By all metrics and accounts, bitcoin’s popularity is exploding across the People’s Republic of China. It now boasts the world’s most active bitcoin exchange, BTC China, the greatest number of bitcoin mining nodes, the highest number of bitcoin wallet downloads, and set the record for the highest price ever paid for a bitcoin (7,000 yuan or approximately $1,120 on November 19) while trading at just $900 on Mt. Gox. A map of global bitcoin trading activity further illustrates China’s dominance.
Bitcoin bulls are eager to see the currency spread and gain broader global adoption, and thus may not view this as a problem. But for a currency touted for its independence from government interference, the growing concentration of Chinese influence over this crypto-currency wealth creates a single point of failure for the system. The same would be true if you replaced China with any other country (assuming it could generate similar trading volumes), but the fact that it is the notoriously unpredictable China doesn’t inspire confidence.
The rapid rise in popularity has attracted both investors and fraudsters. In late October, Lightspeed China (an international arm of Lightspeed Venture Partners) made a $5 million investment into BTC China, adding legitimacy to the already formidable company. Around the same time, GBL a supposed Hong Kong-based bitcoin exchange that was actually based in Beijing, shut down unexpectedly, taking $4.1 million worth of client deposits along with it. Despite red flags in the run-up to this disappearance, the bitcoin market barely noticed, either in China or elsewhere.
A number of possible explanations exist for bitcoin’s popularity in China, each of which raises its own red flag. One factor is that BTC China, the world’s largest bitcoin exchange and one that trades only in yuan (aka CNY or Renminbi), currently offers no-fee trading – a rarity among major global exchanges. Users pay nominal exchange entry and exit fees – 0.5 percent when using Chinese PayPal equivalent Tenpay and 1 percent by bank transfer.
But beyond fee advantages, China’s bitcoin obsession primarily traces back to two central factors: the difficulty of getting wealth out of China, and the fact that Beijing does not allow the yuan’s value to float freely. Should either of these change, bitcoin’s value could plummet.
Today, many wealthy Chinese who want to invest in international assets or send their children to school abroad are turning to bitcoin to move money across borders with greater freedom. The same can be said of Chinese looking for a hedge against the artificially stable yuan, which is widely considered to be overvalued. Should China eventually decide to float its currency, much of its purchasing power could evaporate overnight. Therefore, Chinese bitcoin adoption is less a vote of confidence in an alternative digital currency and more a vote of no confidence in the yuan, as evidenced by the premium – often as much as 20 percent – that Chinese must pay to purchase bitcoin with yuan.
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