Chinese investors seek to mine Bitcoin's volatility

Bitcoin, a virtual currency, has seen values soar and fall. It is not underpinned by any asset other than trading by owners. Image: Better Business Bureau]

China is the world's biggest market for Bitcoins, but around US$5bn was wiped off the value of the currency's global stock within an hour of an announcement from Beijing's central bank in early December, banning financial institutions from dealing in it.

Exchange rates on BTC-China, the country's biggest Bitcoin trading platform, slumped by about 35% from a recent high of 7,050 yuan (around $1,150), almost as much as an ounce of gold.

The values climbed back above 6,000 yuan, until one of Chinese Internet company Baidu's websites said it would no longer accept the virtual currency as payment.

The following day Bitcoins were down to 3,821 yuan - before rising again to nudge 6,000 yuan on Tuesday (10 December). "Prices are certainly volatile but such volatility will create short-term arbitrage opportunities," Wei Zhicheng, a 27-year old Shanghai-based investor, told AFP.

Bitcoin limited to just 21m units

Bitcoin was invented in the wake of the global financial crisis by a computer scientist using the pseudonym Satoshi Nakamoto. It is based on cryptography and only 21m units can ever be created. These units can be stored either virtually or on a user's hard drive.

It offers a largely anonymous payment system with no centralised structure and transactions are publicly logged in what is known as the "block chain", with those who maintain it being paid in new units, a process known as "mining".

Bitcoin has become a global phenomenon, with the price rising so much that a Norwegian man was able to buy an apartment with some of the 5,000 Bitcoins he bought for just US$24 in 2009.

The explosive growth has raised alarm bells, with analysts warning of a potential crash due to a lack of fundamental underpinning.

"The trading of Bitcoins has already formed a bubble," Ding Zhaoyong, a finance professor at Jilin University, told AFP.

No assets underpin Bitcoin

Only 21m Bitcoins can ever be created, pushing up its perceived value. Image: AA+W Fotolia

"The inventor did not pledge any assets to guarantee Bitcoin's value, so when the bubble bursts, all you have left is just a string of useless numbers," he said.

But Chinese buyers have piled into Bitcoins this year, driving the BTC-China price up from 82.29 yuan on 1 January to a high of 7,588.88 yuan on 30 November, a 9,122% increase.

Chinese investors have a limited range of options for their money: authorities impose restrictions on property purchases; returns from the domestic stock market remain historically poor and low interest rates provide minimal incentives to investors.

At the same time the authorities retain significant control over the economy, and are unlikely to welcome the prospect of that control being diluted by an independent currency.

Risks attached to using Bitcoin

Although the ruling Communist Party recently said that market forces will be allowed to play a decisive role in future, tight capital controls remain in place, with the yuan currency not allowed to float freely against global counterparts.

In its announcement the People's Bank of China (PBoC), the country's central bank, defined Bitcoin as a "virtual commodity", ruling out the possibility that it will gain legal status as currency.

It ordered financial institutions not to provide services and products related to Bitcoin - although it allowed individuals to trade it at their own risk.

The central bank also warned of dangers associated with Bitcoin trading, especially after media reports that three people had been detained for allegedly defrauding Bitcoin investors, leaving hundreds with more than 20m yuan in combined losses.

Nonetheless, BTC-China's chief executive Bobby Lee says that the e-money offers a new twist on investing for Chinese, known for conservatively investing their assets.

"China has been known as a nation of savers, people save for a rainy day," the ex-Yahoo engineer told AFP. "Bitcoin is a global asset class equal to common investment choices including gold, shares and real estate," he said.

"Bitcoin will go mainstream, I have full confidence in it and we hope to push it forward in China," he added.

Source: AFP via I-Net Bridge