Thursday, March 2, 2017

Op-Ed: China No longer controls the price of Bitcoin

For a long time, China was the elephant in the room. The influence of the 2nd largest economy on Bitcoin was unsettling, deeply misunderstood and widely discussed. 61% of the mining power that secures the Bitcoin blockchain network is based out of the mainland, and up until recently, media reports cited over 90% of Bitcoin trading volumes were on Chinese Bitcoin exchanges. The mainland has largely fueled the past 18 months of a massive bull run that topped at $1139 on Thursday January 5.

The effect of China’s dominance on Bitcoin’s volatility has been a recurring theme over the past 3 years, and on January 5 it was no different. An official PBOC statement confirmed rumours of a private meeting featuring officials from China’s Central Bank (PBOC) and the largest Bitcoin exchange operators. Within 4 hours, Bitcoin shed off 20% to a $754 low.

As Chinese officials tightened capital control as part of their ongoing devaluation policy, capital had found its way into Bitcoin. A 7% devaluation of the Yuan by PBOC in the preceding months had escalated trading in the digital currency. Bitcoin’s fixed monetary supply, free from government control, was a safe haven for speculators and doubled up as a conduit for bypassing foreign exchange quotas.
China’s increasing trading volumes

On a day like January 12, OkCoin, Huobi and BTCC, China’s top 3 exchanges, reported a 30 day trade volume of 186.3 million BTC. This figure represented 98.3% of global, a worrying statistic for the bitcoin industry. Coinbase CEO Brian Armstrong, attributed this often cited figure as a cover up for China’s fake volumes.

Back in 2013, BTCC and OKCoin pioneered a zero fee trading policy as a strategy to on board traders. This policy encouraged frictionless trading, quickly becoming a model for other exchanges to follow. An arms across Chinese bitcoin exchanges heralded an era of zero trading fees. On these exchanges, traders could trade back and forth with themselves, using 2 accounts registered under the same name. Traders could also write simple scripts to execute bot trading. All it took to generate 500 BTC volumes with no price movement, was an account balance of 1 BTC while trading 500 times in a day. Simulating multiple trades gave the appearance of robust volumes, which appealed to both domestic and international traders. Over the next 2 years, BTC/RMB trading volumes gradually replaced the US dollar.

There was not much point in relying on trading data from China. In fact, there are no agreements or standards on how to price Bitcoin. In addition to unreliable volumes, Yuan prices on the mainland are decoupled from dollar prices on European and US exchanges. Comparing the two is like stacking up oranges against apples. Data vendors like Bitcoin Average, made up for this error by adjusting their price index by weighted volumes that excluded Chinese data.

When it comes to bitcoin, calculating the share of trading volumes for any region, country or currency is a pain. At any one time, it is traded on peer to peer marketplaces, over the counter (OTC) trading desks and bitcoin exchanges. While exchanges set the prices, significant volumes happen off exchanges. According to Neil Woodfine, writing on How Chinese is Bitcoin, realistic estimates place China’s share between 50% – 80% of global volumes.

After PBOC’s intervention, exchanges took the liberty to implement a fee policy and cut down on margin trading activities. OkCoin, Huobi and BTCC introduced

“a flat 0.2% fee to further curb market manipulation and extreme volatility.” according to ZeroHedge. Immediately after the announcement,

“One-hour volume at OkCoin fell 89% to 1,026 bitcoins at 1 p.m. local time, from 10,062 during the same period on Monday, according to the venue’s website. Huobi and BTC China saw declines of 92% and 82% respectively.”

A surprise inspection by PBOC Officials on January 9th reiterated Shanghai’s intention to rein in suspicious activities via the digital currency. Any exchange found contravening anti money laundering and forex exchange regulations would risk shutdown.

The Price of Bitcoin is Not Dependent on China

The tide seems to have shifted. Since January’s $1139 18 month high, Bitcoin has made a new historical high, trading at $1231 on Bitstamp as at writing this. This time, the all time high has nothing to do with China. An upcoming board decision by the SEC is set to approve or decline a proposed Bitcoin Trust ETF by a March 11 deadline, one of 3 in the pipeline. Attention has shifted to the United States, where an approval could spark a $300 million flow into the ETF.

China’s central bank’s actions has had an impact on Bitcoin Yuan prices. Prices in renminbi now lag US dollar prices by a 3%-5% discount; a far cry from the premiums before the clamp down. In the past 30 days, OkCoin, Huobi and BTC China have had a combined share of 52% of global volumes, down from the exaggerated 98% 5 weeks ago as per bitcoinity charts. China no longer controls the price of Bitcoin.

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