The China Problem

Clear information about trading of Bitcoin in China is so important. The over-concentration of trading (and mining) in China is considered by some to be the Achilles Heel of Bitcoin. Is that concentration so great that Bitcoin is not in fact a decentralised P2P payment system? I suggest the China problem is in fact Bitcoin’s greatest problem, more significant than the scaling issue.

I refer to this Twitter thread:

and this one:

How Big is the China Problem?

What is the volume of Bitcoin trading on Chinese exchanges? Is this real or fake volume, inflated by the exchanges in a war for market share of the BTCCNY market? What is the market share of BTCCNY trading relative to global Bitcoin trading on exchanges?

WillyWoo (@dangermouse117 on Twitter) addressed these questions in CoinDesk. (Warning: highly eccentric approach).

Willy Woo defined “true volume” as what the volumes would have been, had the exchanges charged a trading fee.

This was Willy’s conclusion:

Previous educated guesses have put the real market-share at 50%, but the data implies it’s much higher, around 85%.

Willy Woo is wrong bigtime, as I shall demonstrate below.

In the former status quo, before the shit hit the fan in the second week of January 2017, BTCCNY trading was reported to make up 99% of global Bitcoin trading.

Here is an excellent, informed response to that misinformation:

PBOC Bans Margin Trading, January 2017

In early January 2017 the PBOC announced inspections of Chinese Exchanges. Bans on margin trading (also known as leveraged trading) at Chinese Exchanges were issued soon after the inspections.

http://shanghai.pbc.gov.cn/fzhshanghai/113571/3233069/index.html

Banning margin trading will inevitably result in reduced trading volumes. If Trader A has 6,000 CNY, and BTC 1 = CNY 6,000, if his exchange enables 10% Margin Trading he can trade up to a maximum of 10 BTC. Remove Margin Trading and he can trade only a single BTC.

Margin Requirement 5% Trading Capacity 20 BTC

Margin Requirement 10% Trading Capacity 10 BTC

Margin Requirement 20% Trading Capacity 5 BTC

Margin Requirement 100% Trading Capacity 1 BTC

This is what has happened to volumes in the period immediately following the ban.

Source: https://www.cryptocompare.com/coins/btc/analysis/CNY

As expected BTCCNY volumes have declined massively. I understand Margin Requirements of 10% were common n Chinese exchanges and we have indeed observed a decline in trading of nearly 90%, i.e. from 10 BTC to 1 BTC for our Trader A with CNY 6,000. They fell from a high of 11,394,647 BTC on 6 January 2017 to 1,014,048 BTC on 18 January 2017. That is a decline of 89%.

This is what has happened to the share of BTCCNY trading in the global Bitcoin trading market. It has fallen a mere 10% from 98–99% to 88.95% (at 18.01.2017)

Source: https://www.cryptocompare.com/coins/btc/analysis

Note that most of this BTCCNY trading — subsequent to the ban on margin-trading — is fake, non-real trading as defined by Willy Woo, which means to say that most of it is zero-fee trading which has not been banned in Chinese Exchanges.

So it’s immediately evident that Willy’s estimate of 85% is wrong by an order of magnitude — the real answer has to be a great deal less than 85%.

So how much is BTCCNY trading relative to global trading? Is it 70%? 60%? 50%? No one has any idea, but we will find out quite soon.

Refer to this Tweet I sent out today:

(The Twitter account @CnLedger is a fantastic source of news on China.)

Chinese Exchanges have lost a significant source of revenue, namely fees and interest on lending to their leveraging punters. They need a new revenue, and they will re-introduce fees to achieve that. It is likely that zero-fee trading at Chinese Exchanges will be seen to have been a temporary phenomenon.

As Willy Woo mentioned, Chinese Exchanges used to charge trading fees:

BTCC, the first China-based exchange, started with 0.3% fees on trades. Likewise the second Chinese exchange, OKCoin, initially charged 0.3%. Then, on 24th September 2013, BTCC instigated what was to be a three-month experiment in zero fees. This started an arms race between all the domestic exchanges, heralding in an era of zero fees from which China has never returned.

So BTCCNY trading will fall a great deal from current daily volumes of about 1 million BTC, and the true market-share of BTCCNY trading will be revealed to be a great deal less than 85%.

In a nutshell, this is all terrific news as one of Bitcoin’s great vulnerabilities — the perceived concentration of trading in China — has been solved to a great extent in January 2017. That said, the over-concentration of mining in China remains a threat to Bitcoins’s stability and credibility.

Update 1:

Disingenuous reply from Willy:

So, you estimated BTCCNY real volume to be 85%. Please answer this: when Chinese exchanges re-introduce fees, as they will, do you believe BTCCNY market share will decrease from current level of 96% (Bitcoinity.org) / 88% (Cryptocompare) to 85%, or will it settle at a level much lower than 85%?

I propose, Willy, we arrange a bet of 1 Bitcoin. You: 85%. Me: 55%. To be settled in six months from today, 20 January 2017. Global market share of BTCCNY exchange trading to be taken as average of Bitcoinity and Cryptocompare results. Whoever is closest to final result wins. 1 BTC from each of us to be held in escrow in the meantime by my wife or my brother.

Update 2:

Chinese exchanges plan to re-introduce trading fees.