Are Bitcoin and Crypto Prices Totally Dependent On China?

Last year, it banned initial coin offerings. This year, the government there has directed state officials to conduct an “orderly removal” of bitcoin miners from their territories. 

So, is the price of cryptocurrencies totally dependent on China?

That may seem like an odd question, given the facts stated earlier. Typical analysis would make it seem that China is weaning its economy off cryptocurrencies. But appearances are not always as they seem. China still exerts a significant influence on cryptocurrency prices. 

First, a little bit of history about cryptocurrencies in China. The country has had a complicated relationship with them. 

Before the government’s volte-face in 2017, China was among the earliest countries to enthusiastically embrace cryptocurrencies back in 2013, when a Chinese charity began accepting bitcoin. A wave of businesses followed by accepting cryptocurrencies. Even Baidu, China’s search engine giant, began accepting bitcoin for website security services. Miners set up shop immediately afterwards.  

Bitcoin’s politics aside, Chinese investors are enamored with cryptocurrencies and their ability to transcend borders. A qz.com post quotes an engineer at the Chinese Academy of Sciences in Shanghai as saying that the Chinese buy bitcoin because it will increase in value and is a hedge against inflation. An added attraction is that it is free from government control.

Bobby Lee, founder of the BTC China exchange, said the Chinese don’t care about the political aspects of bitcoin. “What they care about is income – can bitcoin make me money now?” he said. As China’s economic growth engine has slowed, those factors have become important. 

Returns from conventional state-backed investments have dwindled. Rich Chinese are reportedly hunting for investment opportunities abroad and exchanging local currency for U.S. dollars. In response, the government had instituted capital controls to prevent yuan outflow and a subsequent drop in its value. Bitcoin and other cryptocurrencies offer protection against a slowing economy and capital controls at home. (See also: Is Bitcoin Being Used For Chinese Capital Flight?)  

One way in which China exerts an influence on bitcoin prices is through its exchanges. Before a ban against bitcoin trading was instituted in the country, China accounted for over 90 percent of trading volumes in cryptocurrencies. The exchanges thrived by charging low fees.

The exchanges have changed their business model since the ban and begun servicing customers abroad. OKCoin, which regularly clocks the highest trading volumes for bitcoin, is now registered in Belize though most of its staff is still based in China. It offers “consumer-to-consumer trading of digital currencies against legal tenders of many countries.” In simple words, this means it accepts foreign currencies for bitcoin trading on its exchange. That it charges relatively low fees is an added attraction.

Huobi, another China-based exchange, follows a similar strategy. Then, there is the six-month-old Hong Kong-based Binance exchange, which has been adding customers at a rapid clip. According to some estimates, it adds approximately 200,000 new customers per hour.

Cumulatively, Chinese exchanges account for the largest trading volumes. For example, according to Coinhills, a site that tracks trading volumes, exchanges based in China accounted for approximately 29% of overall trading volumes in cryptocurrencies during this past weekend. 

Peer-to-peer marketplaces, such as LocalBitcoins, have also become popular with Chinese investors. They allow investments of up to $100,000. A measure of the popularity of bitcoin in China is the 8% price premium that the Chinese paid for bitcoin in the months following the ban. 

Supply plays a significant role in determining a currency’s price. Within the cryptocurrency ecosystem, China controls the supply for prominent cryptocurrencies through mining operations. Approximately two-thirds of all bitcoin mining operations are based in China. (See also: China Intensifies Crackdown On Bitcoin Mining.) 

Bitmain, which is responsible for 39% of all mining operations and runs the world’s two largest mining pools, is a Chinese company with operations that spread far beyond its borders, including to places like the United States and Switzerland. It pioneered the ASIC chip, which runs most bitcoin mining systems, and is referred to as “the most influential company in the bitcoin ecosystem” by some. 

Because bitcoin’s supply is tightly controlled, bitcoin mining plays an important role in determining the cryptocurrency’s prices. Bitcoin miners calibrate their coin production and demand by adjusting problem difficulty and transaction fees. Even though there has been much outcry about bitcoin’s energy consumption, Chinese miners are still making a tidy profit due to high prices. It could be argued that this might be the reason why the Chinese government has not set a deadline for removal of bitcoin mines. 

Bitmain’s mines have also been a major driver of prices for bitcoin cash, a bitcoin fork that came into existence in August 2017. Jihan Wu, Bitmain founder, was a signatory of the agreement that brought SegWit2x into existence. (See also: Who Is Jihan Wu and Does He Control Bitcoin Today?) That move culminated with the launch of bitcoin cash. The bitcoin mining community was split about transferring their system resources to mine bitcoin cash, following its introduction. But Bitmain provided the necessary firepower to fuel a price increase in the cryptocurrency in November 2017. 

China’s influence in mining spreads to other cryptocurrencies as well. For example, consider the battle over Siacoin. The coin belongs to Sia, a Boston-based platform that enables content distribution over its network. Its founder was recently on Reddit expressing concern over Bitmain’s decision to develop ASIC machines that support the algorithm that runs Sia. The company’s decision is expected to significantly increase supply of Siacoins in the market and centralize mining operations. 

But that is not the end of story. Halong Mining, another Chinese company, is competing with Bitmain to develop a machine that supports Siacoin’s algorithm. The net effect may be that the coin’s supply may be centralized and controlled by a Chinese company. 

China is a major player in the cryptocurrency ecosystem. The country has several levers through which it controls pricing for cryptocurrencies even as it might seem that it is cracking down on them. Those levers will be useful if and when it begins regulating cryptocurrencies.

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin.