Will Bitcoin take off in China?

Written by Zennon Kapron || September 19 2013

In February 2013, China became the second largest active Bitcoin market globally as measured by wallet downloads. This has attracted new Bitcoin based businesses to China and what could be a massive market for the developing virtual currency. An example is Bitfash, which was launched in April 2013 and became the first online shopping platform for clothes to accept Bitcoin as payment; one of its key target markets is China. However, will Bitcoin really take off in China? Can the Chinese consumer shift the value of the virtual currency as they did with gold earlier in 2013? What will the government eventually inevitably do to control the currency? It could be a potentially huge market, but will largely depend on its payment function development, the attitude of the Chinese government and the stability of Bitcoin's value.

Early days

Currently, actual Bitcoin transactions for purchasing goods or services have been very limited in mainland China. Most transactions have been the result of Bitcoin mining or for bought / sold for speculation. As compared to larger cities in the US and Europe where merchants accepting Bitcoin certainly are not ubiquitous, but do exist, currently, we found only one physical café in China, specifically in Beijing, that accepts Bitcoin as payment - you would struggle much more to survive in Shanghai for a week than a Forbes reporter did in San Francisco. Online, more forms of Bitcoin transactions are developing: Bitcoins can be used to recharge mobile phones and some merchants on Taobao (think ebay for China) accept Bitcoin payments. However, there are signs that its popularity is increasing.

Not the first time

China has had its own virtual currency before. In 2002, Q-coin was launched by Tencent, a large technology player in China. Q-coins were originally intended to be a virtual currency designed to pay for online services such as electronic greeting cards, online games and anti-virus software. As it became more popular, it began to be used for illegal activities and the government responded with a law specifically targeting Q-coin in 2009. The law stated that virtual currency, which is converted into real money at a certain exchange rate, will only be allowed to trade in virtual goods and services rather than real goods and services.

Bitcoin would likely fall under the purview of this law, but until now, the Ministry of Commerce hasn’t published anything specific related to Bitcoin. Should they decide to try though, they will face challenges. Q-coin was tied to and managed by Tencent, which is a large internet company here in China. This made regulating Q-coin somewhat easier as there was an entity that could be pressured to comply. Bitcoin is decentralized, so it is nearly impossible to control as easily, however this doesn’t mean that Chinese regulators will not try.

Better than physical cash, but still difficult to stuff in mattresses

China has traditionally been a very cash based society with chinese consumers preferring tangible goods and assets as opposed to virtual/non-tangible. However, this is changing rapidly.

The younger generation has texted and clicked their way through to make China one of the top e-commerce markets in the world and payment services like Alipay have surpassed the global giants like Paypal both in usage and functionality. Now many consumers leave a significant portion of their money on the Alipay platform as through their ‘Yuebao’ service offering, users get a relatively risk-free 4% APR, eclipsing most banks. Further, online platforms like Taobao make Amazon look like your corner newspaper stand in terms of selection of goods and distribution; online stores are rapidly becoming the primary choice for consumers purchasing anything from food to dish towels.

So consumers are becoming more used to virtual currencies, which is positive for Bitcoin. Another positive is that Bitcoin is decentralized and much more difficult to control by the government. In the land of the capital controlled currency, having a currency that is largely freely exchangeable and global is a boon for wealthier Chinese who want to get some of their money out of China and / or to diversify their investments. It wouldn’t take too many millionaires to shift the current total market value of Bitcoin (~US$1.3 billion). They essentially did it with gold a few months ago didn’t they?  

Finally, the Chinese love speculation. Although their enthusiasm has been slightly tempered by an under-performing stock market over the past few years, real estate has pretty much been a one-way bet in China despite a ridiculous number of measures and attempts by the government to reign in the frothy asset class. Could Bitcoin be the same way? Chinese consumers will need to get over the fact that there’s nothing behind the currency beyond the belief in the value of the currency by the holders, but again, isn’t that the same idea behind real estate in China? Where else would a ‘prime property’ in Inner Mongolia go for over US$10,000/meter? Is there anything behind that beyond the collective belief that it’s worth that much?

As concluding as you can get at this point

In short, the future of Bitcoin in China could be very bright. The currency does fit with many of the Chinese habits and attitudes, but mass adoption will still depend on whether it will be extensively accepted by people, traded with merchants and online shop owners. Or perhaps China decides to develop it’s own Bitcoin similarly to 3G and IC card standards? The story is far from finished and over the next month we’ll be producing a number of commentaries and webinars on Bitcoin. For more information, please stay tuned to www.kapronasia.com.