With the Bitcoin community captivated by recent price movements, everyone is looking to where the market, namely China, goes next. With the majority of hash rate, trading volume, and Bitcoin startup companies sourced in China, the events that occur within Chinese borders have such a noticeable effect on what is supposed to be a decentralized cryptocurrency.
How Far Does the Presence of Asian Influence Extend?
According to Bitcoinity, 98 percent of all trading volume comes from three exchanges, BTCC, OKCoin, and Huobi. This overwhelming majority of the volume is sourced all from China, leaving many to believe Bitcoin’s market valuation is held almost exclusively at the mercy of Chinese markets.
Look Inside Chinese Bitcoin Exchanges
While there is an element of China's impact on Bitcoin, the trading volume Bitcoinity displays is not an accurate indicator traders should use; this is due to one very distinct difference between Chinese exchanges and other Bitcoin exchanges; BTCC, OkCoin, and Huobi do not charge trading fees whatsoever.
With an entirely frictionless exchange, users can trade as often as they like, which when coupled with leveraged trading, quickly leads to an inflated volume. Add to this the fact that withdrawal fees for Chinese exchanges decrease as a traders volume increases, giving traders motivation to take advantage of their fee-free environment.
Neil Woodfine has an excellent post over at BlockUnchained going more in-depth regarding the possible malignant trading going on, as well as the exchanges themselves trading to inflate volume artificially. He also explains how a higher volume gives the appearance of increased liquidity, which can attract more traders as well as the next round of funding.
In a similar turn of events to the Book of Job, China gave Bitcoin the push to past $1000 as well as taking it back down to where it sits now. This crash which destroyed all upward movement in the last several weeks was due to the People’s Bank of China announcement regarding Bitcoin exchanges. According to Reuters, the investigation was focused on random audits to reveal “possible market manipulation, money laundering, unauthorized financing and other issues.” While short term this has caused a panic, in the long run, this will prove to be beneficial as it will provide some much-needed transparency in the internal operations of Chinese exchanges, as well as cooperation with Chinese government will ensure stability for Chinese traders.
Moreover, the Chinese central bank has cracked down on margin trading with BTCC, OKCoin, and Huobi withdrawing this trading feature on January 12. Whether or not this is a permanent measure remains to be seen. The international version of OKCoin continues to provide 3x margin and up to 20x futures. In the short-term, this should lead to a more stable market, and we should find out if volumes in China are as colossal as they are purported to be. These latest developments could bode well for Bitcoin, as there will be no negative press about the sky-high volatility.
ZE Jiang(https://t.co/OZ6dOjZLyt): Huobi & BTCC stopped margin trading, OKc leverage only 1x, finally no more fake BTC generated by exchange
— cnLedger (@cnLedger) January 13, 2017
What Does This Mean for Bitcoin?
In the next couple months, the trajectory and sentiment still expect Bitcoins to tease the $1000 level and perhaps even higher. We have seen steady support from the $750 - $800 range, with a healthy degree of volume. The PBOC announcement seems to have only accelerated an accumulation phase. While there is still an element of the dominance of Chinese trading, the effect should not be as pronounced especially after PBOC ensures the Chinese exchanges are not manipulating their trade volumes. Consequently, we should see a more stable market with a lower tendency toward sharp, rapid movements in the price of bitcoin. Also, another positive sign is that the exchanges and the PBOC are conferring, while also making the Chinese population aware of the changes step-by-step.