Monday, the Chinese government banned the practice of creating and selling new cryptocurrencies, Reuters reports.
With the rise of Blockchain technology, initial coin offerings (ICOs)—which give investors the opportunity to buy newly-created cryptocurrencies—have gained popularity. In total, Reuters says, ICOs have raised $2.32 billion since the inception of the cryptocurrency market; $2.16 billion of that amount has come in 2017.
In China this year, 65 ICOs have raised a combined 2.62 billion yuan ($394.6-million) and attracted 105,000 investors, according to Reuters.
The value of Ethereum, the cryptocurrency in which most ICOs are transacted, has plummeted on the news. On Sunday, one Ethereum token was worth $349.93. Late Monday, that figure had fallen 14.3 percent to $299.72. As of 1:33 p.m. Eastern Tuesday, Ethereum has recovered slightly; the USD-Ethereum exchange rate sits at 307.56 to one.
The Bitcoin-USD exchange rate has dropped 5.9 percent since midnight Monday morning on China’s news. Late Sunday night, one bitcoin was worth $4,632.46. As of 1:39 Eastern Tuesday, the value of a single bitcoin token is $4,359.07.
The market capitalization of the cryptocurrency industry as a whole dropped 11.66 percent Monday, from $165.095 billion to $145.833 billion. Since midnight Tuesday morning, though, the industry’s market cap has gained 1.7 percent. As of 1:55 p.m. Eastern, the industry is worth $148.358 billion.
“The large price falls can be attributed to panic amongst traders and profit-taking,” said Cryptocompare founder Charles Hayter, per Reuters.
Indeed, China’s announcement had many investors across the internet predicting doom and gloom. A participant in one chatroom set up for an upcoming ICO said “the music has stopped” for the cryptocurrency boom, Reuters reports.
“Sell all your bitcoins now,” another advised, again per Reuters.
The organizer of the ICO to which the chatroom was dedicated, which was meant to launch a new cryptocurrency called SelfSell, has suspended the project.
Regulators around the world are struggling to understand cryptocurrency investment and the risks associated with it, said Zennon Kapron, director of the Shanghai-based financial technology consultancy Kapronasia, per Reuters.
Prior to China’s announcement, the U.S. Securities and Exchange Commission, as well as similar agencies in Singapore and Canada, warned that regulations would likely be needed to control the cryptocurrency market.
The lack of regulation governing cryptocurrency and investment in it is unprecedented. Blockchain, the backbone of cryptocurrency transactions, functions without a centralized overseer.
The nature of investment in cryptocurrency is also unconventional. When one contributes to a fundraiser for a traditional company, one generally receives a share in the company and/or a security. ICO investors, Reuters notes, receive neither.
Therefore, Reuters points out, an investment in a cryptocurrency is little more than a bet that demand for that currency will exceed supply, driving up value. It is a risky bet, considering the volatility of cryptocurrencies.
With risks to investors so high, government regulators are purportedly taking strides to protect their citizens. Cryptocurrency expert and Blockchain proponent Oliver Bussman said, per Reuters, that the lack of private financial advice firms in China obligates the government to be especially vigilant in protecting the finances of its constituents.
Of course, many would argue that it is an investor’s own responsibility to protect him/herself.
Despite some predictions that China’s move spells the beginning of the end of the cryptocurrency boom, many experts believe the regulatory shutdown is but a temporary measure designed to give the country’s government time to develop a strategy by which to handle cryptocurrencies.
“China, in many ways, is no different than the U.S. or Singapore in saying, ok, we need to push back on these for now until we figure out how to deal with them,” Kapron said, per Reuters, adding that he expected regulators in China to eventually ease the ICO ban.
Bussman says, per Reuters, that cryptocurrency technology is too revolutionary, too integral to the future of global economics, to be shutdown. Cryptocurrency, he says, has already worked itself into the fabric of modern investment.
“The initial coin offering is a new business model leveraging blockchain technology and it will remain. This is not the end of the ICO – absolutely not,” he said.
Featured Image via Flickr/BTC Keychain