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Why the Chinese Speculators in BTC will be Different

Why the Chinese Speculators in BTC will be Different

The bitcoin world, and to a lesser extent mainstream media, is abuzz with the news of the Chinese internet giant Baidu announcing that it will be accepting bitcoins for its services. At the time of writing, BTC/USD is up around 6.5% since the news broke, but let’s take a step back.

First, for the bad news. Baidu is not opening up all of its services to bitcoin payments. In fact, it is only allowing users of Jiasule, a DDoS protection service, to pay in bitcoins denominated in CNY. This is obviously not enough of a fundamental increase in demand to account for the price increase that we are seeing, so what is really going on.

The truth is that the announcement of Baidu is the strongest signal of rapidly increasing demand from China for our favorite cryptocurrency. Btcchina, a BTC/CNY exchange,  has been consistently among the top exchanges in terms of volume lately, and plenty of China-centered bitcoin businesses are cropping up anecdotally. We are in the midst of a fresh wave of speculators entering bitcoin, and Baidu is giving it a boost in terms of visibility. However, it is important to understand why Chinese speculators can be expected to act differently than their western counterparts in this market.

Chinese speculation is an interesting topic because investments are so heavily controlled in the country. One of the largest social problems facing China’s middle class is a rising housing bubble that just won’t give in. This is because owning a second or third home is one of the few ways that wealthy Chinese citizens are able to invest their cash hoards. China, like many Eastern economies, has an extraordinarily high domestic savings rate, and that cash is burning a hole in the wallets of Chinese businesspeople.

Bitcoin offers a strong, if fleeting, way for the Chinese to play with their money. It will give them access to currency, debt, and equity markets in ways that have simply not been available before. However, the speculators will not be trading wildly, but far more likely to employ disciplined buy and hold strategies due to a combination of cultural and social factors. In this view, I would suggest that the new capital to the bitcoin currency market will be more stable than similar influxes in the past, with one caveat.

For the reasons set forth in the paragraph above, I also believe that it is likely that the Chinese government will get involved. It may take some time for them to act, but due to a lack of transparency, it is likely to take action in a manner that appears abrupt from the outside observer. Traders should keep these possibilities in mind for the coming months; hedging wouldn’t be a terrible idea, with a net-long position.

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This entry was posted on October 15, 2013 by and tagged .

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