Bitcoin and all the Chinese Investors

A year ago, I was writing about the Chinese stock market (MEANWHILE IN CHINA), and its short and not-so-sweet little asset bubble:

Does anyone remember this gem:

screen-shot-2015-07-07-at-8-39-28-am

Oh my word, yes – that time when I took financial advice from my hairdresser – that was a fun time.

Anyway, it seems that Chinese investors have moved on.

Here’s a new news article from Quartz: “China’s risk-loving mom and pop investors have abandoned local stock markets for bitcoin.” Here are the opening paragraphs:

China’s individual investors are known for their huge appetite for new assets. The government’s strict currency controls make it difficult for them to invest overseas, so their money has traditionally had to go somewhere inside the country’s borders. That’s why from property to copper to domain names to fish bladders, speculation fuels asset markets in China.

Less than two years ago stocks were hot, and the benchmark Shanghai Composite Index doubled from June 2014 to June 2015. After the index tumbled last summer, though, there’s still no sign that investors are coming back to the casino-like bourses any time soon.

Where are they heading now? One word—bitcoin.

And in case the bitcoin fans out there think that this doesn’t really affect them, those paragraphs were followed by this line:

“Over 94% of bitcoin trading involved Chinese yuan in August”

Here are some graphs (find the originals here and here):

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And here’s another graph that I found on data.bicoinity.org:

screen-shot-2016-10-03-at-7-13-10-am

And in case you’re wondering: yes, okcoin and huobi are both Chinese bitcoin exchanges.

In other similarities to the stock-trading bubble, this:

Huang, 32, a father of two preschool kids from northeastern Shangdong province, who wished to be identified only by his surname, quit his job as a mechanic in February to become an at-home, full-time bitcoin trader.

“Why have you lost so much money in the stock market?” he says he asks his friends, trying to persuade them to invest in the digital currency. “Because it’s controlled by China’s policy.” Then he’ll explain that bitcoin is decentralized and can’t be controlled by any government. What’s more important, he said, is that “you can make money fast.”

A self-taught “digital currency expert,” Huang says his life is all about bitcoin except when “eating, sleeping, and doing housework.” Despite no previous trading experience, he claims to have tripled his investment in bitcoin, using half of his family’s savings, in the past six months. Because his wife is a full-time housewife, that’s the only source of family income right now.

Unfortunately, he’s wrong. China can, in fact, if it chooses, control Chinese bitcoin. Or at least, it can influence it enough to encourage the speculation to move elsewhere – while the corresponding ~~burst~~ drop in bitcoin demand can do the rest.

My view: it’s only a matter of time.

And then where will the world be?

Especially as the Bitcoin market is now walled off:

On one side of the wall, there is 90% of the market where the real world value in those bitcoin-wallets came out of Chinese bank accounts; and
On the other side of the wall, there is the 10% of the market who cannot access any Chinese money due to Chinese exchange controls.

While the market demand for bitcoin is high, there is probably enough cross-trading happening that it’s still relatively easy to cash in and cash out without coming up against Chinese exchange controls. But if that cross-trading dries up…

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Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Comments

Andy Tudhope October 11, 2016 at 12:13

So I’m still trying to wrap my mind around why you think speculation is an automatically bad thing. I appreciate your argument that it could lead to a bubble, but in my opinion, one of the primary functions of a market is to transfer risk from those who are unwilling to shoulder it to those who are. Chinese speculators mean a wider range of risk appetites, which is great. I recently heard a story about speculative Chinese investors in Hong Kong back in the day when there were two Rands; the financial one and the commercial one, with the financial one trading at about 75% of the commercial one but fluctuating wildly…

Also, the phrase “the real world value in those bitcoin-wallets” belies your inherent fiat-bias, don’t you think? Are you sure Yuan represents real-world value (what actually is that?), and that Bitcoin depends upon fiat investment in order to remain valuable?

Jayson October 12, 2016 at 21:56

Hey Andy – thanks for the comment!

So, to answer your first question about speculation: I don’t think that it’s automatically a bad thing. Speculation is inherent in everything – when you buy a car, or a house, or decide to marry someone, you’re essentially ‘speculating’ on your future emotional and financial well-being. That’s just life – and if you don’t speculate, you stop living I guess?

But there are degrees of speculation. If I speculate on the possibility of spontaneous flight, and choose to leap off a cliff to test that, then I think that the speculation has become…dangerous. If I preach about it, and encourage a whole lot of wishful non-physicists to do it with me, then I think that’s even more dangerous. And I’m not sure if this situation is so different. The type of speculation that we’re talking about here isn’t the transferring of risk, it’s the creation of it.

And the Chinese are basing their speculation off false premises, like this libertarian idea that somehow Bitcoin is safe from government intervention – which simply isn’t the case in China (the Chinese government may not print bitcoins directly, but they can still kill the Chinese infrastructure that permits its trade, as well as control the banking system where the conversion in and out of bitcoin takes place). More to the point, it’s especially problematic (to me, at least) when the global convertibility of bitcoin is dependent on the existing banking infrastructure, and there is this high wall of Chinese exchange control sitting between China and the world. I’m not sure how well those bitcoin exchanges will function if the swell of bitcoin trade drops to the point where value is no longer flowing so freely over said wall.

Then on your second question of real-world value, I’m not sure that’s about fiat money? Money is a descriptor of value, but it’s not value itself. A bitcoin is only worth what it can be exchanged for, which is usually a question of goods and services (ie. purchasing power). And I think that’s why I’m concerned. Bitcoin’s value is driven by its purchasing power – but purchasing power is not always universally transferrable. In countries like China, where there are exchange controls, purchasing power is effectively hemmed into the country’s borders. And turning yuan into bitcoin will only circumvent that as long as the market continues to speculate. If that changes, Chinese bitcoin sellers might find that there are no takers for their bitcoins on non-Chinese exchanges, and even non-Chinese holders of bitcoin might not be able to sell their holdings for anything usable (because 90% of their trade was Chinese – and exchange controls prohibit them from selling in yuan, and then exchanging that yuan for other usable currencies).

I’m not sure if that answers your questions?
Reply

bitcoinrat December 24, 2016 at 13:05

If The Rat may connect? We are currently in the third or forth phase of the ‘apparent bubble growth cycle” in bitcoins life to date.( look up the talks by Andreas – @aantonop – on this) We are due for maybe another three until the market cap and safe-haven utility stabilises its growth to a more predictable linear increase ( and thus undue volatility is burnt out of the speculation process )

The Rats view, and one to which you are entitled to disagree, is that far from bitcoin being blindly ‘pumped’ by libertarian idealists or speculators its actually the ‘bitcoin nay-sayers’ who are driven by their own negative ideology. (ie only national Govts can create money) and are unable (or unwilling) to look past this view of bitcoins utility.

We are on the cusp of a complete shift in the way the World interacts, the old ‘Empires of Sovereignty’ who could control events are eroding fast. Historians in two centuries will look back on the decades 1980-2030 as the start of a completely new age in humanity – and one in which established authorities – whether that be national governments, or ‘experts in their limited fields’ – lost control of the agenda.

This New Age will be digital, decentralised, autonomous and globally inter-active on a SME type level. If that view is correct (and you can argue it is not) then bitcoin will be very much part of that future, as a seamless, censor and tamper resistant means as lubrication global P2P interaction. The current idea that China ‘controls’ the future of bitcoin is both misguided, and if I may say so, based on political idealogical prejudice;

Thanks for reading.

Andy Tudhope October 11, 2016 at 12:13

So I’m still trying to wrap my mind around why you think speculation is an automatically bad thing. I appreciate your argument that it could lead to a bubble, but in my opinion, one of the primary functions of a market is to transfer risk from those who are unwilling to shoulder it to those who are. Chinese speculators mean a wider range of risk appetites, which is great. I recently heard a story about speculative Chinese investors in Hong Kong back in the day when there were two Rands; the financial one and the commercial one, with the financial one trading at about 75% of the commercial one but fluctuating wildly…

Also, the phrase “the real world value in those bitcoin-wallets” belies your inherent fiat-bias, don’t you think? Are you sure Yuan represents real-world value (what actually is that?), and that Bitcoin depends upon fiat investment in order to remain valuable?
- Jayson October 12, 2016 at 21:56
  
  Hey Andy – thanks for the comment!
  
  So, to answer your first question about speculation: I don’t think that it’s automatically a bad thing. Speculation is inherent in everything – when you buy a car, or a house, or decide to marry someone, you’re essentially ‘speculating’ on your future emotional and financial well-being. That’s just life – and if you don’t speculate, you stop living I guess?
  
  But there are degrees of speculation. If I speculate on the possibility of spontaneous flight, and choose to leap off a cliff to test that, then I think that the speculation has become…dangerous. If I preach about it, and encourage a whole lot of wishful non-physicists to do it with me, then I think that’s even more dangerous. And I’m not sure if this situation is so different. The type of speculation that we’re talking about here isn’t the transferring of risk, it’s the creation of it.
  
  And the Chinese are basing their speculation off false premises, like this libertarian idea that somehow Bitcoin is safe from government intervention – which simply isn’t the case in China (the Chinese government may not print bitcoins directly, but they can still kill the Chinese infrastructure that permits its trade, as well as control the banking system where the conversion in and out of bitcoin takes place). More to the point, it’s especially problematic (to me, at least) when the global convertibility of bitcoin is dependent on the existing banking infrastructure, and there is this high wall of Chinese exchange control sitting between China and the world. I’m not sure how well those bitcoin exchanges will function if the swell of bitcoin trade drops to the point where value is no longer flowing so freely over said wall.
  
  Then on your second question of real-world value, I’m not sure that’s about fiat money? Money is a descriptor of value, but it’s not value itself. A bitcoin is only worth what it can be exchanged for, which is usually a question of goods and services (ie. purchasing power). And I think that’s why I’m concerned. Bitcoin’s value is driven by its purchasing power – but purchasing power is not always universally transferrable. In countries like China, where there are exchange controls, purchasing power is effectively hemmed into the country’s borders. And turning yuan into bitcoin will only circumvent that as long as the market continues to speculate. If that changes, Chinese bitcoin sellers might find that there are no takers for their bitcoins on non-Chinese exchanges, and even non-Chinese holders of bitcoin might not be able to sell their holdings for anything usable (because 90% of their trade was Chinese – and exchange controls prohibit them from selling in yuan, and then exchanging that yuan for other usable currencies).
  
  I’m not sure if that answers your questions?
bitcoinrat December 24, 2016 at 13:05

If The Rat may connect? We are currently in the third or forth phase of the ‘apparent bubble growth cycle” in bitcoins life to date.( look up the talks by Andreas – @aantonop – on this) We are due for maybe another three until the market cap and safe-haven utility stabilises its growth to a more predictable linear increase ( and thus undue volatility is burnt out of the speculation process )

The Rats view, and one to which you are entitled to disagree, is that far from bitcoin being blindly ‘pumped’ by libertarian idealists or speculators its actually the ‘bitcoin nay-sayers’ who are driven by their own negative ideology. (ie only national Govts can create money) and are unable (or unwilling) to look past this view of bitcoins utility.

We are on the cusp of a complete shift in the way the World interacts, the old ‘Empires of Sovereignty’ who could control events are eroding fast. Historians in two centuries will look back on the decades 1980-2030 as the start of a completely new age in humanity – and one in which established authorities – whether that be national governments, or ‘experts in their limited fields’ – lost control of the agenda.

This New Age will be digital, decentralised, autonomous and globally inter-active on a SME type level. If that view is correct (and you can argue it is not) then bitcoin will be very much part of that future, as a seamless, censor and tamper resistant means as lubrication global P2P interaction. The current idea that China ‘controls’ the future of bitcoin is both misguided, and if I may say so, based on political idealogical prejudice;

Thanks for reading.

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