Why China is leading the global rise of Bitcoin
coindesk.com
coindesk.com
Much of the world is trying to get away from the USD as a global "reserve" and trade-settlement currency, without the masses jumping into gold and without pissing of the US (govt, economy, Wall St).
Bitcoin is so much more "tolerated" by Germany and China than it is by the UK and the US, it's pretty obvious.
You don't really want the masses to rush into gold -- it needs to stay cheap so oil can stay cheap for whole economies, and central banks can acquire more of it for a future when intra-national trade imbalances may be settled in a proven, timeless, globally-accepted (at the central bank level) reserve asset that's not subjected to any one nation-state's (or state union's) wims or woes. You also don't want the savers to store their excess savings or retirement funds in USD or even your own currencies, because they'll be screwed over. You also don't want all the excess liquidity printed over the last 5ish years to end up as real-world price inflation on store shelves. Something like Bitcoin solves all these beautifully, and carries no diplomatic concerns because it's something that citizens are now just free to adopt as they see fit.
You think the Chinese want USD long-term? Why on earth would they? They wanna convert them into other wealth assets, even BTC if they like, asap. Think about the situation today or more so the last decade or three: they export something, take in USD. The producer takes those to their bank to convert into spendable yuan. Their bank takes those to the central bank for yuan. Their central bank doesn't wanna sit on them either so (traditionally) they buy treasuries for those USD, which sends the USD back home to the US where Americans go on the next shopping spree of buying Chinese (in our example) goods (circle repeats), and when the treasury is due, freshly printed USD plus a small interest "gain" go to China central bank and they're left holding the bag once again. What to do with those homeless USD? It's called reserve-currency privilegue and really the world would be happy to abandon it, but you can't just flip the switch or madness would ensue. Similar situation for the majority of producing-and-exporting countries.
Food for thought!
Gold is hardly that; Chinese reserves of gold right now are unknown, but they are currently the largest miner and buyer of it (the government, consumers also buy). Given that we aren't sure what the real supply is (China's biggest state secret), the price of gold will remain volatile.
> You think the Chinese want USD long-term? Why on earth would they?
They want to continue to sell us stuff without overheating their economy, which is why they are happy to buy treasuries at a loss (the interest is not high enough to cover inflation). No one is really unhappy, even the Chinese, that USD is a reserve currency as long as the American economy is robust enough to be the largest consumer as well as a debtor of last resort (via treasuries). Bitcoin does nothing here: the US is a safe entity to lend to, Bitcoin doesn't magically create a similar entity.
Put it this way: money simply can't be saved without someone else spending that same money at the same time. China couldn't just sit on all of their USD, gold, or bitcoins even if they wanted to. Buying and sitting on gold doesn't magically create or even preserve value that you can call on to use in the future.
The fix for China is simply to promote more domestic consumption so they need to save less, which would also balance out the export/import deficit. Given that consumption can only be increased gradually (too much inequality in China), this isn't going to happen with a switch flip and in the meantime the Chinese would definitely prefer stability.
Saving means keeping something aside that people will want in the future. Which means you can save without someone spending at the same time.
Saving is normally transmuted into investment: spending money on machinery/land/buildings/software development etc that will offer a positive return in the future. Investment counts as someone else's income and therefore increases GDP.
Simply putting cash aside is basically hoarding, and normally loses you value over time unless the economy becomes deflationary, which tends to turn into a disinvestment and unemployment disaster.
Money, gold, or bitcoin doesn't save any value in itself. If everyone on earth was thrifty and living below their means, the extra value they were saving would pretty much evaporate: bread would rot, clothes would pile up and become moldy, iPhones would become outdated before they were even used. Eventually, the will to produce goes away as you can't sell all of what you are producing, and an equilibrium is reached where you live about at your means: if you must save for future expenses, this is only possible if someone is spending more now via a loan.
This is why China being a country of net-savers is bad, and a push for social or mandatory health insurance is a good thing: people don't need to save themselves for medical emergencies, and can instead consume. But until then, the ability for the Chinese government to lend money to someone reliable (the USA), is quite useful as there is a good chance they can effectively draw on their savings later.
This is done because while currency fluctuations and inflation can jump and fall hugely overnight, an industrial base takes DECADES to build up and decades to destroy. China is planning for the long term.
If there ever comes a point where the US industrial base has been effectively destroyed and China makes everything, they can stop the treasury buying and start cashing in. Inflation in the US will go NUTS and the US will have to build an industrial base from scratch -- starting essentially in China's position circa 1980. Not a happy place.
China will have lost trillions following this strategy, but the US will effectively stop being a strategic or military threat if it is followed through to its logical conclusion.
Bitcoin is not a godsend to the Chinese government, as it creates a means to let capital exit the country (which they are desperately trying to prevent).
His answer blew me away. He explained to me that Chinese families don't think like western families. He pays his parents a seriously large percentage of his earnings every month. If he wants to buy a house or a car or anything that has a large ticket price then he, or his siblings just have to ask his parents. They never have to go into debt and debt was very actively discouraged.
When I asked him why he explained to me that they see the extended family as a single unit or entity. Every generation is deeply involved with the next financially. Companies started by the family are seen as very long term investments. Those investments span more than one generation. In other words, he could start a company that is successful by the time his grandchildren take it over.
The idea that I personally would not benefit, but my grandchildren would, was nuts at the time. Now I have children I'm starting to understand this paradigm shift.
This is of course a generalization, but the Chinese appear to be very patient and serious long term investors.
It's a little different with us. Her sister has a family in China (Hohhot) and her parents sometimes live with us (for several years at a time) and sometimes over there. Whoever they live with supports them completely, and get their pensions. So the flow is reversed from what you describe, but the basic principle of shared financial resources and support is the same. e.g. My wife's parents own two flats in China and the revenue from them go to the Chinese branch of the family. We all know basically what everyone else earns and the money from the 'apex' of the family tree goes where it makes best sense. In contrast on my English side, every family unit is discrete. My parents helped us with the purchase of our first house, it's not that there's a lack of generosity in any way, but arrangements are on the basis of one-time gifts. The Chinese way is continuous real-time resource management but in service of a very long term view.
If managed well it can be great though. My college roommate has a "college sponsorship" program within his extended family which helps pay his tuition.
We're toast!
The Japanese tried that back in the 70s and 80s. How did that work out for them? I also seem to remember they had a huge construction boom, skyrocketing property prices and a very high domestic savings rate.
Certainly not.. how about "net exporters west or east are increasingly uneasy about USD exorbitant privilegue" (to whit, trade deficits / imbalances).
And now they have bitcoin to put their money into. That's a large part of what's driving the boom. And you know what? It'll keep going. If they're willing to invest billions in ghost cities they're willing to drive bitcoin above $10,000.
I'm not bold enough to claim that bitcoin is a bad investment, but to me it seems closer to gambling than investment. As long as it's money you're not afraid to lose, go for it. But for me there are too many uncertainties and I'm not willing to invest the time. There are so many other opportunities.
Edit: Here's some info on the ghost cities http://www.forbes.com/sites/kenrapoza/2013/09/24/what-invest...
I think that is an unfounded conclusion. The ghost city phenomenon is a lot more than just "no other investment vehicles." The process of building ghost cities is ripe with corruption, everybody in the chain gets a cut of what is ultimately land-confiscation and government funded construction loans.
Straight out bitcoin speculation isn't even in the same league of opportunities for corruption.
China is trying to urbanize 300 million people, a ghost city here or there is a drop in the bucket.
Those cities are getting more and more popular because more people migrated from rural areas to these new urban areas, the amount of migration is huge.
#include <speculation.h>
Why cash out on USD when you can avoid doing so?
As BTC becomes more widely accepted the ubiquity of BTC acceptance will growMeanwhile the safest way to do arbitrage is between BTC-E and Bitstamp because they both have low fees for SEPA deposits/withdrawals. Must be European though.
Maybe China is driving the demand and other exchanges are arbitraging against China. Since there's a lag in transferring funds into exchanges, the 20% to 40% premium in China may just be a measure of latency in a fast-moving market.
If so, then we'll see the prices converge over time, and we should use BTC-China as a leading indicator of exchange rates.
http://www.washingtontimes.com/news/2013/nov/13/bill-would-o...
from: http://thegenesisblock.com/bitcoin-the-newest-tool-in-chinas...