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Anyone wondering why Bitcoin prices are rising need look no further than China.
Since the beginning of November, a massive spike in Chinese buying of the digital currency has almost single-handedly caused Bitcoin prices to triple.
When you look at the numbers, it’s almost surreal.
At the start of November, one Bitcoin was worth about $213 on Japan-based Mt. Gox, the world’s second-largest Bitcoin exchange. Today (Monday) one Bitcoin traded as high as $675.
Volume on BTC China, where Chinese yuan can be exchanged for Bitcoins, has risen 10-fold in just over a month. Volume jumped from 2,000 to 5,000 Bitcoins traded per day as recently as September to 40,000 to 60,000 Bitcoins traded per day in the past few weeks.
The spike has made BTC China the world’s largest Bitcoin exchange by volume, surpassing Mt. Gox, which allows Bitcoin trades in U.S. dollars, euros, and more than a dozen other world currencies.
The sudden surge in Chinese interest in Bitcoin – mostly as buyers – is the primary reason why Bitcoin prices are rising so rapidly.
With the total number of Bitcoins in existence having just crossed the 12 million mark, that means the total value of the currency has soared from about $2.5 billion to about $8 billion in less than three weeks.
While some have dismissed Bitcoin as a fad, the virtual currency has slowly gained traction since its inception by an anonymous creator named Satoshi Nakamoto in 2008.
In the past couple of years, more and more businesses around the world, particularly in Europe, have begun to accept Bitcoin as a form of payment.
In fact, one of the events that triggered Chinese interest in Bitcoin was in late October when Baidu Inc. (Nasdaq ADR: BIDU), a search engine company even more dominant in China than Google Inc. (Nasdaq: GOOG) is in the United States, announced it would take Bitcoin.
But it was a much more dramatic development that sent Chinese in far larger numbers to the BTC China exchange…
Why Bitcoin Prices Are Rising in China
In a very rare move, the Chinese government seems to be actually encouraging its citizens to invest in Bitcoin.
This is one of the most glaring oddities about the popularity of Bitcoin in China, as the Chinese government is not known for allowing rogue economic activity that it cannot control. But the government has done nothing to curb the Bitcoin craze.
In fact, shortly after Baidu made its October announcement, the official state television network CCTV broadcast an extremely favorable 30-minute documentary on the digital currency. And it’s probably not a coincidence that the People’s Daily newspaper published a positive story on Bitcoin at about the same time.
It’s possible that Beijing sees Bitcoin – an international online currency beyond the control of any central bank – as a way to indirectly poke a few holes in the dominance of the U.S. dollar.
“China realizes that the yuan has to clear a lot of hurdles before it can become a reserve currency. If people start using and holding more Bitcoins in place of the dollar, it would likely lead to a less U.S.-centric global economy and that’s what China wants,” Kyle Drake, founder of CoinPunk, an open-source hybrid web wallet, told CNBC.
Regardless of Beijing’s motives, the double-barreled stamp of approval from the Chinese government sent the populace scurrying to buy as much Bitcoin as they could.
But that still leaves the question: Why? What do the Chinese love about Bitcoin?
The short answer is that it fills several needs.
“The main reason why Bitcoin has become big in China is because Chinese people are savers, and more people are seeing Bitcoin as a way to store and invest their money,” Linke Yang, vice president of BTC China, told Agence France-Presse at a recent conference in Singapore.
One big problem that Bitcoin solves for the Chinese upper-middle class is that the Beijing government has made it difficult to move yuan outside of the country – Bitcoin can be transferred anywhere in the world with the click of a mouse.
Finally, much of the new wealth in China has almost no place else to go.
“Traditionally, high net-worth individuals and investors first go to the property market to invest and then the stock market, but since the property market is capped and controlled and stocks maybe aren’t doing so well that’s changing,” Yang said.
While Bitcoin prices almost surely will not continue shooting up at the pace of the last few weeks, any correction will be mitigated by the keen interest of Chinese investors.
“The sky’s the limit in some sense,” Bobby Lee, a co-founder of BTC China, told TechCrunch. “The price eventually will settle down when there’s a good balance between supply and demand, but clearly as more people are learning about Bitcoin, all that means is more people are becoming aware of it – and as they become aware they become comfortable buying some Bitcoin. A few hundred dollars or a few dollars. But everything adds to the push-up in price.”
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