US media: China becomes the "central battlefield" of Bitcoin war, Chinese companies control online transactions

Core Tip: Although Bitcoin is a borderless currency, in fact, the main control of its network has fallen into the hands of several Chinese companies. They have achieved this through shrewd investment and a large number of computer server "farms" distributed throughout China. The US delegation flew to Beijing precisely because a large number of Bitcoin resources are concentrated there.

Reference News reported on July 4 that US media said that China has become a Bitcoin market that is unmatched by the Western world, with huge investments entering server "farms" and spawning a large number of Bitcoin speculative transactions. According to analysis, 42% of the global Bitcoin transaction volume this year was contributed by the Chinese market.

In April, a delegation of American business executives flew to Beijing for a secret meeting. They met with some new elites in the industry that is engaged in the most grand and weird money experiment in human history - the virtual currency called "Bitcoin".

Chinese companies control online transactions

Bitcoin was originally conceived to be controlled by no single government or country. It is everywhere, yet nowhere.

Although Bitcoin is a borderless currency, in reality the majority of control over its network has fallen into the hands of a few Chinese companies. They have achieved this through savvy investments and a large number of computer server "farms" scattered across China. The US delegation flew to Beijing precisely because of the concentration of Bitcoin resources there.

As of the meeting, more than 70 percent of transactions on the bitcoin network were conducted through four Chinese companies, known as bitcoin mining pools, and two of them accounted for the majority of circulation, effectively giving them veto power over any changes to bitcoin’s software and technology.

China has become a Bitcoin market that is unmatched by the Western world. Huge investments have been made into server "farms", giving rise to a large number of Bitcoin speculative transactions. According to analysis, 42% of the global Bitcoin transaction volume this year was contributed by the Chinese market. Just last week, Chinese Internet giant Baidu teamed up with three Chinese banks to invest in the US Bitcoin company Circle.

However, the influence of the Chinese market has raised concerns about Bitcoin's independence and decentralization. These characteristics could have protected Bitcoin technology from government suppression and intervention, which is common in China's financial sector. "The concentration of (Bitcoin) in a single country is not a good sign. We need to pay attention to this trend, otherwise decentralization will be meaningless," said Emin Guen-Cyrel, a Bitcoin researcher at Cornell University in the United States.

The new data shows that the majority of bitcoin transactions are exchanges, particularly in China, where people are betting on the virtual currency's potential to rise in value. Using bitcoin to buy or sell goods or services accounts for only a small fraction of all transactions.

Scaling up failed

Among the U.S. companies heading to Beijing are venture-capital-backed startups such as Bitcoin Base and Circle, which are seeking to scale up the bitcoin network, which they hope will be able to handle more transactions and one day compete with PayPal and Visa worldwide.

The current size of the Bitcoin network was determined in its early years, when Bitcoin's founder Satoshi Nakamoto limited network data traffic to about 7 transactions per second. As Bitcoin became more and more popular, these restrictions led to severe network congestion and significant delays in transactions.

U.S. representatives traveling to China proposed a software solution called “Bitcoin Classic” that could change this situation.

However, Chinese companies, which have the final say over any changes to the software, disagreed with the U.S. representatives. The Chinese chose to side with a group of veteran programmers who want to keep Bitcoin small, in part for security reasons.

The Americans hoped to persuade the Chinese to change their ways. But in the end, said Brian Armstrong, CEO of Bitcoin Base, "We failed to convince them."

Some bitcoin supporters complain that Chinese companies are only interested in short-term gains and not the long-term development of the project. Li Qiyuan, CEO of Shanghai-based bitcoin company BTCC, is not happy with this rhetoric or the idea that all Chinese companies are a united front. He attended the April meeting and noted that there are differences among Chinese companies on the urgency of changing the bitcoin software.

From trading to mining

From the beginning, the Bitcoin network was designed to be a decentralized system - people connect their computers to the Bitcoin network to help process transactions, just as Wikipedia entries are entered and maintained by volunteers around the world.

The beauty of a crowd-run network is that there is no single point of failure, and no single company can shut down operations if regulators step in. Bitcoin supporters like to say it is a currency that cannot be censored. Decision-making power in the Bitcoin network lies in the hands of those who join the network, in direct proportion to the computing power they provide.

The lure of new wealth is driving people to join: Every 10 minutes, new bitcoins are issued and handed to one of the computers that help maintain the system. In bitcoin jargon, these computers are said to be "mining" bitcoins. They also act as accountants for the network.

After a few years of not getting much attention, Bitcoin’s price began to soar in 2013, bringing the digital currency into the spotlight, thanks in large part to Chinese investors.

Lee said there are many reasons why Chinese people have quickly taken to Bitcoin. First, the Chinese government has strictly restricted other potential investment channels, causing people to be eager for new assets. Second, Lee also said that Chinese people like the fact that Bitcoin's price is unstable, giving people the feeling of online gambling.

There is widespread speculation that Chinese are using Bitcoin to move money abroad and circumvent capital controls, but Li and other experts say the evidence shows little evidence of this phenomenon.

Intensive speculation in China drove the price of a single bitcoin to more than $1,000 in late 2013. The surge, along with the media attention that followed, prompted the Chinese government to intervene in December 2013, cutting off the flow of funds between Chinese banks and bitcoin exchanges, causing the bitcoin boom to burst.

But the craze has aroused interest in another aspect of Bitcoin: mining it. Many Chinese have turned from trading Bitcoin to amassing computing power to mine it. Peter Huang, a former investment manager, is one of them. He has set up data centers across China where others can pay to set up their own mining computers. Huang said the Bitcoin "miners" in those data centers use enough electricity to power a small city.