What you need to know about the Goldman Future of Finance report and Bitcoin in China

Written by Zennon Kapron || March 17 2015

So over the past week, the internet has been aflutter with talk of Bitcoin and China again. A March 10th Goldman equity research note entitled 'The Future of Finance' offered a few comments about Bitcoin in China seem to have reignited the debate about Bitcoin's place in the Middle Kingdom. There are a lot of misconceptions out there, we felt we needed to set a few of them straight.


Firstly, it is worth mentioning that the entire Goldman report is quite good. If you are involved in the finance industry and can get a hold of it, the report is worth the read. I just came back from London and participating in the excellent Innovate Finance event held last Monday and visiting Level 39 - both strong supporters of the burgeoning fintech scene over there. The report touches on some of the companies involved in this area and the work that some of the more famous start-ups (e.g. Transferwise) are doing to change the industry and better cater to the Millennials that seem to be the top of mind for every bank.

Secondly, there is some good coverage in the report of Bitcoin in general. Mr. Schneider and Mr. Borra do an excellent job of sifting through all of the new business models to simplify the trends into digestible chunks. It is clear to them that Bitcoin and blockchain technology will alter finance, which is likely the best takeaway from the entire report as it relates to Bitcoin, but that's not what we're here to discuss. We're here to discuss China.

One comment, many mentions

China and Bitcoin is mentioned only very briefly in a couple of quotes and one chart:

"Bitcoin has momentum in China - 80% of Bitcoin volume is exchanged into and out of Chinese yuan." 


"Despite China’s higher trading activity, restrictions enacted by the PBoC (People's Bank of China) to limit Chinese Bitcoin companies’ access to traditional Chinese payment processors have prompted many large Chinese companies to stop accepting Bitcoin. However, in light of a somewhat stabilizing Bitcoin economy in China, a few payment processors have re- emerged, such as BTC China’s JustPay."

The chart is actually the basis of the first comment and looks at the trading volume on key exchanges and currencies around the world. 

The statements and comments from Goldman are largely correct. As we discussed many times and I mentioned in Chomping at the Bitcoin, the PBoC regulations that came out at the end of 2013, pretty much shut down any mainstreet acceptance of Bitcoin. At one point over 100 online and offline merchants in China accepted Bitcoin, and that number cratered after the regulations came out. The exchanges all eventually figured ways around the ban on traditional payment processors and now mostly work on a combination of middlemen and vouchers.

Despite the fact that it was only very briefly mentioned in the report, a quick search on 'bitcoin china goldman' and there are numerous news clippings talking about the subject. This is good. The problem is the direction that the coverage seems to go.

Volume does not a transaction make

So the comment from Goldman is that '80% of bitcoin volume is exchanged into and out of Chinese yuan'. What does that mean exactly? Well it's not entirely clear depending on the exchange you look at.

Certainly the basis of the data is the same. Volume would be the total number of Bitcoins that were bought or sold on a particular exchange. Technically this should be counted in only one direction. So if one bitcoin is bought, that's one bitcoin of volume, not two bitcoins being exchanged, one bought and one sold. We know this.

In an effort to promote and attract more traders, all of the chinese exchanges publish their volume numbers, so getting the data is straightforward. There is some question about the accuracy of these numbers, especially in China. Because the trading volume is so high, the Chinese exchanges are locked in a fairly intense competitive battle for attracting trading volume. Most exchanges offer fee-free trading and many pump up the numbers - hopefully legitimately... 

In any case, the total that Goldman mentions is not "transactions" in bitcoin as one Business Insider reporter who believes the Future of Bitcoin is China. Transactions might include purchasing goods with bitcoins, paying others with bitcoin or any other number of types of transactions.

We actually have no idea how many transactions are happening here in China. I could meet someone face to face, take Chinese Yuan and give them bitcoin and there would be a record of the bitcoin transaction, but that's it. No one would know what it was for or who it went to nor would it have shown in the numbers that Goldman quotes.

Goldman is referring to volume exchanged, not transactions. By removing fees, the Chinese exchanges have created nearly a perfect environs for programatic or high-frequency trading. If you are trading on say the NYSE or NASDAQ, your pre-trade analysis should take into account profitability of the trade.

If you're only getting a fraction of a dollar on each trade, you need to make sure that that fraction is not taken up by taxes and trading fees. So in some cases, although you may make money on the trade itself, you don't actually make the trade as it wouldn't be profitable. When the fee and taxes are zero, any gain profit, no matter how small, is a profit. Welcome to trading bitcoin in China. 

Moving money

Several of the articles including one from Bloomberg also raise the issue of Chinese moving their money abroad due to the deteriorating economic situation here in China and the lack of domestic investment vehicles.

This is also untrue. As we have discussed many times before, the rich in China have always had ways of getting their money overseas. Individuals can take money out legally through banks or through grey market through agents.

With agent fees as low as 0.5% and next day availability, why would you take a risk with bitcoin that has fees for cashing in and out and volatility risk? There are certainly people that are doing it, but arguing that it is the driver of exchange volume is misplaced. 

The volume that is referred to in the report is likely all legitimate, but it is not from an increased usage of bitcoin in transactions or every Chinese national trying to get their money abroad. A much more likely rationale is the prevalence of high-frequency trading and Bitcoin mining activity in China. 

So what? Is there a future for bitcoin in China?

Despite the 'minor' corrections with the articles that I mentioned above, there does appear to be a future with Bitcoin in China, albiet one just as unclear as the future of bitcoin globally. Bitcoin is considered a commodity in China and not illegal, so some people are using it for purchasing goods and services. In addition, most miners are concentrated in China, so there is quite a bit of volume that comes from them offloading coins.
Merchants have still shied away from the virtual currency though. As it's not very well known or popular, most have take a wait and see approach. There's very little upside in actually accepting bitcoin in China right now and potentially more scrutiny if you do.

Will it catch on further? Potentially, although it is unclear by how much. The virtual currency globally is still a solution searching for a problem, which is the biggest obstacle. Also, the same potential global adoption drivers don't necessarily exist in China. Merchant fees are low here. There are a plethora of cheap and fast mobile and online payment options already in the market. 

So while it is certainly not all doom and gloom for Bitcoin in China, when you read commentary about the market carefully, read it carefully. Bitcoin's future is not China, but China will play a big part.