Date
11 December 2017
Nearly a million people in China are said to be involved in the bitcoin industry. Photo: Reuters
Nearly a million people in China are said to be involved in the bitcoin industry. Photo: Reuters

Market-makers look beyond bitcoin speculative frenzy

Four years ago, 6,000 bitcoins were equivalent to four pizzas in value. Today, the same amount of the virtual currency buys you a Lamborghini Veneno Roadster, the world’s most expensive car model that costs around US$4.5 million.

Given the digital currency’s wild ride, Chinese investors lost no time in jumping on to the bandwagon, sending prices even higher. A sixty-fold jump in the value of bitcoin over the past 12 months has only fed the frenzy, raising all sorts of questions as to the role of the cyber money.

Now Chinese exchange operators are calling for price stability to ensure that bitcoins serve better as a payment currency. They envision a long-term development into what would become a daily necessity such as the widely-used Octopus smart card in Hong Kong.

Bitcoins, driven by a host of Chinese small investors who once beat Wall Street managers in forcing a gold price rebound, tripled to a Nov. 23 peak of US$776.7 in three weeks, according to a CoinDesk index. The 12.03 million units in circulation value the bitcoin economy at US$9.3 billion.

“Our number of users doubled recently and the growth rate is accelerating,” said Gina Jiang, deputy general manager of Shanghai-based bitcoin exchange RmBtb.com. “But a stable price is more beneficial since the swings are pulling in short-term speculators instead of long-term investors.”

She said her company plans to launch payment solutions in the first half next year, taking the bitcoin craze to the next stage.

RmBtb.com, established in April, sees nearly 3,000 bitcoins change hands per day. It is one of the many mainland round-the-clock platforms created after BtcChina.com, which started operating in June 2011 and has become the world’s biggest with a daily trading volume of more than 100,000 coins.

Yuan Jiguang, chief executive of Hong Kong’s BitCashOut.com, said his firm is looking to develop payment services supported by the digital currency, which was first created in 2009 by an anonymous developer known as “Satoshi Nakamoto”.

BitCashOut.com has 2,000 local and overseas users, with half of them getting registered in the past month to tap the fierce rally. Daily trading value reached up to HK$2 million (US$257,400).

“We aim for value-added services that resemble the Octopus card,” Yuan told the Hong Kong Economic Journal’s EJ Insight. “I believe bitcoins will become a mainstream currency but it takes time and is only possible when prices stabilize.”

In China, nearly one million people, including investors, traders and market markers, are involved in the bitcoin industry, said Eric Liu, chief executive of trading platform GoXBTC.com.

Bitcoin allows users to exchange online credits for goods and services. From restaurants and charities to property developers, a growing number of merchants accept bitcoin because transaction costs are generally lower than those for credit cards or debit cards. On Oct. 14, computer security service provider Jiasule, in which Chinese search engine Baidu Inc. owns a minority stake, started to take bitcoin.

While bitcoin isn’t backed by any central bank, it can be generated by solving complicated math problems in a process known as “mining.” As the number of mined bitcoins grows, so does the complexity of the math equations. Ultimately, only 21 million bitcoins will be “mined.”

Hidden risks

Global regulators remain divided over reining in the emerging currency. In such policy vaccum, investors are left vulnerable to sudden shutdowns of bitcoin exchanges, such as Hong Kong-registered GBL that reportedly took US$3.3 million of clients’ money in its Oct. 26 closure.

“Most people tend to use bitcoin to make profits from arbitrage. Its investment nature is stronger than its use as a payment tool,” said Song Ke {宋科}, a researcher at the International Monetary Institute of Renmin University of China. “The bubble will burst eventually, as the case was when short-selling took hold.”

The People’s Bank of China does not recognize the legitimacy of bitcoin, although individuals are permitted to trade it freely online, the 21st Century Business Herald reported last Friday, citing deputy governor Yi Gang {易綱}.

In August this year, Germany reportedly recognized bitcoin as a “unit of account”, allowing the country to tax users or creators of the digital currency. Last month, US authorities seized an estimated US$28 million of bitcoins after cracking down the online Silk Road marketplace that takes the virtual money for drugs and criminal activity.

“Bitcoin is not a currency but a virtual ‘commodity’,” the Hong Kong Monetary Authority said in an e-mailed reply to EJ Insight queries. “As bitcoin does not have any backing, either in physical form or from the issuer, and its pricing is highly volatile, it does not meet the criteria of a means of payment or an electronic currency.”

The city’s de facto central bank said it does not regulate bitcoin, urging the public to exercise “extra caution” in making transactions in the digital currency.

But financial innovation, as always, runs ahead of regulatory forces. RmBtb.com’s Jiang said many Chinese investors are already asking for high-risk derivatives such as bitcoin futures to satisfy their speculative demand.

“The Chinese government may react slowly to bitcoin”, BitCashOut.com’s Yuan said. It just has “too many things” to deal with amid the internet finance boom, he said.

– Contact the reporter at [email protected]

RC

EJ Insight reporter

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