“Our currency but your problem” was how John Connally phrased it in 1971, as European finance ministers expressed concern at Washington’s decision to suspend the dollar’s convertibility into gold. As Richard Nixon’s treasury secretary Connally had pushed hard for the move, creating a new monetary order backed by nothing more than paper and the holder’s faith in the credit of individual governments.
But the premise of Bitcoin is: who needs governments? And while it may too early to say whether it also is creating a new monetary order, it’s definitely fair to deduce that many Chinese have bought into that premise.
For those still unaware of this phenomenon, Bitcoin is software code that allows users to create a personal ‘wallet’ online with which they can send or receive digital currency. The currency can be dispatched almost instantly anywhere and payments are processed at minimal or zero cost. Bitcoin is earned through a process called mining (a form of reward for updating the algorithm that helps set its value) but most people purchase it with traditional money on web platforms.
There are about 12 million Bitcoin in circulation today with the algorithm setting a cap on supply at 21 million, a limit that should be reached by 2041. But it’s China’s role in driving up Bitcoin’s value right now that is making the headlines. Turnover at BTC China, the leading sales platform in the Chinese market, already accounts for about a third of the global total and China Securities Journal says daily business on China’s top 10 platforms is generating sales of 250,000 coins worth about Rmb1.3 billion ($213 million).
Interest in China seems to have spiked after two stories on CCTV, the state broadcaster. At the moment Bitcoin isn’t much practical use as a means of payment. A few online stores on Taobao accept it and there was a flurry of publicity in October when Shanda Group said it would take it in exchange it for apartments in a new property project (Beijing Evening News says there was little evidence of anyone taking up the offer).
Potentially of far greater significance, China’s equivalent of Google – Baidu – started accepting Bitcoin as payment for its online security services last month, stirring hopes that the internet giant will accept it across its wider operations. Prices jumped immediately.
But truth be told, most of the Chinese buying Bitcoin seem to be doing so for investment purposes, rather than as a new way to pay for cars, clothes or coffee. “China has been known as a nation of savers, who are always saving for a rainy day,” Bobby Lee, chief executive at BTC China told Forbes. “Bitcoin is a digital asset, like real estate, gold, or stock. It is just one more option now. With Bitcoin hard-coded to be limited, it’s like a collectible.”
And like many collectibles with constrained supply, Bitcoin seems to have triggered a speculative craze, soaring more than 60 times in value since the beginning of the year. Much of the surge started in November, with prices on BTC China rising from Rmb1,266 per unit at the start of the month to Rmb5,888 three weeks later. As of going to press today, the price had reached a new high of Rmb7,039.
Clearly, Bitcoin barterers need rock-solid risk appetites. Analysis from the Wall Street Journal suggests that prices in dollar terms have been seven times as volatile as gold or eight times greater than the S&P 500.
Some of the trading in China has been even headier, leading to questions about whether Bitcoin should be tossed into the same basket as other cases of investor mania mentioned by WiC, including crazes for garlic, cotton and even cabbage.
New Express has also identified the influence of the get-rich-quick crowd, suggesting that “Chinese grandma” investors have been particularly active, after data suggesting that 40% of the highest-turnover customers on one trading platform are female.
But others insist that there is more to the demand than speculation. Specific to the Chinese context is the view that Bitcoin is catching on as an option for getting money out of the country, with peer-to-peer transfers offering a new way to dodge the currency controls that ring fence the Chinese economy.
Bihang, another trading platform, alludes to this on its website, the Financial Times has noted. “In 200 milliseconds you can move Bitcoin data to the United States for almost no cost,” it promises. “The world has never been this flat.”
These new horizons could be a factor in why the currency tends to be worth more in China than in other markets, changing hands at 20% premiums versus trades on similar exchanges in the United States this month.
The discrepancy also comes in for comment from Tyler Cowen, author of Marginal Revolution, a blog. Cowen agrees that Bitcoin is popular with Chinese who want to diversify their investment portfolios. But he believes that it should also be seen in a similar light to export licences that allow goods to be traded across borders. The good being shipped is the renminbi, Cowen says, leading him to speculate that Bitcoin will lose a lot of its value if more of the Chinese currency’s cross-border restrictions are lifted.
But if Bitcoin is really making it easier to spirit capital out of China, why has the coverage from the state media been largely positive? Commentary this month from Yi Gang, a vice governor at the People’s Bank of China, the central bank, also seemed to encourage traders to try their luck.
“For now we can’t recognise [the legality] of the Bitcoin”, he told attendees at a seminar. “But if you’re interested, you can go ahead and do your research. You can go ‘mining’ and you can go to one of the exchanges. But if you want to take the risk – and remember that prices rise and fall – it’s your business.”
Telling investors that Beijing is stepping back sounds counter-intuitive for a government that has tried more than most to control currency flows.
And it also sounds tolerant from regulators who have cracked down on online currencies in the past. Circulation of QQ Coins, introduced by Tencent for players of online games about 10 years ago, was brought to an abrupt end in 2009 once it started to leak into the real world, for instance. New rules stipulated that virtual currencies wouldn’t be allowed in trades for real goods and services.
(What of online gambling currencies, alert WiC readers may be wondering? Again these don’t function as ‘real’ money in China. For example, recently listed Boyaa Interactive – the operator of poker and doudizhu games that we featured in last week’s issue – uses an electronic currency, but this cannot be converted back to renminbi via the site, only won and lost from other users.)
So what’s different this time? One suggestion is that the authorities could swoop on the digital currency at any moment. “Is Bitcoin an angel or a devil?” the Securities Times asked. “It’s not clear. But one thing for sure is that we could be in the final few days of partying before it gets regulated. In other words, we are seeing the final feast.”
A more accepted explanation is that the central bank knows that Bitcoin can’t just be switched off overnight because the cryptography underpinning the currency is open source. Telling Tencent to close down its currency was easy, agrees New Oriental Morning Post, but with Bitcoin there is no ownership entity that can be pressured into shutting up shop.
A third option is that the Chinese authorities think they can have more say in how the Bitcoin world evolves. China now boasts the world’s most active exchange, the highest number of wallet downloads and this week it set the record for the highest price ever paid. It also has the greatest number of mining nodes (the online addresses that are needed to clear transactions on the Bitcoin network). Some analysts suggest that the lower cost of processing power in China might even give its mining farms an edge in generating more Bitcoin in future too.
A further possibility is that Beijing sees Bitcoin as potentially helpful in eroding the influence of the US currency. But Bitcoin isn’t in a position to decapitate the dollar quite yet. About $9 billion worth of its digital currency was circulating this week, a fraction of the $1.2 trillion in greenbacks doing the rounds globally.
Keeping track: there was a serious setback for Bitcoin fans last week when China’s dominant search engine Baidu said it would stop taking the digital currency as payment for its firewall services.
Baidu said the suspension was related to Bitcoin’s “recent fluctuations” in price but the news came shortly after China’s central bank said it was blocking financial institutions from processing transactions in the currency.
Bitcoin prices surged in November on speculative buying from Chinese investors, partly on the hope that Baidu would start accepting it as payment across its wider platform.
Prices on BTC China, a leading sales platform, slumped to Rmb4,669 a unit by December 8, down from a Rmb7,395 a week before.
Bitcoin values have since recovered some of their decline, settling at Rmb5,310 yesterday. But the belief that Beijing might treat the digital currency benignly now looks far-fetched. Instead, it plunged more than 20% in value globally after the People’s Bank of China said that the currency lacks “real meaning” and legal status. Nonetheless, the public is free to use it in internet transactions provided they take on the risk themselves, the central bank said. (Dec 13, 2013)
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