Last year, it banned initial coin offerings. This year, the government there has directed state officials to conduct an “orderly removal” of bitcoin miners from their territories.
So, is the price of cryptocurrencies totally dependent on China?
That may seem like an odd question, given the facts stated earlier. Typical analysis would make it seem that China is weaning its economy off cryptocurrencies. But appearances are not always as they seem. China still exerts a significant influence on cryptocurrency prices.
A Relationship That Turned Sour?
First, a little bit of history about cryptocurrencies in China. The country has had a complicated relationship with them.
Before the government’s volte-face in 2017, China was among the earliest countries to enthusiastically embrace cryptocurrencies back in 2013, when a Chinese charity began accepting bitcoin. A wave of businesses followed by accepting cryptocurrencies. Even Baidu, China’s search engine giant, began accepting bitcoin for website security services. Miners set up shop immediately afterwards.
Bitcoin’s politics aside, Chinese investors are enamored with cryptocurrencies and their ability to transcend borders. A qz.com post quotes an engineer at the Chinese Academy of Sciences in Shanghai as saying that the Chinese buy bitcoin because it will increase in value and is a hedge against inflation. An added attraction is that it is free from government control.
Bobby Lee, founder of the BTC China exchange, said the Chinese don’t care about the political aspects of bitcoin. “What they care about is income – can bitcoin make me money now?” he said. As China’s economic growth engine has slowed, those factors have become important.
Returns from conventional state-backed investments have dwindled. Rich Chinese are reportedly hunting for investment opportunities abroad and exchanging local currency for U.S. dollars. In response, the government had instituted capital controls to prevent yuan outflow and a subsequent drop in its value. Bitcoin and other cryptocurrencies offer protection against a slowing economy and capital controls at home. (See also: Is Bitcoin Being Used For Chinese Capital Flight?)
Ban? What Ban?
One way in which China exerts an influence on bitcoin prices is through its exchanges. Before a ban against bitcoin trading was instituted in the country, China accounted for over 90 percent of trading volumes in cryptocurrencies. The exchanges thrived by charging low fees.
The exchanges have changed their business model since the ban and begun servicing customers abroad. OKCoin, which regularly clocks the highest trading volumes for bitcoin, is now registered in Belize though most of its staff is still based in China. It offers “consumer-to-consumer trading of digital currencies against legal tenders of many countries.” In simple words, this means it accepts foreign currencies for bitcoin trading on its exchange. That it charges relatively low fees is an added attraction.
Huobi, another China-based exchange, follows a similar strategy. Then, there is the six-month-old Hong Kong-based Binance exchange, which has been adding customers at a rapid clip. According to some estimates, it adds approximately 200,000 new customers per hour.
Cumulatively, Chinese exchanges account for the largest trading volumes. For example, according to Coinhills, a site that tracks trading volumes, exchanges based in China accounted for approximately 29% of overall trading volumes in cryptocurrencies during this past weekend.
Read more at:
https://www.investopedia.com/news/price-cryptocurrencies-totally-dependent-china/
