Bitcoin and China

Bitcoin in China and its impact on the Chinese economy

China is in the heart of Bitcoin owning 70% of Bitcoin production! Five of the ten biggest mining companies in the world are Chinese, and one of the Chinese leaders controls more than 30% of the computing power of Bitcoin network.

But what exactly is Bitcoin?

Launched in 2009 by an unknown person with the pseudonym Satoshi Nakamoto, Bitcoin is a worldwide cryptocurrency. Unlike traditional currencies such as cash or credit card, which are issued by central banks, Bitcoin has no central monetary authority.

Worth less $1 at its beginning, Bitcoin represents today more than $10,000! These past years Bitcoin has not stopped to increase. We can see on the chart below, an increase of 825% since the beginning of this year. However, we can also notice from this chart is that the price is very volatile: between few days, the value can increase by 20% like it can decrease by the same percentage.

Source: coindesk.com

Why Chinese are so interested in Bitcoin?

The fact that Chinese users are so attracted by Bitcoin and have a real craze for it is because it is a good speculation. Indeed, price is very volatile, as we said it can increase steadily within a day, they can gain a lot with few fees. Gambling is part of Chinese’s people mindset and culture but also a social activity deeply ingrained in China’s history.

However, it is very hard to become a billionaire thanks to Bitcoin, proving that users generally own Bitcoin for speculative purposes. Only 1 Bitcoin address own an equivalent of more than $60,800,00 and most users about 6,2 million have a Bitcoin address owning less than an equivalent of §60.80. So as Chinese users understood, Bitcoin is an easy way to earn a lot of money, but with a high risk.

In fact, the main reason Chinese investors are so keen on Bitcoin is because of economic reason. Since 2013, the restrictions about buying properties have been tightened, Chinese stock markets have generated small profits while banks’ interest rates was high, and above all, Chinese authorities are controlling very closely capital outflows from China. After the 2015 devaluation, Chinese companies stepped up repaying foreign-currency debt fearing further depreciation. Huge capital outflows are a great threat for China because since Bitcoin users can instantaneity and anonymously transfer money abroad. That is why Bitcoin seems very interesting to deal with this economic problem that Chinese investors and companies are facing.

This high activity of Bitcoin in China has a very important impact in the economy. It seems to influence the value of the Renminbi, China’s currency.

According to this chart, the RMB per dollar increased from 6.5 to 6.95 in 2016. It means that to get $1, you have to exchange more RMB, and so that the Chinese currency’s value has fallen. Similarly, the RMB per Bitcoin increased from 2,800 to 6,100. It means that with 1 Bitcoin you can get more RMB than before, showing that maybe it has caused the tendency of the RMB per dollar. This is only an assumption, it is not proven, but we can surely wonder whether there is a correlation or causation between these two tendencies. Thus Bitcoin’s surge may have impacted negatively the economic situation of China and the economy is not able to take control on it.

That is why due to the high level of activity of Bitcoin in the territory, and then leading to a huge leak of capital and negative effects on the Renminbi, China has decided to curtail every speculative activity. With ICO ban, China has now marking the end of an era for the Bitcoin community both inside and outside of China. This year, Chinese government also announced that Bitcoin transactions are going to be banned from the territory. As we said before, small events can impact the value of Bitcoin, and as a result, we noticed that the value decreased after the announcement by 30%. Then Chinese mining company BTC China announced to end all transaction regarding Bitcoin after de decision of Beijing, and it is now announced that other main biggest Chinese Bitcoin exchanges will halt local trading.

The unclear future of Bitcoin in China: China is going to take over the control

Is it the end?

However Bitcoin proves hard to kill in China. Since the shutdown of Bitcoin trading platforms in China, people have found other way to trade Bitcoin within the country. Indeed Chinese investors are also using mobile messaging and other well-known platforms to connect, in order to negotiate bilateral trades without the help of an exchange. They can do so through some platforms such as with Alibaba Group’s Alipay, Tencent’s WeChat but also with QQ chatting group. Offline trades have become popular between Chinese Bitcoin traders, and to shutdown completely with Bitcoin transactions, the country should ban the exchange within these platforms. WeChat along with QQ service, had to adhere to Chinese government rules: censoring sensitive topics, deleting private public accounts without user consent, and storing information sent via its platforms for at least six months on its servers. The country’s Wechat crackdown only drives Bitcoin to another chatting platform called Telegram that is way safer for investors since it is encrypted. However the fight with authorities is not over. Telegram has been blocked in China, and the only way to access to the service is through virtual private networks, and China is also cracking down on VPNs with the help of Apple Inc. by removing many VPNs from its Chinese app store to comply with local rules. So what is the Chinese authority going to do then?

Even though China has banned Bitcoin and private cryptocurrencies, China’s central bank The People’s Bank of China (PBOC) has announced recently to create its own cryptocurrency, in order to reduce fraud and corruption that make Chinese economy weaker and weaker. According to the responsible of the research team in PBOC Yao Qian “The development of digital economy needs central bank to issue electronic currency more than ever”. When it is about technology trends, Chinese people are always up to date. Most of them use mobile payments with Alipay or WeChat payment. Then developing its own digital currency would be a great solution to fight against Bitcoin and to take control on transactions. According to PBOC, by using the technology of blockchain, the cryptocurrency would be transferred to commercial banks when more liquidity is needed. Consumers would store the digital currency in their crypto wallet on their mobile phone or other device, they would get the money from bank tellers or automated teller machines. To purchase things, consumers wire the money from their device to the merchant’s account, and at the end, the merchant deposits the cryptocurrency into their commercial bank account. The aim is to improve the transparency of economic activities in every corner in the country. With the “virtual currency, the traceability would be easier. Thus by banning Bitcoin and other cryptocurrencies, and by creating its own, China would be able to take over the control of its economic situation and thanks to its own cryptocurrency, big data, artificial intelligence and machine learning, China will be able to strengthen regulatory intervention. The real question now is: will China be able to settle its own cryptocurrency and to implement a potential change to the entire economic infrastructure?

{More information on Bitcoin

Bitcoin is not controlled by the state or corporates, so it is not influenced by inflation. Then how the value of Bitcoin is determined? It is very simply by the individuals or the users, by the law of supply and demand. If there is a high demand of Bitcoin, the value of the cryptocurrency is going to increase, and if there is a low demand of Bitcoin, the value of it is going to decrease to make it appealing. Unlike money controlled by central banks, it is possible for Bitcoin to have a quite solid level of its value by keeping producing the money. However small events like economic, geopolitical and more events can affect the price of Bitcoin. Some companies and retailers accept Bitcoin, but it is still unknown to some businesses.

Bitcoin system is very complex. Everyone can become a user by for example simply downloading the software in the computer or the application in the smartphone. Each user has its own address from which they can send and receive the money. Every transaction we make is recorded, a block of this transaction is added to the block chain that is the equivalent if a bank ledger. Today there are more than 300,000 confirmed transactions per day. These different transactions are verified by miners.

Bitcoin mining is a way to ensure there is no double-spending by bitcoin owner and a way to generate new bitcoins. These latter are mined in units called “blocks”, that have to be decrypted. To create a bitcoin, miners have to guess a 64-digit hexadecimal number, called the target hash. They attempt assumptions by emitting what we call a nonce, shorted for “number only used once”. The faster miner to guess nonces that will generate a hash less or equal to the target hash will be the one rewarded with bitcoins. The amount given depends on a bitcoin clock: approximately every 4 years, it will be halved. The initial reward in 2009, at the beginning of Bitcoin was 50 bitcoins. Then, it dropped to 25 bitcoins in 2012 and finally 12.5 in 2016. People tend to work together in what we call pool to reduce computing power cost but also to be more efficient, with a higher hash rate, basically the speed at which nonces are emitted.

There are several advantages of Bitcoin. By using appropriate software, you can directly transfer Bitcoin across the Internet from on user to another, and Bitcoin can be bought and sold in return for traditional currency on several exchanges. Since Bitcoin is not controlled by banks, it almost has no fees that makes it potentially attractive to settle international transactions, without messing around with bank charges or exchange rates, and no personal sensitive data is stored. One great situation where Bitcoin seems really useful is when some countries are facing economic problems, users can navigate over inflation since Bitcoin is not controlled by a monetary authority, and so compared to real money it is more advantageous. The attractiveness, complexity and opacity of the system appeal lots of users, including those with more nefarious purposes in mind, such as money laundering or paying for illegal drugs. }