China and the soaring price of Bitcoin(marginalrevolution.com)
marginalrevolution.com
China and the soaring price of Bitcoin
http://marginalrevolution.com/marginalrevolution/2013/11/china-and-the-soaring-price-of-bitcoin.html
9 comments
To add some additional context as to why Chinese don't trust their banks, Bloomberg did a long writeup on the credit bubble problems over there [1]. TLDR: Chinese banks have ~$6.6 Trillion of outstanding loans to Chinese businesses who are increasingly unable to service the loans due to weak demand, which threatens to turn into a banking crisis.
[1]: http://www.bloomberg.com/news/2013-11-18/credit-driven-china...
[1]: http://www.bloomberg.com/news/2013-11-18/credit-driven-china...
This doesn't make sense to me.
Bitcoin right now is an incredibly bad long term value store. Right now it's a speculative investment. Either it will succeed and demand for bitcoin will go even higher or it will fail and it will be worth nothing. It's like investing in some risky VC fund. It makes sense for people to have wildly different ideas about potential and risk, but it makes no sense to expect it to just stay where it is.
Bitcoin right now is an incredibly bad long term value store. Right now it's a speculative investment. Either it will succeed and demand for bitcoin will go even higher or it will fail and it will be worth nothing. It's like investing in some risky VC fund. It makes sense for people to have wildly different ideas about potential and risk, but it makes no sense to expect it to just stay where it is.
It makes perfect sense -- but only if you look at it objectively. The speculators will trade on the hourly waxing and waning exchange rates, but the savers will look at 52-week moving averages.
If you judge BTC simply by the latter, and have the patience for re-evaluating your BTC finances annually or bi-annually, then you'd be in a pretty good spot.
Sure it fluctuates an uncomfortable amount on a regular basis, but it's a fairly consistent trend otherwise.
If you judge BTC simply by the latter, and have the patience for re-evaluating your BTC finances annually or bi-annually, then you'd be in a pretty good spot.
Sure it fluctuates an uncomfortable amount on a regular basis, but it's a fairly consistent trend otherwise.
I agree. I found myself going through different stages of thinking about bitcoin. I mined early in 2011 and almost sold all of my bitcoin thinking that it would crash any day. Having witnessed three supernova price movements and bitcoin coming quickly back each time settling on a higher value, it does not look like a "penny stock" anymore that would be dead after just one such run. It might be the single simple fact that BTC generation is predictable that creates a pull for people who are willing to bet part of their savings on it. If enough do that, bitcoin becomes a value storage system - self fulfilling prophecy. If that's the case we are just at the beginning.
Not at all, if "...or it will fail and it will be worth nothing" is a possible scenario. If you buy every week, any catastrophic event that makes bitcoin worthless would still wipe out your retirement savings before your bi-annual reevaluation is due.
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> Bitcoin right now is an incredibly bad long term value store.
It's a deflationary currency. Sure there may be rises and falls, but in the long term, the trend will only be in one direction.
It's a deflationary currency. Sure there may be rises and falls, but in the long term, the trend will only be in one direction.
Only if something else does not supplant it. Right now it's like investing in 1980's baseball cards, sure there not making more but nothing guarantees anyone want's them in 10 years.
That's a problem for a currency, no ? You are in effect rewarded for no spending it, or in other word not using it as a currency.
Seems like Bitcoin is instead becoming a new class of asset rather than a currency.
Seems like Bitcoin is instead becoming a new class of asset rather than a currency.
It was in the past, in less dynamic, less connected, less 'always on' economies. We've never seen what a deflationary currency will do in a modern, wired, 'speed-of-light/electricity' economy though.
It could lead to increased capital formation (savings) and less frivolous spending, eg spending only on necessities and appreciating assets, and less on throwaway, planned obsolete junk, while still maintaining enough velocity not to stall the economy. Leaner but still viable. Of course, getting from here to there will not be painless.
Who knows, jury's still out on it imho, will have to watch and see. Front-row seats to one of the greatest economic experiments of history, for better or worse.
It could lead to increased capital formation (savings) and less frivolous spending, eg spending only on necessities and appreciating assets, and less on throwaway, planned obsolete junk, while still maintaining enough velocity not to stall the economy. Leaner but still viable. Of course, getting from here to there will not be painless.
Who knows, jury's still out on it imho, will have to watch and see. Front-row seats to one of the greatest economic experiments of history, for better or worse.
It simply changes how much people are willing to spend. The question becomes "Does buying this thing now have more utility to me than having several times this thing's value in a few years?" The answer is sometimes "yes".
Moving everything into bitcoin doesn't make a lot of sense. Diversifying into bitcoin is more likely to - I don't see tremendous reason Chinese housing prices and Chinese bank solvency would be positively correlated to bitcoin price, though I could very well be missing something (simple or complex).
Its an awesome store of value.
Bitcoin, like gold, is it's own counterparty. If you own bitcoin, you own it irrevocably unless you choose to give it to someone else.
Combine that with the fact that it is globally accessible, globally transferrable, and incredibly low cost to keep secure and you've got something which disrupts 5000 years of financial history.
Bitcoin, like gold, is it's own counterparty. If you own bitcoin, you own it irrevocably unless you choose to give it to someone else.
Combine that with the fact that it is globally accessible, globally transferrable, and incredibly low cost to keep secure and you've got something which disrupts 5000 years of financial history.
You own it only while you remember the password. Gold won't just disappear one day though your memory might.
unless you forget where you buried it
I don't know. I've held it since I bought it at $13/BTC. Seems like so far I am doing OK.
You are doing more than OK ;)
Risky investment doesn't mean bad investment. Startup equity can be a good investment too. I'm just saying bitcoin is not a safe value store, which is what nl was hypothesizing in his comment.
Risky investment doesn't mean bad investment. Startup equity can be a good investment too. I'm just saying bitcoin is not a safe value store, which is what nl was hypothesizing in his comment.
"If you are long Bitcoin for any appreciable amount of time, it seems you are betting that the Chinese economy will do poorly and capital controls will remain. Then more people will be increasingly desperate to get more money out of the country. Or you may be betting that the Chinese use of Bitcoin to launder money will increase due to the mere spread of the idea, through social contagion."
That's kind of silly. Bitcoin has many uses besides bypassing currency controls.
That's kind of silly. Bitcoin has many uses besides bypassing currency controls.
None of the other uses really justify the current price though. That's the point.
Clearly the value of a Bitcoin is not $0. He's not claiming that. He's claiming that if you think it is worth more than the current price of $680, then you are essentially betting on Bitcoin's current Chinese swell to continue.
Clearly the value of a Bitcoin is not $0. He's not claiming that. He's claiming that if you think it is worth more than the current price of $680, then you are essentially betting on Bitcoin's current Chinese swell to continue.
Markets tend to price in future usage. Are there indications that bitcoins will be extremely valuable in the future ? Yes.
Is there progress being made every day with bitcoins ? Yes.
Is there global potential for bitcoin to be used as some form of currency ? Yes. (it is already being used in small amounts in several places)
Markets tend to price these things in. Investor sentiment is optimistic. Bitcoins current position certainly doesn't justify this price. But the market has priced in the future.
Is there progress being made every day with bitcoins ? Yes.
Is there global potential for bitcoin to be used as some form of currency ? Yes. (it is already being used in small amounts in several places)
Markets tend to price these things in. Investor sentiment is optimistic. Bitcoins current position certainly doesn't justify this price. But the market has priced in the future.
Rational and stable markets will tend to price in future usage. But even those suffer bubbles every once in awhile.
But that's beside the point. The argument being made is that the future usage being priced into Bitcoin in the current craze depends on China not doing things that would make it less useful to hold Bitcoin.
But that's beside the point. The argument being made is that the future usage being priced into Bitcoin in the current craze depends on China not doing things that would make it less useful to hold Bitcoin.
Bitcoin is a asymmetric bet[1], your cost of buying is known (price you pay relative to local currency when you purchase BTC), and it will either go to 0 or could return x100 or x1000 in the longer term. It's somewhat analogous to spotting the subprime mortgage madness early prior to 2007 and placing asymmetrical bets via credit default swaps on mortgage backed bonds[2].
There could be a fatal flaw uncovered with Bitcoin making it go to zero, Satoshi Nakamoto's true motives could be revealed to be sinister etc., or it could become a major commodity/currency for much of the world's population so the current price is dirt cheap. That's what makes it so intriguing.
I personally think of Bitcoin as like Napster. Revolutionary idea, scared the establishment shitless, but was ultimately crushed. However, P2P file sharing exploded in popularity afterward, and has proved impossible to stamp out since. I think whatever comes after Bitcoin will be ultra-resilient, will learn from Bitcoin's flaws, and will change how we think about economics, commerce and currencies.
[1] https://news.ycombinator.com/item?id=6753060
[2] http://www.vanityfair.com/business/features/2010/04/wall-str...
There could be a fatal flaw uncovered with Bitcoin making it go to zero, Satoshi Nakamoto's true motives could be revealed to be sinister etc., or it could become a major commodity/currency for much of the world's population so the current price is dirt cheap. That's what makes it so intriguing.
I personally think of Bitcoin as like Napster. Revolutionary idea, scared the establishment shitless, but was ultimately crushed. However, P2P file sharing exploded in popularity afterward, and has proved impossible to stamp out since. I think whatever comes after Bitcoin will be ultra-resilient, will learn from Bitcoin's flaws, and will change how we think about economics, commerce and currencies.
[1] https://news.ycombinator.com/item?id=6753060
[2] http://www.vanityfair.com/business/features/2010/04/wall-str...
I asked some colleagues (I am the only foreigner in a 500-sized web company in Beijing) and they were a bit doubful about the money laundry reason invoqued in the article.
Sure, there is a huge business in money laundering in China and, for example, contemporary art overvaluation is linked to this financial pressure. But still, this reason is not necessary to explain the hotness of BTC in China, because just summing the mass effect plus the Chinese appetence to play money-risking games is just enough.
Sure, there is a huge business in money laundering in China and, for example, contemporary art overvaluation is linked to this financial pressure. But still, this reason is not necessary to explain the hotness of BTC in China, because just summing the mass effect plus the Chinese appetence to play money-risking games is just enough.
This. I've been trying to explain to people on r/bitcoin and r/bitcoinmarkets that I'm pretty sure that the Chinese have well polished ways and means of getting money out of China, in spite of capital controls.
When the mafia figures out bitcoin is a good way to do this things will start looking quite different.
When the mafia figures out bitcoin is a good way to do this things will start looking quite different.
> I'm pretty sure that the Chinese have well polished ways and means of getting money out of China
What makes you "pretty sure"?
Certainly some Chinese have sophisticated methods of exiting money, through overseas corporations and the like. However most Chinese do not, and there are many, many financially unsophisticated rich Chinese.
The evidence is pretty clear that you are wrong. The 20-30% premium Chinese pay for bitcoin, and the inflated Chinese real estate market, both indicate the difficulty. Besides, I lived in China and faced this issue. It is not easy.
Further, Chinese regulators are very smart. The capital controls are there for a reason, and they are effective and enforced.
What makes you "pretty sure"?
Certainly some Chinese have sophisticated methods of exiting money, through overseas corporations and the like. However most Chinese do not, and there are many, many financially unsophisticated rich Chinese.
The evidence is pretty clear that you are wrong. The 20-30% premium Chinese pay for bitcoin, and the inflated Chinese real estate market, both indicate the difficulty. Besides, I lived in China and faced this issue. It is not easy.
Further, Chinese regulators are very smart. The capital controls are there for a reason, and they are effective and enforced.
If the Chinese regulators are so smart and capital controls are so tight, then how would the Chinese get money out via bitcoin ?
What about the entire paper trail:
a) from bank deposits/tenpay deposits to BTC China where they convert to bitcoins
b) and then allegedly sell on a foreign exchange (bitstamp, maybe ?)
c) following which they withdraw to an overseas bank account ?
If we're talking about illegal money (not part of the banking system) then again BTC China isn't reportedly accepting any cash. So how would that work ?
The evidence isn't really that clear. What we see is the Chinese buying a lot of bitcoins.
There's no evidence that they then moved those bitcoins to a foreign exchange, cashed them out, and then moved that cash to an overseas bank account. Do you have anything at all that supports this ? Not even the bitcoin network transaction volume is in agreement with this kind of movement of coins.
What about the entire paper trail:
a) from bank deposits/tenpay deposits to BTC China where they convert to bitcoins
b) and then allegedly sell on a foreign exchange (bitstamp, maybe ?)
c) following which they withdraw to an overseas bank account ?
If we're talking about illegal money (not part of the banking system) then again BTC China isn't reportedly accepting any cash. So how would that work ?
The evidence isn't really that clear. What we see is the Chinese buying a lot of bitcoins.
There's no evidence that they then moved those bitcoins to a foreign exchange, cashed them out, and then moved that cash to an overseas bank account. Do you have anything at all that supports this ? Not even the bitcoin network transaction volume is in agreement with this kind of movement of coins.
Nobody knows or understands why the Chinese government is allowing so much purchase of bitcoin. I suspect they will not continue to allow it.
I did not say that Chinese were buying other currencies with their bitcoin en masse although I'd be surprised if many were not. Perhaps they are just diversifying. Some may have no account in place to sell bitcoin for other currencies.
I did not say that Chinese were buying other currencies with their bitcoin en masse although I'd be surprised if many were not. Perhaps they are just diversifying. Some may have no account in place to sell bitcoin for other currencies.
Okay, so with all of the talk about how China is buying more bitcoin than anyone else, why is the transaction volume not increasing accordingly? You can see it on the coinbase graph - https://coinbase.com/charts - it's basically seen the same volume since April, with the exception of July.
Total output volume may be a useful metric, since people may have used a Bitcoin transaction to move Bitcoin from one exchange to another. But a large amount of Bitcoin can be sent in a single transaction.
https://blockchain.info/charts/output-volume
Another popular metric, since output volume can be pumped up by sending the same coins over and over gain, is Bitcoin Days Destroyed.
https://blockchain.info/charts/bitcoin-days-destroyed-cumula...
http://bitcoin.stackexchange.com/questions/845/what-are-bitc...
Also transactions on the exchanges don't show up in the blockchain.
https://blockchain.info/charts/output-volume
Another popular metric, since output volume can be pumped up by sending the same coins over and over gain, is Bitcoin Days Destroyed.
https://blockchain.info/charts/bitcoin-days-destroyed-cumula...
http://bitcoin.stackexchange.com/questions/845/what-are-bitc...
Also transactions on the exchanges don't show up in the blockchain.
Bitcoins, like any money, is used to satisfy a reservation demand, that is, a demand for holding money for future use. "Currency" appears only when you find a closely connected group of investors in this money that find it useful to trade right in this money. "Circulation" of money happens as an effect of a bunch of investors finding each other in their daily market cooperation.
Today Bitcoin is in hands of fewer than 0.001% of all people in the world and those people are pretty scattered across the globe. This does not diminish utility as "store of value", but it does not create a lot of trade. Once, say, 10% of Shanghai is holding Bitcoin, you will suddenly see a spike in trade in Bitcoin itself (as it will be cheaper than moving cash or using credit cards).
Today Bitcoin is in hands of fewer than 0.001% of all people in the world and those people are pretty scattered across the globe. This does not diminish utility as "store of value", but it does not create a lot of trade. Once, say, 10% of Shanghai is holding Bitcoin, you will suddenly see a spike in trade in Bitcoin itself (as it will be cheaper than moving cash or using credit cards).
That's actually an interesting point. It's possible that people on BTC China are not in fact moving their bitcoins out of the exchange and selling them on another exchange to launder money. They're possibly holding bitcoins in their BTC China wallets. Those transactions will not influence the over all bitcoin transaction volume.
Furthermore, per exchange volumes have been insanely high over the past few days. See: http://bitcoincharts.com/markets/
What you basically pointed out points towards the premise of the article being false. It's not money laundering, it's something else.
Furthermore, per exchange volumes have been insanely high over the past few days. See: http://bitcoincharts.com/markets/
What you basically pointed out points towards the premise of the article being false. It's not money laundering, it's something else.
> Those transactions will not influence the over all bitcoin transaction volume.
Shouldn't there be a "MtGox wallet (say)" -> "chinese wallet" transaction somewhere in the blockchain?
Shouldn't there be a "MtGox wallet (say)" -> "chinese wallet" transaction somewhere in the blockchain?
There should be, if they chose to withdraw their bitcoins from Gox. But assuming that the article is right, there would be another transaction that moves the money from their private wallet to bitstamp/another exchange as well.
Basically all there is evidence of right now is that the Chinese are buying tons of bitcoins. No evidence of selling/moving as such.
It's not possible to use Gox for USD withdrawals at the moment so I don't think they'll try that anyway.
Basically all there is evidence of right now is that the Chinese are buying tons of bitcoins. No evidence of selling/moving as such.
It's not possible to use Gox for USD withdrawals at the moment so I don't think they'll try that anyway.
Check this out, see BTC are going to China (and other countries) in real time.... it's all buying: http://fiatleak.com/
More and more off-chain transactions are happening as well: moving between accounts on exchanges, or moving between accounts on sites such as Coinbase.
I'm not sure that the author of this article is correct. Why would the Chinese gvt push bitcoin, for it then to be used to undermine the Yuan? Doesn't make sense.
From what bitcoin followers have been saying: the Chinese government has been indirectly supporting the rise and adoption of Bitcoin through state-run Bitcoin documentaries [1]. This is seen by some as China pushing for alternatives to the USD as a world reserve currency (following US gvt shutdown) [2].
[1] https://cryptocointalk.com/topic/226-cctv-bitcoin-documentar... [2] http://www.scmp.com/news/china/article/1330873/chinese-state...
From what bitcoin followers have been saying: the Chinese government has been indirectly supporting the rise and adoption of Bitcoin through state-run Bitcoin documentaries [1]. This is seen by some as China pushing for alternatives to the USD as a world reserve currency (following US gvt shutdown) [2].
[1] https://cryptocointalk.com/topic/226-cctv-bitcoin-documentar... [2] http://www.scmp.com/news/china/article/1330873/chinese-state...
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So the question is whether BTC jumping from 200 USD to 600 USD in under two weeks is a bubble or if BTC finally found its calling in China.
That's a very nice little application of behavioural finance to Bitcoin.
Very interesting post.
But one should keep in mind that there is also the possibility that the Chinese are buying Bitcoin as an investment.
But one should keep in mind that there is also the possibility that the Chinese are buying Bitcoin as an investment.
I've been calling it "speculative saving" and think that such behavior is a large portion of the Chinese bitcoin economy. I think a lot of Chinese tech workers have realized that bitcoin is a far better investment than real estate in Beijing.
A report in 2012: 3/4 of bitcoins are not circulating. Not sure if this still is true today, but it does reveal something worrying: BTC is not a currency as you might think.
http://eprint.iacr.org/2012/584.pdf
http://eprint.iacr.org/2012/584.pdf
To generalise massively, Chinese aren't trying to move money out of China.
Instead, they are trying to find any safe store of value, because they don't trust their banks.
Chinese are desperate for any way to save money, because the four-grandparent policy (and no pension) means they need money in old age.
The optimal solution for them is overseas real estate (see the real estate market in Hong Kong, Sydney & Vancouver).
The non-optimal solution used to be domestic real-estate. This solution was less than ideal, because of the huge oversupply in the Chinese domestic market. Chinese investors are aware of that, but "happy" to lose some money, rather than all of it in the case of a bank (and additionally, inflation in China is ~8%, but banks only pay ~1% interest).
It looks like Bitcoin is taking the place of some of that domestic real estate demand.
Note this is only my personal theory, but based on observations from http://brontecapital.blogspot.com.au/2012/06/macroeconomics-...