Several leading crypto-currencies around the world and in India faced network issues over the last two days after a series of events caused a global sell-off in Bitcoins and other crypto-currencies. First, new data concerning crypto-currency energy consumption showed that cryptos consume unsustainable amounts of electricity. Then, a series of tweets by Elon Musk, the chief executive of Tesla Inc caused Bitcoin prices to fall and then Chinese regulators issued a new diktat imposing new restrictions on the country’s financial firms.
Chinese regulators tighten rules
On Tuesday, three Chinese regulators instructed the country’s banks, payment companies and fintech companies to stop servicing crypto-currency investments and related activities. On Tuesday, Chinese regulators tightened existing rules and plugged certain loopholes that allowed financial firms to support crypto investing and trading.
A joint statement published by the People’s Bank of China, the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China instructed financial firms to stop all crypto-related services and step up their monitoring of money flows involved in crypto-trading. The regulators have banned crypto-currency based saving, trust or pledging services, financial products built on these digital assets, in addition to crypto-related information services, insurance and derivatives trading.
The surge in crypto-currency trading activity, adoption and valuations ever since the world was struck by the COVID-19 pandemic last year incentivised Chinese citizens to buy and trade crypto-currencies through crypto-exchanges located offshore, according to a Reuters report. Even over-the-counter crypto-exchanges within China witnessed a surge in investment activity in the last few months, the report added. This prompted Chinese regulators to intervene as the rise in speculative trading compromised “the safety of people’s property and disrupting the normal economic and financial order,” they said.
China is in the midst of testing its Central Bank Digital Currency (CBDC) or digital yuan and recently, began working with financial institutions and entities abroad to scale the digital yuan for cross-border payments. Chinese regulators also recently banned crypto-mining activity. Back in September 2017, the country had banned crypto-investing, crypto to fiat currency conversions and initial coin offerings (ICOs). A year later, 88 virtual currency trading platforms and 85 ICO platforms had left China, according to Reuters.
A crash or correction?
Ever since the world was gripped by the COVID-19 pandemic last year, traditional investors globally have turned to crypto-currencies as a viable investment option as products like mutual funds, stocks and other investment vehicles took a hit due to the global economic slowdown.
According to Coinmarketcap.com between March 2020 and May 2020:
- Bitcoin’s price grew from $9,000 to $58,000 or up by 644%
- Ethereum price grew from $230 to $3,500 or up by 1521%
- Ripple’s price grew from $0.23 to $1.5 or up by 652%
Now whether the prices and market value of these three leading crypto-currencies increased due to investor speculation, or the fact that crypto-currencies have become mainstream within the last year, one cannot tell. According to Michael Novogratz, founder and chief executive officer, Galaxy Digital cryptos had seeped into pockets all over societies in the last year, and a confluence of events had triggered this liquidation event. He told CNBC that the market will see consolidation going forward.
- Bitcoin’s price fell from $42,000 on Tuesday to around $33,000 on Wednesday; As of Thursday it stood at $40,000
- Ethereum price fell from $3,200 on Tuesday to just below $2,000 on Wednesday; As of Thursday it stood at $2,700
- Ripple’s price grew from $1.51 on Tuesday to $1 on Wednesday; As of Thursday it stood at $1.2
In an interview with CNBC TV 18 on Thursday, Gautam Chuggani, director of Indian Financials and Fintech at Bernstein said that the recent crash in prices should be seen as a market correction. While Elon Musk’s recent tweets were a catalyst, the environmental concerns surrounding crypto-currency energy consumption has also come to the fore, he said. Adding that these developments were further triggered by the announcement by Chinese regulators, which added to panic and fear in the markets leading to a sell-off.
According to the Cambridge University’s Bitcoin Electricity Consumption Index, Bitcoin consumes around 130 TerraWatt Hours (TWh) per year, which is more than what Argentina and Ukraine consume in a year and lower than the amount of energy consumed by Sweden and Malaysia. Bitcoin electricity consumption has more than doubled to 134.89 TWh as of May 19, 2021, from 63 TWh a year ago.
What does Elon Musk have to do with the sell-off?
A week ago Musk tweeted saying that while he strongly believes in cryptos, it can’t be driven by “a massive increase in fossil fuel use, especially coal.” A day later, Musk tweeted that Tesla had suspended accepting Bitcoins as a payment instrument, due to its high energy costs and reliance on fossil fuels. Within a few minutes of the tweet, Bitcoins’ price fell by 5%.
Then on Sunday, many speculated that Tesla may have sold parts of its Bitcoin holdings based on a Twitter exchange that Musk was a part of . In February, the electric vehicle manufacturer had purchased $1.5 billion worth of Bitcoins. By Monday, Musk attempted to address the speculation tweeting that Tesla had not sold any of its Bitcoin holdings. However, according to CNBC, Tesla sold some of its Bitcoin holdings during the last financial quarter leading to a net gain of $101 million.
Given that Musk is an avid crypto-currency supporter, investors watch and listen to his every word very carefully. Sometimes, too carefully. Perhaps even reading into his tweets more than what he intended to say.
Indian crypto-exchanges face network issues
As global exchanges like Binance and Coinbase witnessed a large sell-off in Bitcoins and other major crypto-currencies, their networks became congested. Indian investors too began selling their holdings leading to server pressure on domestic crypto-exchanges. Due to the network issues, many investors took to social media to air their grievances stating that orders could not be fulfilled, trades were stuck, funds could not be withdrawn and parts of the exchanges’ platform could not be accessed.
WazirX witnessed 400% more traffic over the last few days, than it did in previous months, and its tech team had to work throughout Wednesday evening to bring its servers back online.
📢 Reports of delays in app
We’ve received reports that you’re facing delays in trading, viewing order book and trade history on WazirX app and website.
We’re investigating the issue and working on a fix. We’ll update you as soon as it’s done.
Thank you for your support! 🙏
— WazirX: Bitcoin & Cryptocurrency Exchange in India (@WazirXIndia) May 19, 2021
Nischal Shetty, co-founder and CEO of WazirX told CNBC TV-18 that on the one hand there is general panic selling in the Indian crypto-markets, while investors who bought cryptos in 2020 are looking to book profits right now and investors who recently bought cryptos in the last few months see the current market as a prime buying opportunity. When these three categories of users jump onto the large exchanges, it leads to unprecedented traffic and therefore, server issues, he said.
In a tweet on Thursday, Shetty said that WazirX was building a new trading engine for which the first version would go live next week.
Our team is working on it. We had announced Project Raftaar and the first version is nearing completion. This new trading engine should help in sustaining the immense load WazirX sees during peak events like last night
— Nischal (WazirX) ⚡️ (@NischalShetty) May 20, 2021
Similarly, due to high user traffic CoinDCX had to go into “maintenance downtime” on Wednesday.
Due to high user traffic we are aware some of our users like yourself might be experiencing issues related to services on our website and our Apps.
We are thankful for your patience and regret any inconvenience this may cause to you.https://t.co/W6oS8yz55v
— CoinDCX: Making Crypto Accessible to Indians (@CoinDCX) May 19, 2021
MediaNama has prepared a guide on crypto-currency regulations in India, listing the government’s position over the last few years and various policy recommendations; read it here: A complete low-down on crypto-currency regulation in India.