Bitcoin Surges As China Battles Capital Flight

Exploding bitcoin trade in China has sparked concerns the crypto-currency offers an easy route around foreign exchange controls.

That misreads how this market is functioning. Chinese investors would be daft to use such a volatile tool to hedge against a depreciating yuan, and the market is too small and unbalanced to channel capital flight.

When bitcoin crossed $1,000 per coin in 2013, thanks to surging Chinese interest, anxious officials stopped financial institutions from trading in bitcoin and made it difficult to fund accounts. That helped knock the global bitcoin price back down to $340.

Investors are understandably worried about a fresh crackdown, after central bank officials met the major local bitcoin exchanges on Friday; bitcoin prices shed 12 percent in reaction.

And superficially, the case for another purge looks more urgent. China is busy battling capital flight, making it harder for firms and individuals to convert yuan, and intervened to crush yuan short-sellers last week. Why spare bitcoin? After all, once a Chinese person owns bitcoin, they can swap it anonymously for dollars.

Fortunately for Beijing, it is not that simple. Using bitcoin, which routinely moves 10 percent in a day, as a hedge against a weakening but far less volatile yuan is dangerous, even if the ultimate goal is to use the bitcoin to buy dollars or euros.

Consider too, that Chinese exchanges now host 97 percent of global transactions, worth $143 billion in December 2016. There was only $1.1 billion in dollar-based volumes during the same period. That mismatch makes it hard for Chinese investors to swap bitcoin for hard currency at will.

As bitcoin prices rose on the back of global uncertainty, a herd of Chinese investors leapt aboard.

This was speculation, not flight.

There’s still little sign Chinese people are converting bitcoin to dollars en masse. Instead they trade amongst themselves under the watchful eye of Beijing. That is no crisis for the Chinese government. But it is a nightmare for those who hoped bitcoin would liberate commerce from the tyranny of central banks.

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