Will Chinese Exchanges Slow Bitcoin Rally?

Will Chinese Exchanges Slow Bitcoin Rally?

Three Chinese Bitcoin exchanges have introduced transaction fees on Bitcoin trades. BTCC, Huobi and OkCoin, three of China’s popular Bitcoin exchanges, announced that they will charge a flat rate fee of 0.2% on all Bitcoin transactions done on their platforms beginning January 24.

Until the latest move, BTCC, Huobi and OkCoin never charged a fee on Bitcoin trades on their platforms.

Although the exchanges didn’t cite government action for their move to introduce trading fees, as Bitcoin soared in the wake of Donald Trump’s surprise victory in the U.S. presidential elections in November, it always appeared Chinese government was closely watching the activities around Bitcoin. Chinese central bank has recently carried out spot checks at various Bitcoin exchanges in China.

Bitcoin has in the weeks since U.S. election appeared to be sapping energy from yuan as it has gained while yuan has declined.

Curbing extreme volatility

BTCC, Huobi and OkCoin said their move to introduce transaction fee on Bitcoin trades was aimed at ensuring market stability. The absence of transaction fees on the exchanges is believed to have incentivized investors to trade large volumes, leading to swift appreciation of Bitcoin price but also creating market volatility. Chinese exchanges accounted for about 42% of worldwide Bitcoin trades in the first half of 2016, according to according to Chainalysis, a blockchain analysis firm.

Containing capital outflow from China

The decision by BTCC, Huobi and OkCoin to charge a fee on Bitcoin transactions is also likely to reduce Bitcoin demand in China, potentially helping the government to curb recent capital of outflow from China’s economy.

The move by the U.S. Federal Reserve to raise interest rates in December and speculations that Trump administration will expand spending on infrastructure projects have triggered a clamor for U.S. yield-bearing assets, resulting in capital outflow from many overseas markets. Many savvy investors are using Bitcoin to move cash out of the markets.

Transaction fee is unlikely to undo Bitcoin gains

Although charging a fee on Bitcoin trades is likely to limit Bitcoin price appreciation, strong demand for the currency remains in many markets around the world. In Mexico, for instance, fears over Trump’s border wall have driven up interest in digital currencies as part of the measures to skirt potential money remittance sanctions between the U.S. and Mexico.

India’s demonetization move last year that saw the government pull certain bank notes from circulation has also led many Indians to Bitcoin and other cryptocurrencies because they consider them free from government interference.