Bitcoin buyers eye Beijing nervously as prices slide from record

[HONG KONG] For Felix Yang, nothing beat bitcoin.

After he bought several million yuan worth of the cryptocurrency in June, the 34-year-old finance worker watched as prices skyrocketed 43 per cent in the second half of 2016 before reaching an all-time high of US$1,162 this week.

Mr Yang is now looking to his nation's policy makers with trepidation. The last time prices reached a record in 2013, China tightened rules on bitcoin transactions, spurring a rout that caused him losses. Jitters among buyers increased after the asset plunged as much as 23 per cent on Thursday before rebounding back above US$1,000.

"The Chinese government's policy is an important factor," said Mr Yang, who owns about US$2 million of bitcoins and lives in Suzhou, Jiangsu. "There may be room for further gains in price, but there'll be a big pullback soon. It's hard to sustain such a rapid rise for a long time."

Bitcoin has rallied since early 2015 as Chinese buyers, who make up the majority of trading, turned to alternative assets to hedge against the weakening yuan and take cash out of the nation. But with officials tightening capital controls, there's increased speculation that the digital asset will be the next target - even though the total value of bitcoins of around US$16 billion is minuscule compared with most mainstream asset classes in the nation.

Even after Thursday's slump, the cryptocurrency has climbed 6 per cent in the new year, extending a rally in 2016 that beat every major currency, stock index and commodity contract. Outside China, India and Venezuela's ban on some bank bills and uncertainty over political shocks such as Donald Trump's election and Brexit also boosted demand for eight-year-old bitcoin, the supply of which is also curbed by its program.

The yuan accounted for 98 per cent of bitcoin trading in the past six months, data from bitcoinity.org show - though this is inflated by the fact that Chinese exchanges, unlike most others, do not charge a transaction fee, said Bobby Lee, chief executive officer of BTCC, the most active exchange in the past month. China is also home to about two-thirds of the world's bitcoin mining power.

By buying bitcoin onshore, selling it offshore for another currency and then moving the money to a bank account, Chinese individuals can take cash out of the country. The government has been stepping up requirements for citizens converting their yuan, which is already subject to a quota, and people familiar with the matter told Bloomberg News authorities are preparing contingency plans to curb outflows.

"Under regulations on cross-border flows, the appeal of using bitcoin to obtain foreign exchange and take capital out of the country will increase, especially for funds that may have been used in illegal operations such as money laundering," said Qiu Difan, a Shanghai-based economist at SWS Research Co, a unit of Shenwan Hongyuan Group Co. "Regulators have always been passive about bitcoin. Tighter regulation is inevitable going forward."

The government may work with bitcoin exchanges to prevent money laundering and possibly even directly limit trading, Mr Qiu said.

Chinese regulators have shown concern over the cryptocurrency's role before. In November, people familiar with the matter told Bloomberg News officials were studying measures to limit outflows via bitcoin and impose quotas on the amount that can be sent abroad. In 2013, the People's Bank of China barred financial institutions from handling bitcoin transactions and said it isn't a currency with "real meaning," sparking a slide in price.

To BTCC's Mr Lee, the move was a "knee-jerk reaction" to the price gains then - and one authorities are unlikely to repeat. Policy makers would probably prefer to have licensed exchanges that give the PBOC information, especially since bitcoin's nature makes it hard for authorities to eradicate anyway, Mr Lee said.

"What they can do is crack down on bitcoin exchanges, but they can't crack on bitcoin itself," Shanghai-based Mr Lee said. "If you actually shut down the bitcoin exchanges in China, the desire will just go underground, and when the desire goes underground, it's out of control."

The cryptocurrency's immunity to changes in regulatory or monetary policies is precisely its appeal. Its supply isn't determined by any central bank. A network of volunteers validate transactions via their computers, which require encrypted electronic signatures, and in return earn fees based on market prices.

Bitcoin tumbled from its record high on Thursday as the offshore yuan posted its biggest two-day rally on record amid speculation Chinese authorities engineered a liquidity crunch to discourage sales of the currency. Bitcoin was back above US$1,000 on Friday, paring Thursday's plunge.

"There is speculation that the Chinese authorities may try and hamper the use of bitcoin as a way of getting around Chinese capital outflow restrictions," Steven Englander, an analyst at Citigroup Inc, said in an e-mail. "At the best of times it is pretty illiquid, so even a small imbalance can have a big impact on price."

The digital asset traded at 7,245 yuan on BTCChina.com as of 8:52am on Thursday in Hong Kong, a 4 per cent premium over the US dollar price indicated by Bloomberg data based on spot rates. The yuan posted its biggest annual decline since 1994 last year, when bonds and shares also fell. Government measures to cool the housing market is fueling concern home prices are headed for a correction.

Lacklustre equity performance, a potential real-estate bubble, yuan weakness and capital controls are all driving Chinese demand for bitcoin, said Thomas Glucksmann, head of marketing at Gatecoin Ltd in Hong Kong.

"Bitcoin is one of the few remaining investment opportunities that has so far received very little direct government scrutiny," he added.

"So for now, investors feel safe that the government will keep its hands off their digital funds."

BLOOMBERG