The Story Behind Asia’s Crypto Squeeze

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The Story Behind Asia’s Crypto Squeeze

It seems not everyone is a fan of cryptocurrencies.

South Korean police and tax officials raided several crypto trading operations in the country last week, looking for tax evaders, money launderers, and generally bad actors.

The government previously informed the crypto community that it thought its activity was little more than gambling and that it could potentially ruin citizens’ financial lives. Officials threatened to shut down cryptocurrency operations around the country, and they now seem to be following through.

This is particularly bad news for Bitcoin and its ilk because Asia, and particularly South Korea, has been one of the hottest areas for trading digital currencies over the last six months.

While this maneuver by the South Korean government might take some of the shine off Bitcoin and other cryptos temporarily, another move by the Chinese government has more bite.

The Middle Kingdom wants to shut down all coin mining in the country.

That’s going to hurt.

Trading or spending Bitcoin (which amounts to the same thing, operationally) and other cryptocurrencies requires those who keep the ledgers, the miners, to perform calculations and share their results with the world.

Over the last month, 80% of the electricity used to mine Bitcoin came from China. This makes sense, because the massive country over built electrical generation capacity as it supported construction. Electricity is cheap. There’s also a lot of land available outside of city centers, and you practically trip over computer components at shipping hubs.

As this group goes dark, other miners around the world will have to pick up the slack. But it’s not clear that there’s enough capacity to do so without significant disruptions along the way.

A couple of facts not widely discussed about cryptocurrencies are that transactions take time to verify, and come with fees paid to miners. As I wrote this, a Bitcoin transaction took eight minutes to verify and charged a median fee of $ 16.75. As the number of miners drops off, both of those numbers could jump dramatically.

The upheavals in South Korea and China weighed on the cryptos, helping drive Bitcoin below $ 14,000 and it’s since tumbled lower. But we have to keep in mind that the digital currency, as of this morning, was still trading near $ 10,000!

That’s pretty amazing for something you can’t touch that has no intrinsic value and no backing. As more countries take a harder look at these digital assets, expect more regulations and bans to follow.

It could be that Bitcoin and its brethren overcome the hurdles and trade higher… or they could collapse under the weight of heightened scrutiny, taking a lot of recent investors down with them.

At this point, there’s still no reason to put in more money than you’re willing to lose, since this use of “fun” money might quickly become no fun at all.

Rodney Johnson

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Rodney Johnson

Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs and is featured on television where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He too is a regular guest on Fox Business’s “America’s Nightly Scorecard.” Rodney’s brand new book, Irrational Economics (2014), explains the forces that you cannot see but that really drive the economy and markets and can cause your wealth to rise or fall. To survive and prosper, you need the new money rules of the 21st century, which he outlines in this book. He holds degrees from Georgetown University and Southern Methodist University.