What happened
Popular cryptocurrency Bitcoin (BTC 0.14%) continued its slide on Tuesday as a consequence of China's crypto crackdown. Around 10 a.m. EDT, the price of Bitcoin had fallen below $30,000, according to CoinDesk -- its lowest price per coin since January. Naturally, funds that directly hold bitcoins like Grayscale Bitcoin Trust (GBTC 1.70%) had also fallen this morning. Grayscale Bitcoin Trust was down as much as 13% earlier in the session.
Some investors practice a strategy involving charts and patterns called technical analysis. While technical analysis tends to be more short-term oriented rather than the long-term investing mentality my colleagues and I advocate for at The Motley Fool, it's worth noting that these traders believed support for Bitcoin would be tested around $30,000. Apparently it indeed found support there. Since dipping just below the $30,000 level, the price of Bitcoin and consequently Grayscale Bitcoin Trust has surged. As of 12:30 p.m. EDT, both have bounced back about 10% from today's lows.
Since much of the current uncertainty with Bitcoin involves China, it's not surprising to see the sell-off continue for Chinese cryptocurrency stocks. As of this writing, SOS Limited (SOS 5.03%) stock was down 4%, Canaan (CAN +0.83%) was down 4%, Ebang International Holdings (EBON 1.57%) was down 9%, and BIT Mining Limited (BTCM +3.52%) was down 9% as well.
Image source: Getty Images.
So what
As I wrote yesterday, reports out of China indicate that over 90% of Bitcoin mining operations in the country have been shut down in recent weeks. The government doesn't want its people mining cryptocurrencies and has provided power companies with lists of companies to cut power to. Considering a significant portion of the mining power for Bitcoin comes from China, this has sparked a sell-off as cryptocurrency investors grapple with the uncertainty.
However, it's important to note that China isn't alone in wanting more regulation over Bitcoin. Perhaps China's crackdown is an extreme case, but even officials in the U.S. want to control cryptocurrencies more. Specifically, President Joe Biden nominee Brian Nelson had a nomination hearing today for a position in the Department of the Treasury. In it, Nelson said he'd be pushing for new rules when it comes to cryptocurrency to prevent money laundering.
While it's true many countries are considering new cryptocurrency regulations, it's fair to say what's happening in China is the most pressing issue for Bitcoin right now. In response to the rapid changes, Chinese cryptocurrency companies have rushed to reassure shareholders. For example, on May 28, Ebang management put out a press release entitled "Crackdown on Bitcoin mining has no direct or immediate impact on the company."
In Ebang's case, it can still sell its hardware to mining companies outside of China, even though over 99% of its customers in 2020 were located inside of China. The same is true of Canaan. For example, the company recently announced that it had sold almost 12,000 mining machines to Mohawk Infrastructure Group, which operates in the U.S. and Australia. Therefore, it's plausible that Ebang could continue doing business with the same Chinese companies as they move operations out of China.
To be clear, this is what some Bitcoin miners in China are trying to do. Yesterday, SOS announced a joint venture with Niagara Development in Wisconsin as it shifts its Bitcoin mining ambitions out of China. In the press release, chairman Yandai Wang said, "we remain optimistic about our strategic expansion in North America." Similarly, BIT Mining announced yesterday that, although the power was shut off to its Bitcoin mining subsidiary in China on Saturday, it's actively shipping hardware to Kazakhstan as it executes its "overseas deployment strategy."
Image source: Getty Images.
Now what
For cryptocurrency companies based in China, there's no denying that what's going on right now presents a real risk and it will take a lot to get up and running in another country. If I was thinking about investing in any of these stocks, I'd wait on the sidelines until they've fully transitioned. If the long-term opportunity is truly compelling, there's no harm waiting during the short term as these problems get sorted out.
However, if you believe Bitcoin will bounce back quickly, it may be worth taking a look at Grayscale Bitcoin Trust sooner than later. As of this writing, bitcoins are trading for $32,465. That puts the asset value of shares of Grayscale Bitcoin Trust at $30.56 each. For comparison, shares trade at $27.98 -- about an 8% discount. This disparity perhaps reflects investor sentiment that Bitcoin has further to fall. But if it bounces back, right now is a good entry point into Grayscale Bitcoin Trust.
