There was blood on the crypto market streets on Wednesday after a Reuters publication suggested that China was intensifying its crackdown on cryptocurrencies through an extended ban. The news triggered intense panic selling that wiped out 25% of the entire market cap.

Unfortunately, the Reuters article may have stretched the seriousness of the situation and seems to have been structured in a manner that would cause fear, uncertainty, and doubt in the market, a recipe that favors bearishness. The publication implied that China was expanding its crypto ban by banning corporates and financial institutions from being involved in crypto transactions.

What really happened?

The China Payment and Clearing Association, China Banking Association, and China Internet Finance Association collectively released a statement warning people about the risks of cryptocurrency trading. It also reiterated that banks and financial institutions would not offer any services related to cryptocurrencies.

The statement noted that institutions that are members of the financial and payments industry in China would not offer cryptocurrency-related services, such as crypto settlements or lending. They will also not accept cryptocurrencies as payments or facilitate the exchange of cryptocurrencies for the Renminbi or vice versa.  The statement also warned traders about the speculative risks associated with cryptocurrency trading, adding that it is disruptive to the economy and puts people’s wealth at risk.

The Reuters publication suggested that China’s new crypto crackdown appeared to be an extension of the 2018 and 2019 ban on cryptocurrency-related activities such as mining and ICOs. In reality, there is no ongoing ban. The statement released by the Chinese financial authorities did not highlight any ban but instead revealed that the payments and financial industry’s decision not to facilitate cryptocurrency-related activities.

It also means China’s citizens are still free to engage in cryptocurrency trading, and no crackdown is ongoing. The only problem is that it will become much more challenging to spend crypto in China now that local financial institutions have distanced themselves from being involved with cryptocurrencies in any way.

FUD was the real reason for the massive sell-off on Wednesday

It is now clear that there is no recent Chinese regulatory development that threatens the existence or success of cryptocurrencies. This week’s bearish trend highlights how fear, uncertainty, and doubt can quickly erode previous gains and facilitate a negative feedback loop that can be detrimental to prices. Unfortunately, it would have likely been triggered by something else if not for the Reuters article because the previous gains over the last two months meant people expected a market crash to happen any time soon.

Whenever there are strong gains, a market correction will inevitably take place. It might be a nightmare for hodlers, but such a situation presents opportunities for retail traders to buy low and sell high, thus facilitating a market correction when the price has been on a strong downtrend. This is equivalent to the swift recovery on Thursday, where cryptocurrency prices bounced back. That recovery might be slowed down by U.S President Joe Biden’s recent announcement plans to implement strict crypto reporting measures aimed at curbing tax evasion. Biden’s administration also wants crypto transactions worth more than $10,000 reported to the IRS.

The market’s sensitivity to cryptocurrency-related news almost certainly means that Biden’s announcement might trigger some further sell-offs or at least briefly hold back the bulls.

The latest cryptocurrency market crash highlights the dangers of FUD due to unfavorable news regardless of whether it is true or not, or even fresh news for that matter. It demonstrates the highly volatile or sensitive nature of the market, the interesting psychology of the market, as well as the ease of market manipulation.