How Extreme Sanctions on Cryptocurrencies are Ironically Fueling Altcoin Price Rallies
As more people embrace digital currencies, authorities in several jurisdictions have ramped up restrictions on their usage. The legal status of Bitcoin (BTC) and other cryptocurrencies varies from country to country. Crypto usage is not strictly illegal in most countries; its status as a medium of exchange and a store of value varies with different regulatory implications.
Countries With Sanctions Against Cryptocurrencies
Some governments have placed limitations on how crypto is used. In countries like Nigeria, financial institutions may be penalized if they allow customers to conduct crypto transactions in their banking halls or online platforms.
More authoritarian regimes outrightly forbid any crypto use within their borders. These countries have put in place heavy penalties for anyone caught contravening crypto-related laws.
Algeria, for instance, passed a law in 2018 that made it illegal to hold, trade, or use crypto. Bolivia also has a total crypto ban stemming from a 2014 Central Bank resolution that outlawed the use of any form of currency not regulated by a country or an economic bloc.
On the other hand, India has shown growing hostility towards crypto in the last year. In November 2021, the Indian government made public its intention to bring a bill to parliament that, if passed, would establish a central bank digital currency (CBDC) and, at the same time, ban all other cryptocurrencies in India.
At one time, the Indian government contemplated criminalizing the owning, issuing, transferring, trading, or mining of crypto.
However, China's stance on crypto has made the most headlines. Throughout 2021, Chinese authorities increasingly cracked down on all forms of crypto assets, crypto mining, and crypto exchanges.
There is a suspicion that China's actions against its crypto industry are motivated mainly by the desire to float its own government-sanctioned and government-controlled digital currency. Indeed, China's primary fiduciary authority, the People's Bank of China (PBoC), plans to fully introduce the digital renminbi, or e-CNY, by the time the 2022 Winter Olympics come around.
Interdependence Between Bitcoin and Altcoins
These extreme sanctions on crypto may have caused significant dips in the market, especially after China kicked out all BTC miners from the country. Still, some stablecoins have surprisingly rallied even against a backdrop of stultifying sanctions.
Why is this so? The most likely reason for altcoin prices rallying in the face of extreme sanctions is probably the existing interdependencies between BTC and altcoins. Crypto market analysts postulate that the prices of altcoins are often driven by BTC price development.
BTC price development affects altcoins in two main ways. Firstly, Bitcoin enjoys about 80% of the crypto market share and is often the preferred medium of exchange. This market dominance also makes BTC the digital asset of choice for crypto investors. Secondly, BTC is the most used crypto in altcoin transactions. Even when buying coins like Ripple (XRP), Dogecoin (DOGE), Litecoin (LTC), or Dash (DASH), people will still use Bitcoin.
So how do these factors lead to altcoin price rallies even in the face of sanctions? Simple, because of Bitcoin's dominance of the crypto market, sanctions are usually leveled explicitly against it.
These sanctions then result in significant Bitcoin price dips. And since serious crypto investors will more often than not have diversified investments that include bitcoin and a few significant altcoins, a reduction in the value of BTC will see them buy more altcoins to prop up their portfolios. A run on altcoins then means that their prices will significantly increase in the short term while BTC suffers a dip.
Competition Among Altcoins
Good old competition could be another reason for the unlikely price rallies among altcoins, even under extreme sanctions. At the time of writing, slightly more than ten thousand altcoins were listed on CoinMarketCap, the world's most referenced price tracking platform for digital assets.
This veritable smorgasbord of altcoins represents a near-endless array of investment alternatives. Therefore, if some sanctions affect one or more coins, investors may opt for more attractive options from the long list of available tokens. This will then see the prices of the altcoins considered to be better investments rally dramatically in the short term.
Compliance With Regulations and Legal Requirements
While China's sanctions against crypto were all-encompassing, other jurisdictions have demanded that digital assets fulfill certain requirements to comply with the law to be allowed to function. For example, India's punitive cryptocurrency bill was slightly watered down when legislators met with representatives from the country's crypto industry.
As a result, the bill that would have criminalized all crypto activities in India will instead regulate and monitor the space. Therefore, altcoins meeting the set legal thresholds will likely see their prices rally, while those unable to beat the sanctions will most likely suffer massive dips.
Final Thoughts
More countries worldwide are choosing the route of regulations instead of blanket sanctions when it comes to crypto. Ironically, Russia, which had been at the forefront of the crypto ban, has reverted to using cryptocurrencies to subvert sanctions and embargoes placed on it by the United States and its European allies.
Funnily enough, Russia's enforced embrace of crypto was one of the reasons why BTC and several major altcoins registered significant price increases at one point. Hopefully, a realization of the potential importance of crypto will lead to a relaxation of the sanctions placed against them.