With Bitcoin (BTC +0.34%) looking as if it's regaining momentum, there's reason to believe there's a new tailwind helping it along, as well as potential catalysts on the horizon.
Let's take a look at both of those factors because they're both related to China and its Bitcoin policies.
CRYPTO: BTC
Key Data Points
China is going to become a big story
Despite it being illegal to mine and trade Bitcoin in China since 2021, 21.1% of the world's Bitcoin is produced in the country. That means whatever Bitcoin-related policies China pursues are going to have a big impact on the coin's price, as well as on its prominence in the future. And there's reason to believe that the country's position on the coin is slowly changing in a way that's favorable for holders.
In February, China's Supreme Court met with other judges and legal experts to evaluate the legal status of cryptocurrencies as well as potential regulatory frameworks for the sector. Broad legalization didn't happen as a result of that meeting, but it's an important step forward because it shows that the current laws are not set in stone.
One factor spurring the potential change in the country's policies is its hoard of Bitcoin seized from enforcement actions, which by some estimates is as large as $16 billion to $19 billion, making China the world's second-largest holder after the U.S. One possibility being discussed is stockpiling those assets in a strategic reserve, similar to the U.S.'s as-yet unimplemented policy. That would spur upward price pressure on the coin and represent a major new catalyst, but it isn't the only upside that could result from shifting regulations.
Regardless of what the government says, Chinese citizens are buying Bitcoin over the counter from crypto banking services based in Hong Kong, where regulations differ somewhat from those of the mainland. Assessing the total volume of these transfers is difficult. Nonetheless, given the number of these services that exist, and the country's large population, it is probable that there is enough purchasing activity going on to be a modest tailwind for the coin's price; legalization would probably boost the effect significantly.
China's economic policies are also changing. Domestic consumption and investment is being encouraged through stimulation of financial markets. More money going into people's pockets means that people will have more disposable income to invest. Some of that additional capital will doubtlessly flow into Bitcoin, which is a new tailwind that wasn't in play before the last few months.
Maintain your strategy for now
China's new consumption-promoting policies aren't a reason to buy Bitcoin on their own, even if they are likely to support the coin's price. Similarly, the prospects of cryptocurrency legalization aren't guaranteed, and if it does occur, it might not be soon even given the recent motions that make it look more probable. So don't put your life savings into Bitcoin right now as a result of this new information.
Instead, consider that the conditions are riper than ever to dollar-cost average (DCA) into a larger position than you held previously. It's reasonable to increase your allocation to the coin slightly in anticipation of the additional purchasing activity from Chinese citizens with a bit more money on hand. But there isn't much point in doing any of this if you aren't willing to hold onto your coins for at least the next five years or so.
On that timescale, realizing big catalysts like crypto legalization is more likely. Plus, core factors driving Bitcoin's price, like its ever-slowing supply growth, will have more time to play out in your favor during that period. Finally, keep an eye on policy updates in China. Major policy changes might be foreshadowed by smaller ones, and if you detect those signs, it will be worth loading up on more coins.
