From US$0.03 during its inception, its value ballooned to US$250 at its peak on 10 April 2013. Why the Chinese government is giving this digital currency a go
In 2008, an anonymous developer, who called himself Satoshi Nakamoto, published a paper about a currency anyone can use—without regulation. In elegant English, the paper described a system of currency that could potentially be a game changer. Or an idealist dud.
A year after, the Bitcoin network was born.
Bitcoin, in a nutshell, is decentralized currency. It is completely digital and transactions are made through the Internet without any fees.
Bitcoins are transferred directly from person to person, without going through banks. It works the way peer-to-peer file transfers work (e.g., torrent downloads through Pirate Bay). Proponents claim that anyone can use Bitcoins anywhere in the world—as long as you have access to the Internet.
Bitcoins are available for sale, and watching Bitcoin prices fluctuate can be riveting. Definitely not for the faint- hearted.
ne Bitcoin was valued at just US$0.03 when it was first publicly traded on 25 April 2010, but the value has multiplied exponentially since then. The total market value of Bitcoin now stands at more than US$1 billion.
Another way of acquiring Bitcoins is to ‘mine’ them. Bitcoin can be generated by users running a free application called the Bitcoin Miner. By solving mathematical equations, users can mine Bitcoins.
It is really much more complicated than that, but basically the application uses the computing power of a user’s computer to process Bitcoin exchanges.
Bitcoin users who let the application run, get Bitcoins in return for letting the network use their computer. Bitcoin users who rely on mining will have to change computer parts regularly, as the application takes its toll on the hardware.
Even in its infancy, Bitcoin has already attracted the eye of the Chinese government. And why not? The Chinese are hellbent on creating a world where the US dollar is no longer the main currency. That is the reason why they are forging direct currency trading ties with countries like Japan, Brazil, and Australia. New Zealand is currently negotiating with China to join in the action.
A documentary about Bitcoin was recently shown on China Central Television (CCTV), the biggest TV network in China. The state-owned network, which is governed by official sanctions on the content they air, seems to have given Bitcoin the thumbs up with surprisingly sober reporting.
But it is not like Bitcoin has been unknown to the Chinese. Some of the digital currency’s early adopters were Chinese. In an interview with a newspaper, Cheng Hua, one of the first Chinese to deal with Bitcoin, recalls his first Bitcoin purchase in May 2011.
“At that time, there weren’t many people mining, so it was easy,” Cheng says. Early adopters could mine up to three Bitcoins a day.
However, Cheng’s experience with mining was not exactly fruitful. The Bitcoins Cheng acquired were worth less than the money he put into his electronic infrastructure.
He and his friends eventually gave up on the whole venture—but Cheng did not sell his Bitcoins. He held on to about 2,000 Bitcoins, and he forgot all about it until recently, when a small Mediterranean island succumbed to the financial crisis plaguing Europe.
On March 16, Cyprus was hit by a banking crisis. And the Cypriot government wanted a bailout. They would receive 10 billion euros on the condition that they raise 5.8 billion euros. The Cypriot government’s proposal for acquiring the 5.8 billion euros was to introduce levies on bank deposits.
Anyone with over 100,000 euros would lose 10% of their savings, while those with less than 100,000 would lose 6%. In order to stop panic withdrawals, the government imposed a 100-euro daily limit.
The banking crisis in Cyprus made many Cypriots look for options to put their money in. They found out about Bitcoin—and Bitcoin’s price soared because of the sudden increase in demand.
From US$0.03 during its inception, its value ballooned to US$250 at its peak on April 10 this year, before crashing to as low as US$105 on the same day, losing 61% of its peak value.
Cheng, following the news, saw the value of his Bitcoins multiply 40 times that of his initial investment.
In China today, speculation is at an all-time high. Many real estate investments have become ghost properties, pushing the prices of entire cities up, even when no residents are living in those high-rises built for them. Bitcoin, though largely speculative in its early stages, is touted as inflation- and risk-free by its supporters.
Li Xiaolai from Beijing, an early Bitcoin user, bought more Bitcoins when the currency’s value fell to US$50 one day. “I’ve only trade it once. The number of my Bitcoin increased to 1.3 times more than before. I can tell you, it’s around six digits now,” he says.
Jack, an American expatriate living in Beijing, in an interview with CCTV, says, “The US government prints money every year. Inflation is about 4%. So the greenback depreciates 4% annually. But Bitcoin has a ceiling.”
Bitcoin miners work on blocks of coins, such that the amount of Bitcoins generated are automatically adjusted by the Bitcoin network. So Bitcoins are generated at a predictable and limited rate. Each Bitcoin created in every update of the network will be halved until the year 2140, when no more Bitcoins will be generated and the number in circulation will have reached 21 million.
However, the basis of the Chinese government’s support for Bitcoin—a documentary about Bitcoin shown in the state-owned CCTV—was preceded by an earlier rumor that the Chinese government was moving to block Bitcoin-related traffic online.
A user from Bitcointalk, one of the largest forums for Bitcoin, posted a supposed e-mail that said the Chinese government was moving to quash the growing digital currency.
But users in China say they operate without any problems. Indeed, there are even signs that the Chinese government is giving the digital currency a chance to flourish.
In the early aughties, an Internet company in China called Tencent launched Q Coins. Users can buy items with Q Coins for their avatars. But users started dealing with each other using Q Coins. These untraceable Q Coin exchanges were then used by the ingenious Chinese for black market transactions. The government eventually took action, putting Tencent under it’s oversight.
So why the support for Bitcoin?
A farfetched assumption is that, as it stands, China is forcing the exchange between the yuan and the US dollar by setting the price, but the US is trying to adjust the rate to balance out exports and imports.
When the US prints more dollars, China matches that by buying them at the same rate. China is able to keep the cost of exports low for everyone else, in exchange for setting a strike price.
China, in a gross oversimplification, is suffering from the quantitative easing the US imposed after the 2007 financial crisis. Basically, the US saved itself by exporting inflation outward.
There is nothing China would like more than to ease their dependence on the manipulable dollar.
But is Bitcoin the way to go? From China’s perspective, allowing Bitcoin to prosper may be to their advantage, if only to annoy the US.
So far, no government has recognized Bitcoin officially. But if Cyprus is any indication, where ATMs allow the transaction of Bitcoins, then there may just be a huge place for Bitcoin in China.
Print ed: 06/13