Today, November 28, 2017, bitcoin hit $10,000 for the first time. I feel I can hear collective cheers all around the world, except, maybe, in China.
Yeah, at this particular moment, it is all mum in China bitcoin-wise. However, only a few months ago, China dominated the bitcoin stage in trading volumes, China had the largest exchanges. Currently Chinese mining pools still control more than 70% of the bitcoin network’s hashrate.
It probably started with the LuShan earthquake.
The LuShan earthquake
In 2013, LuShan county in the south west of China province was hit by a 6.6-magnitude earth quake. Chinese citizens were wise and quick to call for donations. One form of donation is bitcoin.
The Director of a Chinese charity One Foundation (壹基金) created an address to accept bitcoin donations. On the second day following the quake they had already received 50 bitcoins.
It is the first time in China that any charity has offered to receive donations in bitcoin. It is probably also the first time some of the early Chinese bitcoin adopters have ever caught a glimpse of bitcoin (Disclosure: I did not pay any attention to bitcoin until August 2017, when somehow the collective bitcoin shouts and murmurs suddenly broke into my consciousness).
Luckily for bitcoin then, the Chinese government viewed this in a favorable light. The bitcoin donation moment was amplified on state media. This by most accounts directly attributed to the ensuing explosion of interest in China. Google trend attested to this as well.
Digital Currencies in China Before bitcoin
China is no stranger to digital currencies or virtual coins long before the birth of bitcoin. In 2000, Chinese tech giant Tecent launched Q-coins, initially using it for within-game purchases, then it expanded and started being accepted by online and offline retailers for real goods. Eventually an estimated 100 million Chinese customers were using Q-coins and at it’s height it accounted for 13% of China’s cash economy (see here and here).
Surely, Chinese government stepped in. In 2009, Chinese ordered Tecent to reel in Q-coins and declared purchase of real-world goods using Q-coins illegal.
Then there comes bitcoin.
Chinese Bitcoin Boom in 2013
2013 is an eventful year for bitcoin.
In April 2013, Cyprus announces a ‘bail-in’ for its banks, meaning portions of people’s accounts will be seized to pay off debts. Bitcoin soars in response.
On May 15, 2013, the US Department of Homeland Security (DHS) issued a warrant to seize money from Mt. Gox’s U.S. subsidiary’s account. (Mt. Gox collapsed in 2014). In October, FBI shut down silkroad (the first modern darknet market, best known as a platform for selling illegal drugs.)
In the mean time, bitcoin was growing red hot in China.
Chinese CCTV have had a few more feature reports of bitcoin, which did not escaped the all-seeing eyes of redditors; Baidu (Chinese search engine in place of Google) began accepting Bitcoin; Before long, Alibaba’s Taobao followed suit; BTC China, the leading Bitcoin exchange in China, replaced Mt Gox to become the biggest exchange in terms of global trading volume for Bitcoin.
The year of 2013, the staggering demand of bitcoin from China has pushed bitcoin price to a high of $1200.
Then it crashed.
On December 5th, the People’s Bank of China and four other ministries and agencies announced that banks and payment companies were prohibited from dealing with the coin, but that the country’s citizens are still free to buy and sell it.
The value of bitcoins on Chinese exchanges fell by 20%. Baidu stopped accepting bitcoin the next day.
2014 to 2016
2014, globally, bitcoin had received acceptances from big names such as Microsoft and Dell, price-wise bitcoin continued on a downward trend. Following the collapse of Mt. Gox, and the prices dropped by 67% in 2014, from $951.39 to $309.87.
In China, bitcoin craze seemed to have cooled down on the surface. However, Chinese exchanges continued to grow. BTC-China hacked a way for customers continue to buy bitcoin using some voucher system, in the meantime, two other Chinese exchanges, Huobi and OKCoin are letting users wire money directly into exchange bank accounts. Huobi also had grown its market share by not charging transaction fees.
At the end of 2014, 80% of bitcoin exchange volume is driven by the Chinese yuan.
2015 to 2016
2015 is the year of blockchain technology. Major financial institutions, banks and technology firms have ventured into the realm of blockchain technologies. Even some of the notorious bitcoin critics and skeptics, such as J.P.Morgan.
J.P.Morgan had issued its private blockchain Quorum. Nations like Russia and India who had been wary of cryptocurrencies are also join in the chain adventures.
China continued to dominated bitcoin market.
Throughout 2015 to 2016, relatively lax Chinese regulation and high demand drove bitcoin to new highs. In 2016, bitcoin rallied 120% to $952, threatening to break the $1,000 mark for the first time since 2013.
The boom of bitcoin (and later ethereum) also brought out a plethora of ICOs (Initial Coin Offerings) in China. In the first half of 2017, China-based ICOs raised about $400 million through 65 offerings with more than 100,000 investors, according to a report from the National Internet Finance Association of China.
The China Bitcoin ban
On Sept. 4th 2017, the Chinese central bank declared ICOs to be illegal; on Sept. 15 2017, all bitcoin exchanges are ordered to stop trading and block new registrations.
We all know the rest. The bitcoin market plummeted. However, soon rebound. Today (November 28th, 2017) bitcoin price reached 10,000 and continues its climb upward. In the meantime, Japan has taken over the first place in trading volumes.
Looking back … through the booms and busts
Looking back, it is surprising- almost an irony -that bitcoin took hold in China. It had been largely known that China dominated bitcoin market and drove its upward movement.
After all, bitcoin is created as a stateless currency that is not subjected to the control of any central government or big institutions such as banks. It is born out of 2008 financial crisis, a vote of no confidence in government, fiat money and banking system.
How on earth did it flourish in China, the very country where information along wth currencies are tightly controlled? Out of all the countries and states in the world?
Turned out that, political statement aside, bitcoin makes a terrific vehicle of speculation and Chinese has both the appetite, tolerance and money for insane speculation.
Over the last three decades, Chinese private sector grew massively, with that astounding rise in the wealth and purchasing power of Chinese citizens. This created a middle class of investors almost overnight. This middle class is a ravenous source of global consumption and investment in financial products such as stocks, bonds, alternative finance, and, yes, bitcoin.
Bitcoin’s borderless nature makes it easy for Chinese to move their money overseas. That bitcoin has barely any correlation to major asset classes and generally disconnected from the Chinese economy, which also makes bitcoin an attractive choice.
Some savvy Chinese technologists and investors also use bitcoin for arbitrage (buying bitcoins at a low on an exchange and selling it high at another exchange). The prices of Bitcoin vary on various exchanges, due to various factors (different geographic locations, political environment, size of the exchanges).
There are a class of Chinese also makes great profit from bitcoin mining.
Bitcoin mining in China
Other than trading, bitcoin production and processing (called mining) is the other side of bitcoin. Many people compare bitcoin to digital gold and China is literally sitting on the largest digital gold mines.
There are a few reasons for this concentration:
- Laws of supply and demand; The bitcoin boom attracts more and more miners and resources;
- China is biggest manufacturer of bitcoin mining products (mainly, ASICs - computer chips that are specially designed for the task of computing bitcoin hashing algorithm). Ironically, when Santoshi NaKamoto first created bitcoin, he was envisioning a perfectly decentralized system where normal user can mine bitcoin using normal cpu. However, the ever increasing difficulty and competition in bitcoin mining drove the industry more and more toward centralization. The biggest ASICs supplier in the world is Bitmain. Bitmain also operates the biggest bitcoin mining facility in Ordos of Inner Mongolia. Jihan Wu, the CEO of Bitmain, claims that 70 percent of the Bitcoin mining rigs in operation today were made by his company.
- Cheap electricity. China has a large and cheap supply of hydroelectric power. Cheap electricity, together with relative low labor cost, give Chinese miners big advantages.
- Leading mining pools. China is home to four of the five largest Bitcoin mining pools over the past year. As of the 29th of March, 2017, the distribution of hashrate was as follows:
What is in the future ….?
So China in a hiatus, looking on to a exuberant bitcoin world which it once utterly dominated. Will it come back? I would say yes. With the largest mining power, China still has a upper hand.