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  • Aug 22, 2014
  • Updated: 10:54am

Bitcoin

Bitcoin, released to the world in 2009 by a person or people called Satoshi Nakamoto, is not backed by a central bank or a government and is seen as an alternative payment system. In February 2013, Bitcoin went into the mainstream as a monetary crisis threatened to bankrupt Cyprus, seen as a safer bet. Early adopters of Bitcoin have been richly rewarded as the price has soared – in one case, a young Norwegian bought a house from an $850,000 windfall on a US$22 investment.

CommentInsight & Opinion

Bitcoin bubble won't last without Beijing's approval

Andy Xie believes the Chinese government's regulatory crackdown on the digital currency will starve this bubble of the credulous retail investors it needs to sustain itself and grow

PUBLISHED : Monday, 13 January, 2014, 11:26am
UPDATED : Tuesday, 14 January, 2014, 9:41am

Bitcoin is a Ponzi scheme masquerading as a futuristic currency. It was a small bubble until it found China last year. But when the Chinese government launched its crackdown, it was the beginning of the end. Its recent revival is merely the last gasp. No retail Ponzi scheme can last without the credulous and speculative masses in China.

The US Federal Reserve's super loose monetary policy has spawned a plethora of colourful bubbles, from modern paintings and fine wines to properties, bonds and stocks. Internet stocks, for example, are as big a bubble as in 2000.

Bitcoin was trying to join the internet bubble without much success. In the West, bubbles are driven by money managers. Bitcoin is too crazy for them.

But China is the land of retail bubbles. Puer tea and paintings of faces featuring big smiles are two recent examples. In the 1980s, old deutschmark notes from the hyperinflation era were doing the rounds in China. All those zeros got speculators excited. People didn't know the real deutschmark. Bitcoin works in China just like the old deutschmark did then. As long as you are ignorant, it promises untold millions.

China's M2 money supply has risen by more than 22 per cent per year on average since 1978. This is the root cause of why China's masses enjoy speculating so much and are prone to believing in fantastic get-rich-quick stories. Chinese people are big savers, but the monetary policy destroys the value of their savings. Rolling the dice seems more attractive than keeping money in the bank.

Bubbles, by definition, are zero-sum games. In China's case, the credulous masses have become easy prey. The government sector usually takes the lion's share. Some smart cookies take the crumbs. Because the population is so large, the crumbs have made some people very rich.

China's stock market, for example, was founded to raise money for state-owned enterprises in financial difficulty, not for making money for investors. The market works by creating speculative opportunities. When the money goes into the market, the state-owned enterprises take the lion's share by selling shares. The Ministry of Finance gets the second pick from imposing stamp duty on vast trading volumes.

When the money inflow exceeds the appetite of both the firms and the ministry, the market rises. People then play the game of who can catch the crumbs. Unfortunately, it is not a random game.

China's Growth Enterprise Market board doubled last year, while the main board fell slightly. Chances are, the small capitalisation stocks on the GEM board have dealers or price-makers. These are specialists who pump up a stock to attract a crowd. When enough people are in, they dump the stock and pocket enormous profits. These people are not considered villains; they are praised for keeping the game going. The losers are just considered unlucky.

Bitcoin caught fire in China because it has attracted retail punters and the dealers could smell a winner. The bitcoin market capitalisation was tiny, and perfect for the pump-and-dump strategy that China's dealers are used to. It surged 100 times last year before China's government cracked down. As its trading volume in China vanishes, so it will elsewhere.

Its recent price recovery is just a dead cat bounce. Lots of foreigners may be waiting for China's government to change its mind; 1.4 billion Chinese would then pump up the price to US$1 million per coin. But I'm afraid this dream will meet its death this year.

Retail bubbles in China are usually tolerated when they benefit the government. Today's property bubble is the best example. Some bubbles are just games among people who want to gamble. They serve to keep them entertained. When too many get hurt, the government can always force the winners to cough up some of the winnings to pacify the losers.

Bitcoin is a bubble that foreigners cooked up and, by all appearances, is designed to rob the credulous Chinese masses. When the bubble bursts, the Chinese government won't be able to arrest these foreigners and get the money back. The bubble is not under Chinese government control. Hence, it cannot be tolerated.

Maybe Hong Kong is still open for business. There is talk of a bitcoin ATM. It is really a machine for trading bitcoin into real money. Calling it an ATM is to put on a charade that bitcoin is real money. Hong Kong is always ready to serve as the conduit for clever scams on the way to the mainland. But, without bitcoin actually making it into mainland China, Hong Kong cannot hold it up.

When the price is holding but trading volume is gone, a bubble has no juice left. Those who hold the chips are looking into the rear-view mirror and dreaming that the game will return. Time will kill this fantasy. When there are only people leaving the casino, with no one entering, it's bedtime.

Andy Xie is an independent economist

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donholderjr
I think that bitcoins will be the biggest thing online and very popular internationally in the future dont miss out to get secrets and tips then learn from an actual bitcoin millionaire who is sharing his mining software for basically nothing ****318tae.bitcoin.clicksurecpa.com
sam.gillespie.184
Could it be possible that Bitcoin was created by a spy agency to undermine the Chinese economy?
Bitcoin has all the nefarious characters of a spy implantation. Under the cloak of secrecy and using massive surveillance and mass indoctrination to create chaos.
Everything seem so farfetched until Snowden came out with the proofs.
Using a massive network of the internet to do harm to the unsuspected Chinese people. If there is something that is so good and easy and makes so much money, would foreigners give it to the Chinese so readily?
So far I can see foreigners trying to rip off Chinese people, nothing is for free for the Chinese.
Why all of the sudden the foreigners are so good to the Chinese with this internet created currency? Wow free money created out of thin air so Chinese people can pay for with real money.
Bitcoin has to be created by an organization with massive networking and internet control power and ability to influence the minds on a massive scale. The only organizations with this capability are foreign spy agencies.
lexishk
I hope you were wearing your tinfoil hat when you submitted this comment, otherwise the NSA is now monitoring your terminal.
blaqfather
美國的力量被誇大。中國政府的權力也被誇大了。永遠不要低估對手。Bitcoin
blaqfather
其他國家在世界(190)有知識,這篇文章是不相關的在這個時候。我們尊重政府,尊重對方。這是另一種嘗試降低價格 Bitcoin.
你好我們的中國朋友。你的生活應充滿快樂和幸福。
captam
Funny........... I always used to think the SCMP was an English language newspaper.
So here goes : .....
起來!不願做奴隸的人們........ 前進!前進!進!
I actually love this march. The music was written in 1934 by George Njal (Nie Er/ Nie Shouxun 聂守信). I digress!... it truly has little to do with Bit Coins but in ten years time no one one will remember what these were, just like Lehman bonds whereas the 'March of the Volunteers' will endure.
puddlebiker
Bitcoin was not designed as a get rich quick scheme. It was designed as a school project and brought online by a bunch of individuals who thought it was a great idea. The idea is to have a currency that is not controlled by one individual or corporation. Bitcoin's hyperinflation and get rich quick tendancies were not intentional, instead a by-product of growing technology. This has occurred due to growth in popularity. Early adopters had little concern over losing what they invested into bitcoin because they used bitcoin for a purpose. With time more and more people came on board and seen a value in the bitcoin system. It's the usefulness and value of the system that has caused it to grow. On top of that growth, it has seen extra growth caused by other reasons. One reason is the growth in value has been perceived as an investment tool. Many people have seen the popularity as a way to grow their money the same as investors who buy and trade currencies. Another reason is the growth in tools and services needed to support day to day business in bitcoins. Only because of the bitcoins inflating value is bitcoin trading and bitcoin mining popular. Otherwise bitcoin would resume its normal growth. In the end, bitcoin is a technology. You can accept it or ignore it. It's your choice. If you can't see its usefulness then maybe its not for you. In the end its growth will continue as long as it is useful, regardless of China's governmental policies. But hey, thanks for the advertising.
captam
@"brought online by a bunch of individuals who thought it was a great idea".
Please retype that as "bunch of idiots".
No currency which is used as a high speculation instrument can last. If exporters and importers are using a currency to settle international trade deals they need stability of value and the Bit Coin fails to provide this. This is also why the world needs to bring back the gold standard to replace the Mickey Mouse US Dollar and Pound.
jonny.phun
It's not about the price, it is about the revolution. Join the revolution...
Have a business? Use Bitpay or Coinbase to start accepting bitcoins for your products or services.
Post your companies products and services on BitcoinCities.com and expose your business to the bitcoin community
sam.gillespie.184
Bitcoin is not transparent. Show the proof on who is managing it. Who are the creators of Bitcoin.
Why the secrecy.
I think China should come up with its own Bitcoin and put ATMs in North America and England.
And give free Chinese Bitcoins to Amazon and eBay and see how that would affect the US economy.

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