Friday, November 22, 2013, 08:01
Asia Weekly: China leading the bitcoin charge

Asia Weekly: China leading the bitcoin charge
Housewife investors at a securities exchange in Shanghai. A Chinese television program on bitcoin in May stoked the interest of Chinese investors who have been credited with the leap in value of the digital currency. Thirty percent of the global total of bitcoin “wallets” was sold in China during this month alone. (AFP)

Enthusiasm for the digital currency means that the country could hold the key to its future

For about a week leading up to Oct 26, depositors in China’s Global Bond Limited (GBL) had been having problems accessing their accounts.

The reason became clear that day, when some 500 bitcoin investors that still had money with GBL were unceremoniously kicked out of the company’s QQ group, a social media platform.

GBL went blank, vanishing into thin air along with about 25 million yuan ($4.1 million) of investor money. It may be the largest bitcoin scam since the virtual currency came into existence about four years ago.

There was much about GBL that should have raised red flags. The company was registered in Hong Kong, although its servers — if it had any — may have been in Beijing. The company address on the website was fake.

Investors screamed and threw accusations around but there has been little that they could actually do, at least not in terms of bitcoin.

But that particular scam has done little to deter others from investing in bitcoin. On the contrary, thanks to the sheer size of the market, China is playing a critical role in the evolution of the cryptocurrency.

Since May, when CCTV aired a documentary on the obscure but freely tradable bitcoin, Chinese buyers have taken to it in huge numbers — huge at least relative to the still-small size of the global bitcoin market.

Most bitcoiners attribute the recent and very rapid rise in the value of a single bitcoin to rising demand in China. In May alone, there were 84,000 “wallet” downloads in China, about 30 percent of the global total for the month. The wallet, in this case, being the software used to store and keep track of bitcoin.

“China has the potential of making or breaking bitcoin,” says Zennon Kapron, head of Kapronasia, a market intelligence firm that has worked on the rise of bitcoin in China.

Kapron says part of the appeal is the opportunity to invest in something other than stocks or real estate and, perhaps, as a gateway for the renminbi.

“Bitcoin allows for the rapid movement of renminbi out of the country,” Kapron says.

For the time being, bitcoin in China remains useful to move capital within the country or across borders, to invest or to speculate. Despite the publicity, there are still very limited opportunities to use it as a medium of exchange.

There have been reports of The Garage Café in Zhongguancun, near Beijing University, accepting bitcoin. Café Bar 2nd Place in Wudaokou regularly accepts bitcoin as payment. The venue, owned by a Japanese businessman, has become a regular hangout for bitcoiners.

At least one property firm, the real estate arm of IT giant Shanda Group, launched its first real estate project on Oct 25 and said it would accept bitcoin in payment — but locked the rate at 1,000 yuan per bitcoin, giving itself the option of raising the rate as it saw fit. It will probably have to, given that the current price is several times that.

By last count, there were 17 different exchanges, the largest of which is BTC China, which found itself on the receiving end of $5 million in venture capital recently. In early November, BTC China became the largest exchange in the world, surpassing Tokyo-based Mt.Gox. BTC was the first exchange to convert bitcoin for yuan.

BTC was founded in June 2011 by three investors: Bobby Lee, Linke Yang and Xiaoyu Huang. Long a shoestring operation, BTC China last week closed a $5 million round of fundraising from institutional investors Lightspeed China Partners and Lightspeed Venture Partners.

In the seven days to Nov 20, BTC China traded 476,193 bitcoins, making it the busiest exchange in the world with a market share of about 31.7 percent. The second largest, the multicurrency and international exchange Mt.Gox, accounted for trades of 397,387 bitcoins, a market share of 26.53 percent.

BTC’s CEO Bobby Lee credited “the people in China, for having recognized the importance and value of bitcoin”.

Bitcoinity.org, which tracks bitcoin related statistics, says China accounts for about half of the daily global turnover of bitcoin. Just a few months ago, bitcoin was virtually non-existent in the country. Investors in China are still buying and driving up the price.

As of Nov 18, the value of a single bitcoin on the largest exchange in China had hit a high of 6,989 yuan, more than $1,000. Perhaps underscoring the volatility, the low on the same day was 3,799 yuan.

For the time being, the path ahead for bitcoin appears to be clear.

Kapron says none of the bitcoin-related sites appear to be blocked and regulators have not taken any significant steps to curb its use.

The success of BTC and the growing popularity of bitcoin in China should not be much of a surprise. Chinese people are not strangers to digital currencies. Gamers, in particular, are famous for trading in whatever currency is available through popular multiplayer online games.

About five years ago, Tencent, a Chinese Internet company best known for its QQ instant messaging software and a raft of online games, developed Q Coins to buy virtual goods. The virtual currency rapidly gained in popularity to the point that people were using it to trade among themselves. China passed a law that virtually eliminated such currencies.

But clamping down on the Q Coin was relatively easy. The currency was operated and centralized in a single company with a raft of physical assets that the regulators could easily tap into. This is not the case with bitcoin, which by its very nature is completely decentralized.

So far, the government has kept out of the whole bitcoin business. During a conference in Singapore on Nov 15, many participants suggested that the CCTV documentary on bitcoin earlier this year was something of a tacit endorsement of the cryptocurrency.

Others say the Chinese government believes bitcoin could, in time, challenge the domination of the US dollar.

“China hasn’t really taken a position on bitcoin and the reason they haven’t is because they see it as a hedging tool in the currency wars,” says Steve Beauregard, a US entrepreneur.

Like most others, however, he had little more than speculation.

For the time being, the percentage of the population in China aware of bitcoin is very small, so regulators have by and large stayed out of it. But eventually they will have to step in and deal with the fact that bitcoin is relatively opaque as a conduit for hard currency.

In the end, the regulators may dictate the fate of the market and the market may, in turn, dictate the fate of bitcoin.

“China is 1.4 billion consumers that will move in one direction, basically whichever way the regulators go,” Kapron predicts.


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