Even after showings signs of a recovery in recent weeks, the price of two leading digital coins, Bitcoin (CRYPTO:BTC)and Ethereum (CRYPTO:ETH), have fallen almost 30% since May. Meanwhile, trading volume for all cryptocurrencies plunged more than 40% in June, and it hit year-to-date lows last month.
But be warned, even as cryptocurrencies seem to be building positive momentum again, the fundamentals still look troubling, and it could get worse in the near future. As a result, Bitcoin, Ethereum, and other cryptocurrencies all face mounting risks looking ahead.
The end of the line for cryptocurrencies in China
For years, Chinese investors had been some of the biggest drivers of the cryptocurrency bull market. This is because of stringent capital outflow controls enforced by the central government. In fact, citizens are only allowed to purchase $50,000 worth of foreign currencies every year, so shifting hard-earned money abroad through cryptocurrencies became a no-brainer.
This has inflated the value of some coins due to limited supply. For example, let’s say Chinese tech billionaire Chen wishes to transfer $48 million to the Cayman Islands via a cryptocurrency known as the send-me-now (SMN) coin. However, there are only 100 SMN coins available, so Chen must first bid up the price of each coin to $480,000 to make it a one-time transaction. One can see how the price of cryptocurrencies could go up frequently and suddenly this way.
But the Chinese government doesn’t seem to like this loophole. Recently, the ruling Communist Party barred financial institutions and corporate entities from doing business with cryptocurrency investors. In addition, provinces are beginning to outlaw cryptocurrency mining operations, citing environmental concerns (which we’ll get to later). It’s hard for any asset to rebound in price when its major buyers have been barred from the market, and the recent volatility for non-fungible tokens (NFTs) has only added fuel to the flames.
NFTs are not what they seem
The logic behind the NFT hype is simple: authentic, physical art is expensive. NFTs are authentic, digital art. Therefore, NFTs should be expensive as well (corollary: NFT coins go to the moon). Unfortunately, that is far from the case. Physical artwork isn’t just expensive, because people who buy it are connoisseurs who like drinking red wine while viewing their collections. Much of the demand in that world is also driven by tax avoidance (that is, the reduction of taxes through legal means).
The setup works like this. Let’s say a high-net-worth individual (HNWI) named Sarah purchases a $5 million piece of artwork from an auction and ships it directly to a free port — a designated economic zone where customs duties and taxes do not apply until an asset leaves the zone — to legally avoid…
Read More: Is the Cryptocurrency Bear Market Over?