Growing concerns about secrecy and the vulnerability of the global financial sector are forcing the general public to learn about bitcoin and associated technologies. Digital Gold: The Untold Story of Bitcoin, by Nathaniel Popper, is a timely primer.
It tells us that a large number of bitcoin mining farms in Inner Mongolia and other remote parts of China are taking full advantage of the cheap electricity and computer hardware to generate massive numbers of bitcoins. In the meantime, it is often said that over half of global bitcoin trading now takes place in China. While the Chinese government is generally cautious about bitcoin, several very active exchanges have sprung up in mainland China, and there is a large army of Chinese participants in the bitcoin food chain.
This is odd in light of two well-known facts. First, China is overbanked, and there are bank outlets even in remote corners of the country. The postal savings network and state-backed rural credit cooperatives provide unrivalled banking access for the poor, as well as the rich. Opening a bank account is quite simple; anyone can do so anywhere in the country, usually in less than 10 minutes. It’s even possible to get a debit card the moment the account is opened, with no questions asked. The same applies for a business entity.
Second, Chinese banks and post offices provide very good services for money transfers. In addition, Alibaba, Tencent, Unipay and a host of other payments operators provide transfer services cheaply and even subsidise users. So it’s hard to imagine bitcoins enabling cheaper and more efficient money transfers.
So what explains bitcoin’s popularity in China? Unlike in the West, the Chinese public are not as attuned to libertarian issues as, say, Satoshi Nakamoto, the legendary bitcoin inventor. And, for example, anonymous drug purchases cannot be a big factor, as cash transactions are just as hard to trace as bitcoin’s distributed ledgers. After all, Popper notes that, in China as elsewhere, most bitcoin users are not that concerned about total privacy of their transactions. So, that leaves us with only one logical explanation: the Chinese are gripped with a real fear of inflation.
Popper and many others argue that the high volatility of bitcoin’s price prevents it from becoming a currency. I beg to differ.
The price of gold, and the exchange rates of the Russian ruble and the Nigerian naira for example, are just as volatile and that has not prevented them from being used as currencies. More importantly, bitcoin users treat their holdings as parts of their asset diversification, therefore the high price volatility does not matter much, as long as the long-term trend is up. Bitcoin’s short history shows that it is mostly going up, and fast – outperforming all fiat currencies in the past six years.
Bitcoin or any other cryptocurrency may not become a medium of exchange in the near or even medium term, but as a store of value, it is proving to be an excellent choice. Popper cites high inflation, poor payment infrastructure, and a grey market for foreign exchange in Argentina as three big reasons for bitcoin’s popularity there.
Those factors are very relevant to China too – except that the grey market disappeared about 15 years ago and the Chinese payments industry has become quite efficient thanks to “disruptive” operators such as Alibaba and Tencent.
It is true that inflation rates in China are nowhere near Argentine levels. But, to the Chinese public, inflation has always been a major concern. It was inflation (and poverty) that toppled the Nationalist government in 1949.
Between 1949 and the late 1980s, the Chinese government steadfastly refused to accept the existence of inflation in a socialist economy. In those four decades, it resorted to rigid controls over product prices to reinforce that myth. Since the 1990s, however, the government has developed a warm feeling for inflation as a sort of “necessary bubble”. The proliferation of quantitative easing in the West since 2008 has given the Chinese government unexpected vindication in that regard.
In the West, the independence of central banks has failed to prevent populist governments from abusing the printing press. In contrast, China’s central bank is only one part of government, rather than an independent institution. This lack of checks and balances has been a very convenient set-up for a flood of fiat money to solve any political and administrative headache, with severe consequences.
In the past 25 years, inflation has swept China, leading to worsening inequality. In the past decade, property prices have surged and continued to raise alarms. Meanwhile, the stock market in China remains one of the most expensive in the world, despite the crash in mid-2015. So it is small wonder that bitcoin is becoming a popular hedge against the steady erosion of the yuan’s purchasing power.
Joe Zhang is the chairman of China Smartpay Group, and a former manager at the People’s Bank of China