China’s individual investors are known for their huge appetite for new assets. The government’s strict currency controls make it difficult for them to invest overseas, so their money has traditionally had to go somewhere inside the country’s borders. That’s why from property to copper to domain names to fish bladders, speculation fuels asset markets in China.

Less than two years ago stocks were hot, and the benchmark Shanghai Composite Index doubled from June 2014 to June 2015. After the index tumbled last summer, though, there’s still no sign that investors are coming back to the casino-like bourses any time soon.

Where are they heading now? One word—bitcoin.

Over 94% of bitcoin trading involved Chinese yuan in August, up from about 60% a year earlier, according to data provider Bitcoinity. China’s two biggest exchanges, Huobi and OKCoin, collectively account for more than 90% of global trading. OKCoin reached more than 1 million registered users in the first half of this year, thanks to a user growth rate that was five times greater than a year earlier.

That’s a big shift. The bitcoin markets were once dominated by trading in US dollars, and the Tokyo-based exchange Mt. Gox. That ended in early 2014, as yuan trading shot up in the wake of bitcoin’s historic bull run to over $1,000 a coin, and Mt. Gox’s spectacular implosion.

Chinese traders’ dominance in the bitcoin markets has had little negative impact on the cryptocurrency—so far. That could change if mainland regulators target Chinese exchanges, raising the specter of plummeting liquidity, as bitcoin traders saw briefly in 2014. China’s mainland retail investors are also notoriously fickle, historically abandoning one asset class for another as volatility dries up or there’s a major downturn. While bitcoin is hot right now in China, that could all change in weeks or months, adding a new level of uncertainty to the cryptocurrency’s future.

Even now, China’s latest bitcoin frenzy bears a striking resemblance to the last stock market rally, as the market is dominated by speculation and moves on rumors. Small investors prefer the virtual currency to stocks, because trading bitcoin in Chinese exchanges is more flexible, riskier and, accordingly, has higher returns.

“Chinese people are known for their love of gambling,” said Eric Mu, chief marketing officer of HaoBTC, a Beijing-based bitcoin wallet. “Bitcoin fluctuates wildly. It’s easy for you to make money, and also to lose money.” Really, there is “no big difference” between bitcoin and gambling, he added.

Fast money, no government



Huang, 32, a father of two preschool kids from northeastern Shangdong province, who wished to be identified only by his surname, quit his job as a mechanic in February to become an at-home, full-time bitcoin trader.

“Why have you lost so much money in the stock market?” he says he asks his friends, trying to persuade them to invest in the digital currency. “Because it’s controlled by China’s policy.” Then he’ll explain that bitcoin is decentralized and can’t be controlled by any government. What’s more important, he said, is that “you can make money fast.”

A self-taught ”digital currency expert,” Huang says his life is all about bitcoin except when “eating, sleeping, and doing housework.” Despite no previous trading experience, he claims to have tripled his investment in bitcoin, using half of his family’s savings, in the past six months. Because his wife is a full-time housewife, that’s the only source of family income right now.

The price of bitcoin soared to a two-year high in mid-June before the supply of new bitcoin was halved a month later. Huang said his friends who followed his advice and bet on the coming price surge made a killing. They sent him gifts to express their gratitude, he said, including “white liquors, very good ones.”

Liu Fang, a 26 year-old from northeastern Heilongjiang province, is less radical than Huang. By day she is a website designer at a tech startup. By night she makes short-term bitcoin trades on her smartphone. Liu began to invest in bitcoin in 2014, shortly after bitcoin hit an all-time high of over $1,000. ”At that time I only knew it was something like stocks, something you can make money” with, she said.

Liu decided that bitcoin is even better than stocks, because it’s more volatile and more convenient. In 2013, when she was investing in stocks, she said, she hated that she had to halt trading after the markets were closed or when an individual stock hit its 10% daily limit, up or down. But now she can trade bitcoin 24/7. Every night she spends a couple hours placing orders on OKCoin’s mobile app. So far this year she has earned about 50,000 yuan (about $7,500), or 20% of her total investment, she said.

Half of her funding comes from her mother, who has no idea what bitcoin is but trusts her daughter to invest for her. After all, “she can afford to lose the money,” Liu said.

Amid China’s slowdown, Chinese retail investors are looking for places to put their money besides low-interest savings accounts, the moribund stock market, or the fragile housing market. The investing landscape is so unfriendly that many fall for financial scams packaged as “wealth management products,” which promise zero risks and annual returns as high as 30%.

Bitcoin with Chinese characteristics

China’s bitcoin market has several unique characteristics. For one thing, Chinese bitcoin exchanges don’t charge users transaction fees—an anomaly in the crypto markets. Huobi was the first to waive transaction fees when it started in September 2013, as part of plan to attract a larger user base and then make a profit by offering other “value-added services” like margin trading, a spokesperson tells Quartz. OKCoin, started one month later, followed its rival’s business model. Otherwise, it “would have been wiped out of the market,” OKCoin founder and CEO Star Xu says.

That helps to explain China’s dominance in bitcoin trading. Speculators—or computers—can buy and sell bitcoin throughout the day in China and pocket any tiny difference with no cost. More than 80% of Huobi users are day traders, while only 13% hold bitcoin long-term as a safe-haven asset. Automated trading, performed by pre-programmed instructions, accounts for nearly 80% of the total volume on Huobi, the exchange says. OKCoin didn’t reveal its users’ trading strategies, but says around 50% of the trading on the platform is automated.

Beijing’s capital controls, which mean yuan can’t easily be converted into other currencies, add another unique element. From time to time, a “China premium” emerges, reflecting both the high volume in the Chinese market, and the difficulty in cashing out of yuan. One such period was in May (paywall), when bitcoin prices soared, and a pronounced China premium of up to 9% emerged for several days—fodder for nimble arbitrageurs.

Then there’s the miners, the server farms that process bitcoin transactions. Chinese mining pools have emerged as the world’s largest bloc of miners, and make up 50% of the total processing power devoted to bitcoin transactions. While this has raised concerns over a concentration of power (paywall) in the hands of Chinese miners, which could allow them to collectively block or adopt certain core software changes, it also adds a regular flow of bitcoin to Chinese exchanges.

Miners typically sell the coins they unlock to fund their day-to-day operations. This boosts trading volume on those exchanges, says Arthur Hayes, a former prop trader at Citigroup who’s now chief executive at BitMEX, a Hong Kong-based cryptocurrency derivatives trading platform. ”There’s more supply of bitcoin in Chinese hands from the start than anywhere else in the world,” he says. “So if you’re going to trade it, where’s the supply? It’s in China.”

Beijing’s global reach

China’s bitcoin markets have plenty of liquidity, but only people with mainland bank accounts can access them. China’s capital controls mean that it’s difficult to establish a mainland bank account, and harder still for an international trader to repatriate arbitrage profits out of the mainland and into another currency. “For a non-Chinese person [liquidity in China] has zero impact,” says Hayes. “As a non-Chinese person, you can’t interact with the banking system.”

Even though Chinese volume is siloed off from other bitcoin markets, the concentration of trading activity there means regulators in Beijing could have an outsized impact if they decide to focus on the cryptocurrency. Agencies in the US have already shown a willingness to extend their authority to bitcoin markets that deal with American customers, fining Bitfinex, a Hong Kong-registered exchange, for failure to comply fined with US margin financing rules.

In 2013, China’s central bank banned financial institutions and payment services from bitcoin-related business, but Beijing has made no rules covering bitcoin exchanges. Still, they have impacted prices.

In 2014, bitcoin’s price plummeted 10% after liquidity on Chinese exchanges dried up in a flash, when banks were reportedly told by the regulator not to accept deposits from bitcoin exchanges. That stance has since been relaxed, and mainland regulators appear content to leave bitcoin markets alone, but the future is anyone’s guess. “Yes, they definitely could [disrupt global bitcoin trading],” Hayes says.

The small short

How do Chinese exchanges make a profit? Both Huobi and OKCoin charge users to transfer bitcoin from their exchange accounts to bitcoin wallets, a fee of 0.0001 to 0.001 bitcoin each time, or similarly, yuan to their bank accounts, a fee of 0.3% to 2%. They also collect commissions when offering margin trading services, which are essentially loans for investing that carry interest rate of approximately 0.1% per day. OKCoin says margin trading accounts for around 20% of the exchange’s total trading volume, while Huobi refused to reveal the number.

Margin trading lets investors borrow yuan or bitcoin from the exchanges to boost their bets, magnifying both profits and losses. Both Huobi and OKCoin offer a leverage of 1:1 up to 1:5. That means you can borrow up to five bitcoin for every one bitcoin deposited. They offer similar leverage with yuan. “There’s obviously lots of bitcoin enthusiasts in China,” says Hayes of BitMEX. But “it’s the speculators who make exchanges money. They’re willing to put in the leverage to trade.”

Margin trading also allows investors to “short” bitcoin, or bet that its value will go down. Few exchanges outside China give traders the option to short currencies.

This is exactly how Xu Xiaoxiao, a 24-year-old software engineer from the eastern city of Hefei, made a big fortune during this year’s $65 million exchange heist. After the hack on Bitfinex was revealed at 2am Hong Kong time on Aug. 3, bitcoin’s price dropped some 14% the next day. Between 6am and 7am that day, Xu made 25% of his principal by shorting bitcoin on Huobi, thanks to other investors’ “panic selling,” he said.

Overall, Xu has grown his 20,000 yuan investment—half of his savings—by 15% after he began trading bitcoin in June. Previously he had only invested in equity funds, but he wanted a new place to put his hard-earned money after stocks tanked last year. “Trading bitcoin is just like trading gold or silver,” he said, but only with higher returns.

Xu learned margin trading quickly—but not everyone is like him. In a WeChat group Xu belongs to, nearly 300 Huobi users who own margin trading accounts actively discuss trading strategies. Some unseasoned investors ask others when to go long or short, Xue said, while others complain that they shouldn’t have leveraged themselves too much after losing money. ”Someone has even lost one year’s salary,” he said.

Shen Feng, 22, managed a Hangzhou-based hedge fund launched in 2015 that specialized in automated bitcoin trading for retail investors. The fund had attracted more than 4 million yuan ($600,000) from around 200 investors by May of this year, when Shen left his job for family reasons, he said.

In mid-2015, the average daily return of the fund was as high as 3%, Shen said, because the Chinese market is especially sensitive to rumors about things like hacking. Even as the market became less volatile, the fund still had a 0.1% to 0.2% daily return in May, he said, or approximately 40% annually.

His clients were basically speculators who didn’t care about bitcoin’s future or the technology behind it, Shen said. “To be honest,” he added, “I still don’t really understand bitcoin now.”