operating officer of the virtual currency trading platform AAX.

After seeing the data, Tuya was very surprised. "After discovering the plummeting price of the currency, my first reaction was to check Musk’s Twitter and start looking for news sources with my colleagues to discuss the reasons."

But after May 19, trading volume began to decline and soon fell below the average level of the past. Li Jin admitted, "It has been sideways for a month now, and it will continue for at least another half a month."

The income of virtual currency exchanges is mainly through transaction fees. Li Jin cited his exchange as an example, "At present, if you buy or sell immediately, the fee is about 0.6%; if you set a price to place an order, the fee is 0.4%."

Tuya explained to the Southern Weekend reporter that the previous two crashes brought about a surge in trading volume, which means that as long as there is movement in the market, whether it is falling or rising, the exchange will not lose money. "The exchange is most afraid of sideways trading, and no one is interested in cryptocurrencies, and no one wants to buy or sell them."

The price of Bitcoin plummeted and the market was sluggish, which also brought difficulties in attracting new users. When the market was good, there would be a steady flow of money into the market, and the exchange did not have to spend too much time on marketing strategies. Once the market deteriorated, a new marketing strategy would be needed.

Zhang Min, who is in charge of an intelligent fixed-investment digital currency software, told the Southern Weekend reporter that “with this round of plunge, the platform users have suffered large losses, which has made it more difficult to attract new users and reduced the conversion rate by 50%-60%.”

The stores selling mining machines and graphics cards in the mall are mainly concentrated on the third to fifth floors, with a total of more than 20 stores, and most of the store names contain words such as "mining" and "technology". (Photo by Wu Chao, a reporter from Southern Weekend)

Compliance risks are growing

At the same time, exchanges are also facing more serious trading compliance issues.

In 2017, the central bank issued regulations prohibiting the issuance of tokens for financing and prohibiting cryptocurrency trading platforms from exchanging between legal tender and cryptocurrency. Since then, individuals in China have been unable to directly use RMB to purchase cryptocurrency from exchanges and other institutions.

Tuya recalled to the Southern Weekend reporter that before 2017, investors could use the RMB in their bank accounts to buy Bitcoin directly from exchanges, and the exchanges also had accounts in banks in China.

Nowadays, if a resident with an account in China wants to buy Bitcoin, he or she can mainly rely on OTC transactions. Individuals can use RMB to buy Bitcoin on cryptocurrency trading platforms, or convert it into stablecoins equivalent to US dollars for purchase. However, the entire process is a transaction with individuals, and the account is also transferred to the other party's personal account. The platform plays a role similar to Taobao in matching and ensuring transaction security.

Li Jin told the Southern Weekend reporter that buyers need to transfer money to the seller's bank card by themselves. The platform will temporarily freeze the cryptocurrency to be traded, and the seller will release the currency after receiving the money.

The "Announcement" of the three associations believes that, based on my country's current judicial practice, virtual currency trading contracts are not protected by law, and the consequences and losses caused by investment transactions can only be borne by the relevant parties themselves.

On May 18, after the People's Bank of China issued an announcement, exchanges successively closed OTC transactions. On May 19, MXC Exchange suspended OTC transactions. Subsequently, Huobi Exchange, one of the three major cryptocurrency exchanges, announced the cancellation of OTC block transactions.

On June 21, the People's Bank of China issued an announcement stating that it had recently summoned the Industrial and Commercial Bank of China, the Agricultural Bank of China, the China Construction Bank, the Postal Savings Bank of China, the Industrial Bank of China and Alipay, requiring them to conduct a comprehensive investigation and identify the financial accounts of virtual currency exchanges and over-the-counter dealers, and to promptly cut off the payment links for transaction funds.

Li Jin told the Southern Weekend reporter that he has received two most inquiries recently. One is whether there are legal risks in investing in Bitcoin and whether it is possible to enter the market after the increasingly stringent policies. The other is the future market trend of Bitcoin.

(At the request of the interviewees, Zhao Lan, Gao Ling, Zhang Bin, Li Jin and Zhang Min are pseudonyms.)