Two and half a year ago I posted “China: If Bitcoin remains small, it will be allowed to live” I didn’t expect the Party to tolerate Bitcoin for so long. I left China soon after that post so I stopped reporting much about China. However, the recent cryptocurrency market crash prompted me to offer insights and to explain some basic information of China for investors and speculators. This information, I feel, is very important for you to form your investment of business strategy going.
The pirated software and invasive freeware (like WeChat on Android)in China created an environment in which people don’t trust their own computers or mobiles. In 2015, I met a typical bitcoin investor with a few hundred coins, who bought a MacBook Pro unplugged and sterile from the Internet, just to run and manage his own key by running a wallet and generate a public key. I explained that any normal unplugged internet sterile computer would do, and that he didn’t need a fancy MacBook Pro for that task. He remained unconvinced, reasoning that the Windows edition that shipped with Dell/Lenovo computers would be bugged at the outset. His argument actually has some merits. Unlike him, the smaller investors (or big investors poor with time) would just keep their money in the exchange and transfer from one exchange to another (direct) upon security rumors. Trezor isn’t to be trusted either, unless the user reads English and
have the common sense that SatoshiLabs is actually a legit business.
Thus, when the recent sequence of terribly bad news came, most of the Chinese cryptocurrency holders weren’t prepared to run their own wallet or use proper key management services. I expect that those who attempt it not prepared to write their key-pairs seeds down. Unable to safe-guard their own wealth, they would have to cash out in fiat, driving the price further down. This is the opposite situation of what happened at the time with MtGox exchange hack. Months before MtGox closed, due to the difficulty in withdrawing fiat (not crypto), MtGox was full of Bitcoin buyers, causing MtGox Bitcoin to be a whopping 20% more expensive than other exchanges at the time.
The current 20% price difference between BTCChina and the international price could be reflecting the opposite predicament: Cryptocurrency withdrawal is difficult.
It was estimated that the Chinese markets trade no less than 20% of the bitcoins trading volume on the market, so a naive idea would be that the market will only take 20% dent. In reality, the exchange close-down will force the holders to enter the market and sell, since they will soon not have the vessels (or coinjars to hold the coins. But, There is a counter-force: the price will draw in some, mostly western, informed players to enter the market, but these people don’t have a deadline to influence the price in the coming weeks.
To make the matter worse, I expect some exchanges in China having been running on fractional reserve for years — some of the arrogant CEOs of big exchanges are bound to have personal enemies around them who can snatch their pockets. We know that exchanges are also serving “Bitcoin Bank” roles in China thanks to their customers using them as a wallet. Hence, a few heist to the hot wallets won’t have emptied their reserves. But this force-closure will certainly reveal some insolvencies.
Back in MtGox days, in order to delay the exposure or buy time for salvation, Mark Karpelès chose to delay the fiat payment, blaming Banks’ AML/KYC operations. The situation in China is the opposite. If exchanges make fiat withdraws difficult, they risk being made an example of disrupting financial stability while there is a race “to be seen doing the right thing in front of the lord (regulators)” going on. To buy some time, their best course of action is to make cryptocurrency withdrawal really difficult. I already noticed that cryptocurrency withdrawal in some exchanges are very slow, with added “security” questions asked than usual to delay withdrawal authorization. If insolvent exchanges make cryptocurrency withdrawal difficult, more people will sell Bitcoins, as demonstrated in MtGox’s case.
All these scenarios though has not considered the following development:
Websites of foreign exchanges may be blocked, more than 1/2 of the international Internet is already blocked in China, adding a dozen IP addresses won’t be a shocker, and that’s not all there is to it; The Great Firewall of China can be re-configured to blockade block-replication. This itself will do less damage to the price than the news that someone successfully double-spent his coin in the ensuing reorganization.
An action at this scale usually is arranged between ministries. Mobilizing multiple ministries takes time, e.g. MIIT needs time to reconfigure The Great Firewall. But the acutest influence to the price may come from the ministry of propaganda. I would not be surprised if stories are being shot as we speak, how an honest Chinese family lost all their fortune because they believed in Bitcoin and their only daughter happen to be sick, badly need medicines that the family couldn’t afford to buy with the now-devalued Bitcoin. Every day, 7:30pm will be a sensitive time in China to expect such a drama from state media
All these issues will be updated again as I get more information from fellow countrymen. I have been away from “the ancestor’s land” (yes we don’t say “motherland”) for a bit too long.