China, and the soaring price of Bitcoin

Here is one clue as to what is going on:

To what does he [Zennon Kapron] attribute bitcoin’s popularity in China, and how could others benefit from it?

“There’s BTC China’s no-fee trading for starters. You can leave your money on the platform, your coins on the platform, and trade in and out for free,”  he said.

The entry and exit points aren’t free, with a 0.5% Tenpay (China’s PayPal equivalent) cash in/out fee, and a 1% bank transfer fee.

Capital controls in China are strict. It’s easy to bring money into the country, but getting it out (to invest or spend) is more difficult. That means there are are plenty of wealthy Chinese citizens and residents looking to move their money around the world with greater freedom.

There is more here.  And here is a map of Bitcoin flows, recommended.  In other words, more entrepreneurs in China are holding Bitcoin and accepting the volatility of its value, in order to sell the asset to those looking to get money out of China.

Those using Bitcoin may wish to diversify their portfolios, they may need to make payments abroad, or they may think the Chinese currency is currently overvalued, or some mix of the above.  Bitcoin has become increasingly popular in China, and the largest Bitcoin exchange is in China, yet the currency has hardly any retail use in the country.  Still, the number of yuan-based Bitcoin trades has risen thirty-fold in the last two months, according to Bloomberg.

Right now, you can think of the value of Bitcoin being set in the same way that the value of an export license might be set through bids.  If/when China fully liberalizes capital flows, the value of Bitcoin likely will fall.  A lot.  To the extent the shadow market value of the yuan rises, and approaches the level of the current quasi-peg, the value of Bitcoin will fall, by how much is not clear.  Or maybe getting money out through Hong Kong (or Shanghai) will become easier and again the value of Bitcoin would fall.  If Beijing shuts down BTC China, the main broker, which by the way accounts for about 1/3 of all Bitcoin transactions in the world, the value of Bitcoin very likely will fall.  A lot.  You will recall that the Chinese government shut down the virtual currency QQ in 2009; admittedly stopping Bitcoin could prove harder but still they could thwart or limit it.

If you are long Bitcoin for any appreciable amount of time, it seems you are betting that the Chinese economy will do poorly and capital controls will remain.  Then more people will be increasingly desperate to get more money out of the country.  Or you may be betting that the Chinese use of Bitcoin to launder money will increase due to the mere spread of the idea, through social contagion.  According to this source, the value of Bitcoin is up by a factor of 66 this year in China.

To the extent the price of Bitcoin incorporates expectations about the future strength of the social contagion effect in China, the price of Bitcoin may become more volatile.  Expectations about the future strength of social contagion effects are probably not so stable.

In theory these points might give you a way to hedge the value of Bitcoin.  Or hedge the value of China.  Here is an interesting post about how Bitcoin prices in yuan do not so closely mirror Bitcoin prices in dollars.  If you are a resident of China and have a BTC account there are numerous interesting possibilities, none of which I recommend for the faint-hearted.  (Justin Wolfers doesn’t have to like this, but how can he think it is not interesting?)

I do not recommend that you go either long or short in Bitcoin, unless it is a small amount of money and done “for kicks.”

By the way, Ben Bernanke, by “talking up” the price of Bitcoin, is placing an implicit tax on the Chinese Johnny-come-latelys to this market, whether he intends it or not.  He also is raising the price for circumventing Chinese capital controls and perhaps thus delaying a fall in the actual market value of the yuan.

For related ideas behind this post, I am indebted to a series of tweets by Izabella Kaminska.

Addendum: Izabella comments here.


I wonder how much of the inflow is just bitcoin scams hosted in China.

I'm out of investing for the moment because I've spent all my capital and have no means of employment, but if I had capital I'd buy the shit out of bitcoin now and on any future drop. It is here to stay and will exist for another century and appreciate several hundred fold. 10% of your speculative portfolio should be in bitcoin.

That's right. Bitcoin has reached a new, permanent plateau.

Re Bitcoin: "I have my entire retirement and savings invested in Bitcoin. I will track its progress here over time."

From what I can tell, the author of this reddit thread borrowed $30k from his credit card, made about 10 times his money when bitcoin went from 20 to 200 $/BTC, quit his job, and is a stay-at-home dad with most of his money out of bitcoin as of a few months ago. Good on him, but I could not retire on $300k USD as he apparently did.

I could. Do you have any extra money?

dirk, in another century, the encryption and signing protocols that are the basis of bitcoin will almost certainly be broken. there is also a method to render bitcoin unusable right now by creating a monstrously large number of "legal" transactions, which exchanges must either accept or alter the bitcoin protocol. Because there is no difference between a transaction designed to make bitcoin unusable and a normal transaction, this shift would not be able to occur without invalidating genuine transactions.

You should just stick to posting links and restaurant reviews or something. Every time you open your mouth you say something stupid. You're always wrong. You're consistently wrong about immigration, and you've been consistently wrong about Bitcoin.

Has it now been proven that Bitcoin is going to be a long-term success, and not a bubble like Tyler predicted? The thing about bubbles is, they keep increasing--until they pop.

Here is the most specific prediction I found that Tyler made: "What will be the rate of Bitcoin appreciation five years from now? I guess it will be falling."

It does not seem that this claim has been disproven yet (admittedly his claim that it would be his "last post ever" on the topic was somewhat less accurate).

And if I were you, I would not be so quick to claim victory and a lot more worried about the fact that a large portion of its current success depends on China continuing to allow activity that circumvents Chinese policy.

Also: "You’re consistently wrong about immigration"--References please.

I become ever more convinced of my belief that the biggest impediment to widespread Bitcoin adoption is the Bitcoin community.

A volatile currency is not useful for business. It's useful for investing and speculation. But, unless you are using the greater fool theory, investing and speculation has to end with something useful to people. A volatile currency is not useful for business.

I think the volatility is basically unavoidable for a time. A currency has to start somewhere, and the smaller the market, the more volatile it is going to be. As (if) its adoption grows, the volatility will drop. My worry over it would be technological. It might be hackproof now, but if anyone ever solves the problem, its value will hit zero within a week. This worry also suggest to me that an even more secure digital currency might supplant it at some point.

What if it's not a currency but a programmable decentralized wealth registration and exchange mechanism?

Since it's one fungible form of wealth, and the registration mechanism is secure, viola we have a currency.

Currency exchange is very useful. Lowering the high transaction costs created by currency controls is very useful. That alone more than justifies all the computer cycles that have been expended creating and trading bitcoin.

Well, there is also this:

The text is simply "Fool", and the link is to the guy saying he was putting his life's savings into Bitcoin back in May 2011. That guy is up roughly 100x at this point, assuming he held on.

It is fair to say that Prof. Cowen has been bearish on Bitcoin at least since it was in single digits (USD).

If I invested my entire life savings in lottery tickets, and then won the lottery, would that prove I was smart?

Maybe that guy was an investment genius, or maybe he just made a foolish, highly volatile investment that happened to pan out.

It is probably fair to say that Bitcoin has gone further than Tyler expected. But was he fundamentally wrong about the currency, or is it just a bigger than expected bubble? It is far too early to claim the former.

Well, by your "lottery' logic, nobody is ever right or wrong about anything; they just get lucky or unlucky. That might be true, in a vacuous sense, but it has nothing to do with Bitcoin.

The original comment said Prof. Cowen has been "consistently wrong about Bitcoin". I suppose it could have included " far" to be technically precise, but the statement as phrased is easily defensible.

The deeper story is gold. Look at what Chinese people are doing with Bitcoin, now consider the flow of gold is similar to the flow of Bitcoin (both Indians and Chinese are paying premiums to hoover up physical metal). The total market for Bitcoin is much smaller, but the stakes in gold are much higher. The important lesson is also: when "China" decides to buy something, it will blow the doors off the market. If you can figure out what Chinese will buy next, you will be set for life, because their disposable income is set to grow rapidly in the coming decade.

Colored bit coins with hashes that are considered "lucky" by Chinese numerology.

Apparently, the bitcoin powers-that-be do not create/print 85 billion additional bitcoins every month.

Is bitcoin an alternative to the dollar, yuan, and/or gold?

Why is bitcoin soaring and gold (down 25% for the year) futures are decreasing?

PS: I'm a small-scale (6% of TA; average bullion coin costs in fiat $868) gold bug.

They are different markets, and there's no "paper" bitcoins to increase supply. There's a far larger supply of gold and lots of stock that can flow and push down prices. Taper talk is certainly helping. And when gold crashes, it is doing it on the Comex where a lot of futures are being sold. Physical is still being bought and accumulated in China and India, in fact the pace of physical buying is accelerating as the price drops.

In the last few months gold has gone way down and bitcoin has gone way up. Many gold investors who need to move their wealth are moving from gold to bitcoin, since bitcoin is easier to move and harder to confiscate.

'He also is raising the price for circumventing Chinese capital controls and perhaps thus delaying a fall in the actual market value of the yuan.'

Seeing as this is the best satire site on the web, let us take a quick moment to let readers in on the joke in terms of the scale involved.

Yuan - 2013-11-11 16:00:00 ¥5560B in circulation (

Bitcoin - 12,000,000 in circulation (

Resulting, in dollar terms, in a total value of Bitcoin at something like 600 dollars each (a number which is all over the place at Mt. Gox) of 7,200,000,000 dollars.

The yuan amount in circulation comes in at 912.37 billion dollars or so.

Bitcoin is a rounding error in terms of the yuan in circulation. The total amount of Bitcoins aren't even enough to pay off just one American bank's acknowledged responsibility for engaging in massive global financial fraud.

Such a dry joke.

It's a little weak to say that Tyler's taking the argument far enough that "scale" is the major indictment against his argument. He's simply making the point that there is interest in this sort of option. In that light, just imagine if there were a 100% legal and 100% proven way for yuan holders to do what they're doing now. There'd be a flood of capital out China within a matter of days.

In light of the limited availability of Bitcoin, the not 100% sure to be legal (in China) status, the obvious volatility and risks, and the technical barriers to using it, I'd say the amount of trade is fairly impressive. Again, it would be a complete shitstorm for the PRC if something easier and more clearly legal came along.

You use the word "joke" as if the original statement wasn't intended as a joke.

You don't need to be resident of China to do arbitrage, just live here and have a bank account. The issue is still the capital controls: you need someway to get around them to cycle the money. Otherwise you end up with a yuan sink.

What does the hacker sub culture do best? Teach average people how to better circumvent control. In short: Bitcoin is working as designed in China.

Or it's because they just like gambling?

Interesting points, however, why should Chinese Bitcoin holders be so keen of getting rid of it in the case export limitations fall, if Bitcoin has worked so well for them in the past (the future past, that is :-)? Also at least the two risk points "export limitations fall" and "BTC exchanges are being shut down by the government" seem to be inversely correlated.

Another aspect: if Bitcoin are used to buy things outside of China (or money, or whatever), shouldn't we see a lot of BTC flowing from China to somewhere else? It seems at the moment it is mostly flowing to China, not out of it.

Re: "flowing to China, not out of it"

Once BTC is owned, it is everywhere (and nowhere specifically). It's an entry in the global highly-replicated ledger.

So it could be sold on another exchange, in another country, for another currency, at any future time, without generating an obvious inflow/outflow. Hence the occasional description of Bitcoin as "gold with teleportation".

(The balances aren't yet easy to tag with the nationality of the exchange where they were most recently traded... but that would be possible with sufficient omniscience/enforcement.)

Mr Cowen, I must say, i sense a deep bitterness in your article. Accusing Bernanke of inadvertently delaying the fall of RMB is a stretch of imagination if i ever saw one. Are you kidding me?!

"Are you kidding me?"

I think the correct answer is yes.

One would hope this is merely another example of a jape - but then again, this is also the person that put out a best non-fiction list of 2013, while also noting that one of the books on it was one he hadn't read.

Which is truly a joke. Though it does allow one to now concretely answer a commenter's speculatation of whether Prof. Cowen had actually read all of the books he recommends as being the 'best' with a definite 'no.'

Maybe one needs something like Poe's law for GMU economist bloggers?

If you aren't enjoying it, you can always stop reading.

The jealousy in your blather is quite noticeable today. You really cant stand the fact that people care so much about Prof. Cowen's opinions and endeavors and dont give a shit about you and yours at all, can you?

QE causes dollars to flow into China. No QE means deflation and dollars flowing out of China, popping the credit bubble and sinking the yuan.

Purchasing Bitcoin is highly insecure as well as the investment might be lost completely. But, the upside potential is tremendous. Why do I say so? You can see here:

Eff you Tyler for giving away my arb.

From a people-watching perspective, it's interesting to see how Bitcoin ( or at least commenting on Bitcoin) makes people quite angry.

I've yet to work out why that might be...

Some people have a lot invested in it. Both emotionally and financially.

That, and i think there is a lot of misinformation spread about Bitcoin, which naturally bothers its supporters. The other part of it is that I dont think Bitcoin is shaping up to be what its supporters hoped it would be. They wanted a universal, digital currency and got mostly a digital speculative asset.

Some supporters wanted it to be a currency. They were vastly outnumbered, at nearly all stages of life, by the speculators.

Maybe it would have been different it Bitcoin were inflationary or even stable, but since it is deflationary it attracts people who think how cool it is to hold deflationary currency. You can't have the whole society pile into a deflationary currency, though. Eventually the pyramid runs out of layers.

Some people have a lot invested in it. Both emotionally and financially.

Similar holds, but about a thousand-fold greater, for what people have invested in competing currencies.

Far more people are emotionally and financially invested in the system Bitcoin aims to destroy.

The chances it succeeds are minuscule, of course. But rising.

yet the currency has hardly any retail use in the country.

I have to confess some skepticism of this claim. China's black market for normal stuff is enormous and beautiful. I would not be surprised if BTC use is more prevalent than what shows up in data.

If "the data" is the public block chain, then it has to show up in "the data" almost by definition. It's hard (but not impossible) to transfer Bitcoins without publicly transferring them.

(There have been a bunch of attempts to make physical bitcoins but IIRC they rely on trusting the organization making them, which ironically works with an American system of laws but probably won't on an underground black market.)

Yeah, that's a good point. I stand corrected. I'd say, "I thought about that after I posted my comment," but there's no point saving face here ha ha... I should have thought that out a bit more.

> If “the data” is the public block chain, then it has to show up in “the data” almost by definition.

But not in any useful fashion (laundries/tumblers/mixes, CoinJoin, web wallets) nor even necessarily (Silk Road was your normal centralized site: you deposited coins and eventually at some point withdrew, or not; all SR transactions were then done the usual way, by pooling funds and updating little entries in its database, not by on-blockchain transactions).

Silk Road was your normal centralized site

"Was" is the operative word here. A centralized site doing illegal things was not a sustainable use of bitcoin.

Re: "[physical coins]… rely on trusting the organization making them"

There's a way to have an untrusted party make a 'physical coin' (artifact representing a private key) for you, where the key is further protected by a passphrase only you know. It's the "EC-multiplied keys" user-story motivating BIP ("Bitcoin Improvement Proposal") 0038 – – and already supported by lots of tools. It's not quite the same as a purely-physical, bearer-instrument – you still need the passphrase – but very close.

I believe this same technique is behind the ability to outsource 'vanity address' generation: you give a third party a seed value, and some desired string to appear in your address. They are able to discover (using brute-force search on their hardware) values combined with the seed to create desirable addresses, and sell those to you... but without the private-portion of your seed, never revealed to them, can't control balances sent to those addresses.

There have been a bunch of attempts to make physical bitcoins but IIRC they rely on trusting the organization making them

Indeed. Physical bitcoins, or strongly anonymous Chaumian cash backed by bitcoin, would lose the leading bitcoin feature: a global ownership registry that is secure without a gatekeeper. Once you get a gatekeeper, currency controls can be enforced, and the whole thing becomes worth no more than the previous attempts at cybercash. Practically the entire value of bitcoin stems from its ability to transfer wealth online without a gatekeeper. Gold coins also have no gatekeeper, but they can't be transferred online, whereas other forms of cybercash, except for the various bitcoin spinoffs, have a gatekeeper.

I don't think commenters are giving this post enough props. It is very clever and creative.

A more boring reason for the large representation of Chinese in overall bitcoin activity is that China is the world's most populous country, and one would therefore expect them to have the most busy bitcoin exchange.

I'm sorry Tyler, but you've got this mostly wrong.

Yes, skirting currency limits in China is a factor. However, this same factor applies in Russia, India, etc- The same factors apply in other areas, China is just ahead of the curve. Also, China has limited investment options for average investors (hence the crazy real estate situation.) Clearly you think the many other uses of bitcoin are bunk (ecommerce, US inflation hedge) so I'm not going to even get into those.

Bottom line, you're saying "bitcoin price"="Chinese currency export limits" which is a straw man: You're confining a general purpose tool to an extremely tiny sliver of utility just so that you can knock it down rhetorically.

I don't know, conrad ... after all, Tyler_Cowen has been so insightful and accurate regarding bitcoin in the past two years, you've gotta trust his brilliant analysis on this.

“bitcoin price”=”Chinese currency export limits”

If it was actually equal Chinese currency controls alone would justify a bitcoin price far higher than $700. Of course as many have observed China is hardly the only place with currency controls, nor are currency controls the only kinds of high transaction costs impose on currency movements.

Wrong Wrong Wrong. It's actually very easy in China to get RMB convert to USD for CHINESE and for low fees. It's another matter for foreigners outside China. Chinese are not looking to buy USD, they trust the RMB more. They don't trust the governement, yes and they want big return. That's why they are buying and holding Bitocoins. It's not gonna stop. And it's not to buy dollars with it.

Not that easy. I work at a Chinese firm and we have limited batch payments to Hong Kong banks that have to be prioritized daily. There is definitely a limit, and I am sure if we could get around it we would!

I don't know how reputable this site is, but:

"Chinese nationals are able to transfer the equivalent of US$2,000 per day into a foreign bank account, however Chinese nationals face a US$50,000 annual ceiling when exchanging RMB into foreign currencies while foreign nationals do not face such restrictions."

If you are long Bitcoin for any appreciable amount of time, it seems you are betting that the Chinese economy will do poorly and capital controls will remain.

Right, because there aren't a zillion other things that affect bitcoin's price.

Now consider this statement: "If you are long USD for any appreciable amount of time, it seems you are betting that the currency won't be inflated away to nothing." The statement is true, and yet it does not imply that this is the *only* thing affecting the USD.

The US inflating away the value of the USD is something that could destroy its value. The Chinese government not doing enough to prop up demand for bitcoin is not something that could destroy its value.

If circumventing capital controls is driving a lot of use of Bitcoin, then the removal of those capital controls could destroy its value. Why not? Any factor that causes some people to stop using Bitcoin could make the currency drop significantly. Further, any big drop in the currency could trigger a run that would destroy all its value.

It is much easier for something to destroy Bitcoin's value than the USD's value, because dollars are tied to the US economy in a way that prevents their value from being completely destroyed apart from a total collapse of the economy. Bitcoin could be destroyed just by people deciding it's not such a cool idea any more (for any reason or no particular reason).

Bitcoin has found its 2nd major niche, low friction international exchange. Its first was of course currency to buy illegal wares. If continues to find use cases where it out performs traditional currency, it will continue to grow and gain in value.

It would be interesting if bitcoin emerged as a international B2B currency.

Can Bitcoin really continue successfully in this niche if governments with capital controls try to prevent it? My guess is no. They won't be able to completely stop it, due to its decentralized nature, but they will be able make it difficult enough to not be worth it. Exchanges can be shut down or blocked, and without exchanges this will no longer be viable for most people.

It seems most of the Bitcoin community agrees with you; there are several competing "decentralized exchange" projects to address this weak point.

Yes, exactly. I'd go further: many people around the planet -- not just in China! -- want to diversify away from local currency and local financial institutions, so they turn to the US dollar, gold, Swiss bank accounts, foreign real estate, or anything else that can possibly hold its purchasing power under all but the most dire of economic scenarios. Consider that a majority of US dollar bills in circulation – the cumbersome ones made of paper – are held outside the US.

Bitcoin is an *ideal solution* for all those people. It is becoming the go-to asset for anyone who wants to diversify away from local currencies (or local financial systems). Bitcoin solves a big problem for a HUGE global market.

I wrote about this three years ago, and correctly predicted it would have a huge impact on Bitcoin's price appreciation in the long run:

Those who cannot change their minds cannot change anything.

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