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What is the value of a currency that cannot be traded or spent? Beijing has placed its most extreme ban yet on crypto transactions. It is a far cry from the days when China generated the world’s largest crypto trading volumes — and the biggest supply of bitcoins.
Cryptocurrency exchanges and other services providers were already technically banned. A loophole allowed locals to trade via offshore accounts. Chinese cryptocurrency exchanges went overseas to carry on trading — Huobi, for example, moved to the Seychelles.
China has now banned crypto transactions regardless of where exchanges and accounts are based. Regulators are set to enforce the prohibition, which includes crypto mining, with the full support of the Supreme Court, police and central bank. Binance and Huobi, the world’s largest exchanges, have halted registrations of mainland China users. Huobi will close down existing mainland user accounts this year.
The outlook for Huobi is bleak. It relies on its Chinese customer base for a large slice of profits. Sales more than doubled in the six months to March and gross margins almost tripled to more than 50 per cent. Businesses trading blockchain-based assets and their ilk accounted for about 40 per cent of the group total. Other divisions, such as technology solutions and software, also boast fat margins. But they depend on cryptocurrency trading too, offering platform technologies, data centres and cloud services tailored to investors in virtual assets.
As bitcoin prices soared, Huobi’s Hong Kong-listed shares rose more than seven-fold in the year leading up to their April peak. Even after sharp declines following Beijing’s previous crackdowns on cryptocurrencies, the stock stands at more than double last year’s levels and trade at a steep 83 times forward earnings. That is more than double the valuation of peers such as US-based Coinbase, which has lower risks.
A fall in the number of Chinese investors will remove an important source of liquidity for trading in cryptos. Burgeoning demand elsewhere could soon make up for that. But China-focused Huobi cannot expect to offset fully its client losses.
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