Bitcoin Price Update – Could China’s Crypto Crackdown Trigger a Flash Crash?

  • China’s central bank announced all transactions of crypto-currencies illegal, effectively banning digital tokens such as Bitcoin.
  • “Virtual currency-related business activities are illegal financial activities,” the People’s Bank of China said, warning it “seriously endangers the safety of people’s assets.”
  • With the heightened default risk surrounding Evergrade, I see the potential for a widespread contagion and rapid deleveraging that could trigger a flash crash in crypto.

BITCOIN FUTURES DAILY: Bitcoin is down on today’s news. Breaking below $40,000 would imply a secondary top at $53,125 and promote more sideways consolidation. Ultimately, a breakdown below $28,000 is needed to confirm a crypto bear market. Until then, prices are merely consolidating.

A screenshot of a computer Description automatically generated with medium confidence

Note: To signal a flash crash, bitcoin would have to drop below $28,000. 

Deleveraging: The Chinese economy is highly leveraged. Many of its citizens have their wealth wrapped up in real estate. The situation with Evergrande is horrible and could lead to massive losses. If a deleveraging begins, the government may have to step in to cover losses and maintain order. If they fail to respond appropriately, we could see a sharp selloff in most assets, especially in overleveraged crypto.  

Potential Flash Crash: One scenario I’m considering is a potential liquidity shock and flash crash in crypto exchanges. Let me explain; if we see a panic deleveraging (now or later), liquidity could dry up along with buy orders. If buy orders dry up while investors are still rushing to the exits – crypto prices could plummet, temporarily. How low could they go? I have no idea, but theoretically, some could drop to the lowest buy order on the books. A flash crash would likely last just a few seconds before exchanges shutter.

The flash crash described above is unlikely but certainly possible given today’s fast-moving markets. If a flash crash occurs, it’s most likely to happen over the weekend (when traditional banks and funding sources are closed). Think about it: low weekend trading volume combined with a deleveraging event could trigger margin calls at a time when traders that are leveraged to the max can’t assess additional funds. That could result in forced selling.

Final thoughts, if crypto transactions are illegal in China, and there is a rush to liquidity – investors may switch back to gold to protect purchasing power. If that occurs, precious metals could see a nice boost.

AG Thorson is a registered CMT and expert in technical analysis. He believes we are in the final stages of a global debt super-cycle. For regular updates, please visit here.

For a look at all of today’s economic events, check out our economic calendar.