Crypto Crumbles. What China’s Ban Means for Digital Currencies.

The ban applies to all digital tokens, which China said are not legal and cannot be used as a currency in the market. Online crypto services to Chinese residents provided by overseas virtual currency exchanges are also considered illegal financial activity. The ban applies to crypto derivatives trading, too.

The move sent crypto markets down an average of 5% Friday, according to Coinmarketcap.com.

Bitcoin, the world’s largest crypto with a $775 billion market cap, fell 4% to $42,400 after briefly dipping below $41,000. Ethereum sank 7% to $2,900, and legions of smaller tokens were down at least 5%, including Cardano, Ripple, Binance Coin, and Solana.

Crypto-related stocks followed Bitcoin lower on Friday. Bitcoin mining company Marathon Digital (ticker: MARA) was down 5.6%, Riot Blockchain (RIOT) was off 6.4%, and the Bitwise Crypto Industry Innovators fund (BITQ) was down 4.3%.

Crypto exchange Coinbase Global (COIN) was also lower, sliding 2.4% to $232. The stock is highly correlated to Bitcoin and would be negatively impacted if the ban plays out, Piper Sandler analyst Richard Repetto wrote Friday.

Crypto markets have been skittish for weeks on tougher regulatory talk in Washington, including commentary from Securities and Exchange Commission chair Gary Gensler. The Treasury Department is developing a framework for regulating stablecoins, including potentially classifying them as securities, which would require registration with the SEC.

Bitcoin is now well below its 50-day moving average of $46,500 and breached technical support levels around $41,900. Its next support level is $38,777, according to technical strategist Michael Boutros of Dailyfx.com.

The latest downturn is another bearish signal, he said, adding the market is now in a correction phase with room for a deeper pullback. If prices keep sliding and settle below $38,777, it would be a complete washout, he adds, pegging the next support level at $32,000.

Boutros still views the long-term trend in Bitcoin prices as higher and says he would be buying in the $38,900 range. But the near-term path of least resistance appears to be lower from a technical standpoint.

Technical indicators are only one factor to consider, moreover. Cryptos have become increasingly vulnerable to global capital flows as institutional traders and firms enter the market. They sold off on fears of a credit crisis related to the Chinese property developer China Evergrande. And it’s hardly positive if the world’s second-largest economy shuts down for crypto mining, trading, and transactions.

China is developing its own digital currency, now in a pilot program, with plans to roll it out more extensively next year. The ban on crypto appears designed to build support for the official digital currency while signaling to Chinese residents that financial transactions must be traceable and won’t be tolerated on decentralized blockchains.

China has threatened to crack down crypto before and hasn’t followed through, according to analyst George Monaghan of GlobalData, a financial data and research firm based in London. The next few weeks will be rough for crypto markets that were already edgy due to a tougher regulatory posture at the SEC, he said.

Write to Daren Fonda at daren.fondabarrons.com and Joe Woelfel at joseph.woelfelbarrons.com