Behind the surge in Bitcoin prices: Is it a safe-haven investment or a money laundering tool?

Bitcoin, defined as a "virtual commodity" by the People's Bank of China and a niche "investment product" with the largest trading market in China, has unexpectedly become the most favored safe-haven product among Chinese speculators in its eighth year, and its exposure continues to increase.

Four months ago, after the RMB fell below the important 6.7 mark against the US dollar, the price of Bitcoin entered an upward channel, rising to more than 4,300 yuan per coin. On November 1, the price of Bitcoin broke through the 5,000 yuan mark for the second time this year. From 20:00 on the evening of November 16, the price of Bitcoin rose from 4,966 yuan per coin to a maximum price of 5,499 yuan per coin within one hour, breaking the highest price record in 35 months.

According to Huobi COO Zhu Jiawei's analysis, this was related to the RMB exchange rate falling to a new low on that day, which was driven by risk aversion; it was also due to the positive expectations for assets such as Bitcoin brought about by the international situation, such as the bank run in India and the Italian referendum to leave the European Union.

The reason behind the continuous rise in the price of Bitcoin is that this "virtual commodity" is being accepted by more and more investors. This means that players believe in the intrinsic value of Bitcoin and have expectations for exchange rate fluctuations; at the same time, perhaps a considerable part of it is the secret outflow of RMB.

The image of digital currency player types comes from the 2014-2016 Global Bitcoin Development Research Report

Currently, Bitcoin is considered a commodity rather than a currency in most countries, allowing it to bypass national capital account controls. At the same time, due to the non-sovereign, decentralized, and anonymous nature of Bitcoin itself, it is almost impossible for third parties to track non-platform transactions, and it is difficult for governments and institutions to define and monitor "illegal transactions" in their regulation of Bitcoin.

On December 5, 2013, five ministries and commissions jointly issued the first regulatory document specifically for Bitcoin, "Notice on Preventing Bitcoin Risks", pointing out that Bitcoin does not have currency attributes such as legal tender and compulsion, and is not a real currency. Bitcoin transactions are a commodity trading behavior on the Internet, and ordinary people have the freedom to participate under the premise of assuming their own risks.

Subsequently, the central bank banned Chinese banks and third-party payment institutions from directly or indirectly participating in Bitcoin exchange transactions. Users who want to buy Bitcoin must go through email authentication, mobile phone binding, and two-factor authentication before they can remit money to the trading platform agency. The agency will remit money to the bank where the account is opened to purchase a recharge card, which is then manually recharged into the electronic account. Only then can investors use the platform funds to buy Bitcoin.

Bitcoin trading platform users need real-name authentication to open an account, which provides the possibility for customer due diligence. In order not to violate the regulations of regulatory agencies, several major Bitcoin trading platforms in China have stated that they will strictly control risks, detect large suspicious transactions, ensure the real-name inflow and outflow of RMB, and strive to get rid of the negative impact of being involved in money laundering and other allegations.

Interface News reporters learned from the top domestic trading platforms that if the public security organs find that the money involved in a case involving a large amount of money has flowed to a Bitcoin exchange for escape, the public security organs will send a "Letter of Assistance in Investigation" to the platform, and the platform will assist judicial organs, customs, taxation and other departments in inquiring, freezing and deducting customer deposits.

Despite the many hurdles, the idea of ​​exchanging anonymous Bitcoin for foreign currency is simple. Buy Bitcoin and then withdraw it, transfer it to a foreign trading platform or find someone on a foreign forum to exchange it for US dollars. After selling Bitcoin, withdraw the foreign currency to a bank card. This means that funds can flow across borders without restrictions.

Although long-term unilateral actions through exchanges will trigger the vigilance of trading platforms on both sides, large amounts of funds can always find a way out.

One possible idea is that, thanks to the US regulatory policy, Bitcoin can be used directly for shopping in some US stores. Ideally, it takes time and procedures for tourists to buy products with RMB. Choosing to pay directly with Bitcoin can save time. In formal consumption scenarios, Bitcoin cannot be directly exchanged for US dollars, and the goods will be directly delivered. However, an insider revealed that currency swapping exists abroad. You pay with Bitcoin here, and the US dollars will be exchanged for you a few hours later. However, this statement has not been further confirmed or verified.

The top 10 merchants that accept Bitcoin payments are from the 2014-2016 Global Bitcoin Development Research Report.

Another method is to conduct offline transactions through Bitcoin "underground banks". Different from the general concept of underground banks, it directly provides RMB-USD transactions, and both parties cooperate through virtual wallets.

An industry insider told Jiemian News that it is difficult to conduct large outflows of funds on trading platforms, so they can only be traded off-site, which greatly limits the amount of funds transferred through Bitcoin. However, it must be admitted that the above method can indeed achieve tens of millions of RMB outflows over a long period of time.

However, regarding the popular belief that money can be laundered easily through Bitcoin, the anonymous person and many financial experts and veteran Bitcoin players all said that this statement is not true.

The Bitcoin designer Satoshi Nakamoto created the Bitcoin model based on the idea of ​​gold. The total amount of Bitcoin was initially fixed at 21 million. Websites such as coinmarketcap.com can display the total amount of Bitcoin mined in real time. As of press time, nearly 16 million Bitcoins have been mined. Based on the RMB price of 5,200 yuan, the total value of Bitcoin mined worldwide is close to 83.2 billion yuan.

Bitcoin production curve Image source: coinmarketcap.com

A senior Bitcoin player believes that although the website shows that nearly 16 million Bitcoins have been mined, a large number of Bitcoins were lost during the early mining process. "Bitcoins have offline wallets. If a player with a technical background spends a few days to download all the information, the hard drive will become a Bitcoin wallet. But if the hard drive is lost, the Bitcoins inside will not be found," he said. There was a news report that James Howells from the UK mined 7,500 Bitcoins in a week with a laptop in 2009. After that, he threw away the hard drive containing Bitcoins in 2013 and left it in a landfill. He was never able to recover the Bitcoins worth about RMB 45.7 million that year.

The player believes that if there are still 10 million coins on the market, and if all of them are in China, and calculated at a price of 5,200 yuan per coin, the total market value of all transferred overseas is 52 billion yuan. According to a report by Goldman Sachs in November, RMB outflows in October amounted to 80 billion US dollars; according to the latest data from the People's Bank of China and the State Administration of Foreign Exchange, the total net outflow of RMB from China from October last year to August this year reached 265 billion US dollars.

In reality, the total amount of bitcoins circulating in the market is difficult to estimate. Unlike the assumption, in reality bitcoins are dispersed around the world. Although China has the most active transactions, it is impossible for China to have all or even most of the bitcoins in circulation.

Zhao Qingming, chief economist of the China Financial Futures Exchange Research Institute, said in an interview with Jiemian News that Bitcoin can indeed transfer domestic assets to overseas, but it is difficult to use it as a means of "money laundering" and it is even more impossible to affect the exchange rate. According to the existing logic of Bitcoin going overseas, it must be a process of buying and selling, which can be balanced in the long run.

While multiple funds are betting on Bitcoin, Zhao Qingming said that we should avoid the revelry of the gambler mentality. Bitcoin's 24-hour trading, no price limits, and T+0 characteristics are tempting but also bring high risks. Senior investor Yi Fei told Jiemian News reporters that he still holds the view that Bitcoin is a "speculative product": "Investment should be to put money into a business model. Whether investing in equity or bonds, value generation is a prerequisite. Bitcoin consumes energy during the mining process, which can be considered as a transaction target, with a price but no value."

The picture of Bitcoin price changes comes from the "Global Bitcoin Development Research Report" from 2014 to 2016

Many players still remember that in 2013, the price of Bitcoin broke through the $1,000 mark, reaching a high of $1,200, and was once close to the price of an ounce of gold, and then the price fell from a high place in a thrilling way.