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Chinese investors look to mine Bitcoin volatility

11 december 2013, 10:28
0
Bobby Lee, CEO and Co-Founder of BTC China, China's bitcoin exchange at his office in Shanghai. ©AFP
Bobby Lee, CEO and Co-Founder of BTC China, China's bitcoin exchange at his office in Shanghai. ©AFP
Chinese speculators have seen Bitcoin values plunge, soar and plunge again within days, but say the virtual currency's extreme volatility is a profit opportunity despite the white-knuckle ride, AFP reports.

China is the world's biggest market for trading Bitcoins, but around $5 billion was wiped off the value of the currency's global stock within an hour of an announcement from Beijing's central bank in early December, banning financial institutions from dealing in it.

Exchange rates on BTCChina, the country's biggest Bitcoin trading platform, slumped more than 35 percent from a recent high of 7,050 yuan (around $1,150), almost as much as an ounce of gold.

They climbed back above 6,000 yuan, until one of Chinese Internet giant Baidu's websites said it would no longer accept the virtual currency as payment.

The following day Bitcoins were down to 3,821 yuan -- before rising again to nudge 6,000 yuan on Tuesday.

"Prices are certainly volatile when it's in the teeth of the storm, but such volatility will create short-term arbitrage opportunities," Wei Zhicheng, a 27-year old Shanghai based investor, told AFP.

He bought more of the virtual currency when the price fell. "Risks are peer to peer with opportunities," he said.

Bitcoin was invented in the wake of the global financial crisis by a computer scientist using the pseudonym Satoshi Nakamoto. It is based on cryptography and only 21 million units can ever be created, which can be stored either virtually or on a user's hard drive.

It offers a largely anonymous payment system with no centralised structure and transactions are publicly logged in what is known as the "block chain", with those who maintain it being paid in new units, a process known as "mining".

Bitcoin has become a global phenomenon, with the price rising so much that a Norwegian man was able to buy an apartment with some of the 5,000 Bitcoins he bought for just $24 in 2009.

The explosive growth has raised alarm bells, with analysts warning of a potential crash due to a lack of fundamental underpinning.

"The trading of Bitcoin has already formed a bubble," Ding Zhaoyong, a finance professor at Jilin University, told AFP.

"The inventor did not pledge any assets to guarantee Bitcoin's value, so when the bubble bursts, all you have left is just a string of useless numbers," he said.

But Chinese buyers have piled into Bitcoins this year, driving the BTCChina price up from 82.29 yuan on January 1 to a high of 7,588.88 yuan on Nov 30, a 9,122 percent increase.

Chinese investors have a limited range of options for their money, with the authorities imposing restrictions on property purchases, historically poor returns from the domestic stock market, and low interest rates offered to savers.

At the same time the authorities retain significant control over the economy, and are unlikely to welcome the prospect of that being diluted by an independent currency.

Although the ruling Communist Party recently vowed that market forces will be allowed to "play a decisive role" in the future, tight capital controls remain in place, with the yuan currency not allowed to float freely against global counterparts.

In its announcement the People's Bank of China (PBoC), the central bank, defined Bitcoin as a "virtual commodity", ruling out the possibility that it will gain legal status as currency.

It ordered financial institutions not to provide services and products related to Bitcoin -- although it allowed individuals to trade it at their own risk.

The central bank also warned of dangers associated with Bitcoin trading, especially after media reported that three people had been detained for allegedly defrauding Bitcoin investors, leaving hundreds with more than 20 million yuan in combined losses.

Nonetheless, BTCChina CEO Bobby Lee says that the e-money offers a new twist on investing for Chinese, known for conservatively investing their assets.

"China has been known as a nation of savers, people save for a rainy day," the ex-Yahoo engineer told AFP.

Bitcoin is "a global asset class" equal to common investment choices including gold, shares and real estate, he said.

"Bitcoin will go mainstream, I have full confidence. We hope to push this forward in China."

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