When three leading Chinese bitcoin exchanges recently began charging traders a transaction fee, the impact of the development was felt by bitcoin investors worldwide, suggesting how China has become an influential bitcoin economy.
Over the past three years, China emerged as the most robust bitcoin market. Bitcoin trading volumes and mining activities have both soared in the country. Chainalysis, a startup that analyzes bitcoin activities, estimated that Chinese exchanges accounted for 42% of global bitcoin transactions in the first half of 2016. Other estimates have cited that China accounts for more than 80% of worldwide bitcoin trading volumes.
As for bitcoin mining, a BBC report in 2016 said as much as 70% of the digital currency’s mining takes place in China.
Several factors have been cited to explain China’s bitcoin dominance and here are a few of them:
China’s love for speculative investment
A huge appetite for speculative investment among Chinese retail investors and a shortage of investment opportunities in China are believed to have played a major role in endearing bitcoin to Chinese investors. Bitcoin is perceived as a volatile asset, making it popular with day traders out to make a kill from short-term price fluctuations. Prices of bitcoin can swing more than 5% in a day.
Bitcoin is also quickly gaining reputation as an alternative safe haven asset thanks to the perception that it is free from government manipulation, though China is beginning to test that belief.
Additionally, unlike traditional safe haven assets such as gold, bitcoin doesn’t attract storage costs for traders and that has increased its appeal as a store of value for risk-averse investors.
Robust bitcoin mining industry in China
The popularity of bitcoin mining in China is believed to be another reason bitcoin is popular in the country. Mining describes the process of creating new bitcoins and the activity is resource intensive. Besides the technical know-how, bitcoin mining requires powerful computers and consumes a lot of energy. The lower energy cost in China compared with many Western countries is likely giving Chinese bitcoin miners leverage over their overseas competitors.
The BBC estimated that Chinese mine about $8 million worth of bitcoin every year.
Effects of bitcoin popularity in China
Selling bitcoin mining systems: Bitcoin experts in China have identified a business opportunity in selling powerful computers used for mining new bitcoins. They are selling the systems abroad, but this trend could offset China’s dominance in bitcoin mining.
Ease of moving assets: Being a virtual currency, bitcoin has provided savvy Chinese investors an easy way to cart their assets out of the country and that has increased its appeal as a tool to evade government’s economic restrictions. China is one of the countries where moving out assets is difficult.
However, Chainalysis estimates that about $2 billion left China in 2016 in the form of bitcoin. As investors jostle for US assets amid speculations that Donald Trump presidency will usher an era of economic prosperity in the US, China is one of the economies that have been rattled by massive capital outflow.
Government control: The rise of bitcoin in China is beginning to test the long-held belief that digital currencies are free from government interferences. The decision by Chinese bitcoin exchanges to slap traders with transaction fees is believed to be influenced by the government as a way to curb capital outflow. But the move impacted bitcoin volumes and prices around the world.