Bitcoin struggles to regain ground after plunging on China crackdown

© Reuters. A representation of the virtual cryptocurrency Bitcoin is seen in this picture illustration taken June 14, 2021. REUTERS/Edgar Su/Illustration

By Alun John, Andrew Galbraith and Tom Wilson

LONDON/HONG KONG (Reuters) -Bitcoin strained on Tuesday to climb away from a two-week low touched a day earlier when China's central bank reaffirmed a crackdown on cryptocurrencies and restricted trading channels for Chinese residents.

The world's largest cryptocurrency gave up most of its earlier gains and was last up 0.5% at $31,753. It tumbled over 10% on Monday, its largest one-day drop in over a month.

The sell-off was sparked by the People's Bank of China (PBOC) urging China's largest banks and payment firms to crack down harder on cryptocurrency trading.

Crypto exchanges were effectively pushed out of China by a 2017 rule change, but over-the-counter (OTC) platforms based overseas have sprung up to receive payment from people based in China and buying cryptocurrencies on their behalf.

"It basically says now OTC transactions are not legitimate ... we are not allowed by the banks to transfer money for cryptocurrency purchases and sales," said Bobby Lee, chief of cryptocurrency wallet app Ballet and formerly CEO of BTC China, China's first bitcoin exchange.

After Monday's PBOC statement, banks including Agricultural Bank of China (OTC:ACGBF) and Ant Group's ubiquitous payment platform Alipay said they would step up monitoring to root out crypto transactions.

Ether, the second-biggest cryptocurrency, was up a sliver at $1,980, after hitting a five-week low the day before.

Last month, three industry associations issued a similar ban on crypto-related financial services, though market players said it would be hard to enforce as banks and payment firms could struggle to identify crypto-related payments.

"We are definitely in the midst of a correction," said Anthony Wong of Hong Kong-based crypto firm Orichal Partners.

"This time China's iron-fist ban on crypto seems to be more serious than back in 2017 as the directive came straight from the top."

HASH RATE DECLINE

Beijing has ratcheted up its campaign against cryptocurrencies in recent weeks, with China's State Council, or cabinet, saying last month it would tighten restrictions on bitcoin trading and mining.

Authorities in major bitcoin mining hubs including Sichuan, Xinjiang, and Inner Mongolia have issued their own curbs with greater details on the restrictions.

As a result, the hashrate, which measures the processing power of the bitcoin network and shows how much mining is taking place, on Monday hit its lowest level since late 2020.

The mining crackdown will likely hit prices in the short-term, market players said.

"Some of the miners in China may be more willing to sell their bitcoin now versus when they are able to run their mining operations, because they have to raise cash," said Seth Melamed, of Tokyo crypto exchange Liquid.