Investors look to mine Bitcoin volatility
Extreme fluctuations in the virtual currency's values provide profit opportunity for mainland speculators, but they come with risks as well
Mainland 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.
The mainland is the world's biggest market for trading Bitcoins, but about US$5 billion was wiped off the value of the currency's global stock within an hour of an announcement from its central bank early this month banning financial institutions from dealing in it.
Exchange rates on BTCChina, the country's biggest Bitcoin trading platform, slumped more than 35 per cent from a recent high of 7,050 yuan (HK$8,942), almost as much as an ounce of gold.
They then climbed back above 6,000 yuan, until one of mainland internet giant Baidu's websites said it would no longer accept the virtual currency as payment. On the following day, Bitcoins were down to 3,821 yuan, before rising again to nudge 6,000 yuan yesterday.
"Prices are certainly volatile when it's in the teeth of the storm, but such volatility will create short-term arbitrage opportunities," said Wei Zhicheng, a Shanghai-based investor.
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 US$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," Jilin University finance professor Ding Zhaoyong said. "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."
Nonetheless, BTCChina chief executive Bobby Lee says Bitcoin is "a global asset class" equal to common investment choices. "Bitcoin will go mainstream, I have full confidence," he said. "We hope to push this forward in China."