China’s Big Players in Bitcoin

Since the beginning of the year, Li Lin has added more long-distance flights to his schedule. As the founder and CEO of Huobi.com, he wants to go out and look for foreign partners to expand the company's existing Bitcoin trading business to the European and American markets.

Li Lin

Chinese speculators have now become one of the main players in Bitcoin. In March, Goldman Sachs wrote in a report on the future of currency that "80% of Bitcoin transactions are currently completed in RMB."

The Bitcoin industry, where the price of a single coin has dropped from 8,000 yuan to around 1,400 yuan, has received more and more good news. In April, the payment platform PayPal announced that it would allow all its partner merchants to support Bitcoin payments; on May 19, the New York Stock Exchange officially launched the Bitcoin Index. Earlier, the United States already had licensed exchanges, and major companies such as Dell, Microsoft and Rakuten America also announced support for Bitcoin payments. All of these have added a new layer of credit protection to this virtual electronic currency.

Since its official launch in September 2013, Huobi.com has seized the opportunity of the surge in Bitcoin and quickly become the largest trading platform in China. Starting from the core trading, Huobi.com's business has now developed into a full-industry chain service from upstream production "mining" (obtaining Bitcoin through computer calculations), Bitcoin storage wallets to financial management and payment applications.

At a class reunion in 2011, Li Lin first heard the new word "Bitcoin". Like many other new things he heard every day, he didn't pay much attention to it, and had a rough impression that it was a limited amount of encrypted electronic currency. At that time, he was busy with his second entrepreneurial project, the "Renrenzhe" group buying search navigation website. Only two years later, as the group buying industry became more and more concentrated, the search demand became lower and lower.

When Li Lin was looking for a new direction, Bitcoin, a virtual currency, suddenly became popular in 2013 with the development of Internet finance, and more and more media reports about it appeared. After searching for detailed information and joining discussion groups, he immediately decided to enter this industry.

"Both the concept and the technology are very powerful. The currency does not need to be issued by the central bank, and payments and currency transactions can be completed instantly through the Internet." Li Lin told China Business Weekly. When he started his third business, Li Lin chose Bitcoin. This new thing meets his standards of "high frequency, close to money, and seemingly high ceiling".

In his opinion, Bitcoin is first of all an ideal standard investment product: the total amount is limited, which represents scarcity; it is decentralized and not affected by the government; it has a relatively wide audience and recognition, and can be converted into legal tender. Secondly, in the long run, it also represents a new technological value, which can be a new payment technology. "The traditional cross-border settlement method, such as sending money from the Industrial and Commercial Bank of China to Citibank in the United States, takes 1 to 2 days to arrive, and the time cycle and cost are quite high. Bitcoin arrives instantly, which can improve efficiency." Li Lin said.

At that time, there were already Bitcoin trading platforms in China. In the Bitcoin discussion group, Li Lin found that many users complained about the poor experience of trading websites and slow opening speeds. He registered for trading on one of the platforms and found that the entire experience process was very different from that of mature securities trading. "It's basically an old-fashioned e-commerce platform, just for buying and selling. You put things on it, the price doesn't move, and there are no tools." He felt that there was an opportunity here.

From a global perspective, the Bitcoin industry is concentrated in four areas - upstream mining, the most basic wallet, intermediate transactions and application links (mainly payment). As the core part of the Bitcoin industry, transactions are a basic and high-frequency demand, which is undoubtedly a good entry point. Referring to the mature securities trading system, Li Lin and his team planned the elements that a "trading platform" should have in mind: real-time dynamic price charts, technical indicators, capital channels, system security, etc.

His confidence also comes from his previous experience in group buying-related businesses. The team has had a complete experience of Internet entrepreneurship from website development to operation, marketing and promotion.

The first thing Li Lin considered was how to provide good service. "In the early days, we were not the best in R&D technology, but we knew the most about financial products." At the beginning, Huobi launched the "financing and currency" function, which is similar to the margin trading of stock trading, providing users with financial leverage. Because of his previous e-commerce experience, Li Lin knew the importance of capital channels, so Huobi had multiple recharge channels from the beginning of its business - in addition to third-party payment, there are also ways to buy point cards from Taobao, offline recharge, and direct remittance.

In terms of Bitcoin trading and market experience, Huobi.com has also made it more like the Chinese stock market - the trading market panel is similar to A-shares, the buy and sell order information can be quickly updated, and there are K-line charts for analysis, etc. This is more in line with the experience of Chinese users.

As soon as it went online, Huobi.com also announced that it would permanently waive transaction fees and use value-added service fees as its main profit-making method. The so-called value-added service fees include the rate of "financing and currency lending", and a channel fee of 3‰ to 5‰ for withdrawals. This approach made it easier for it to gain a foothold in the early stage of entering the market, and forced other trading platforms to gradually reduce fees.

The most important thing is that Huobi entered the market at a good time. In just three months from September to November 2013, the price of Bitcoin rose from 800 yuan to 8,000 yuan, a 10-fold increase that attracted a large number of new users. According to subsequent statistics, by the end of 2013, RMB trading volume quickly accounted for more than 2/3 of the entire market.

Ten days after Huobi went online, the daily Bitcoin trading volume exceeded 1 million yuan. Li Lin remembers that at the peak, more than 10,000 accounts were opened per day, and six months later, the daily trading volume reached 1.5 billion yuan. This set a record for the highest Bitcoin trading platform in the world.

When it was actually put into operation, Li Lin found that this virtual financial product platform was very different from other categories, and there were actually some risk loopholes in the business and process. For example, when purchasing point cards from Taobao, someone initially committed malicious fraud, exchanged them for Bitcoin, and then went to Taobao to apply for rights protection. Since virtual currency products had no delivery record, Huobi.com lost tens of thousands of yuan at one time, and later had to stop this recharge channel.

During the initial three-month promotion period, Huobi.com’s deposits and withdrawals were free, which led to many people using their credit cards to cash out. Some users also applied for small withdrawals of 10 or 20 yuan as a test. More than 3,000 withdrawal applications a day required manual processing without third-party payment access. The entire team worked two nights to complete the process.

This outbreak overwhelmed the team. The large number of new users and 24-hour non-stop transactions forced Huobi.com to constantly sort out process loopholes. Due to rapid growth and external traffic attacks, many hardware failed to keep up, resulting in website freezes and inability to open. Li Lin was particularly troubled, "This is a fatal blow to the user experience. It suddenly stopped opening when I was just trading. We couldn't cope with it on our own because we had never encountered such a situation before." It was not until the end of 2013 that Li Lin found a number of operation and security experts to join, and cooperated with professional security system suppliers such as Baidu Accelerator and Wuyun.com, and this problem was solved.

Just as Li Lin was looking forward to further growth of Huobi's business, the entire industry suffered a blow - on December 5, 2013, the People's Bank of China and five other ministries and commissions issued the "Notice on Preventing Bitcoin Risks". On that day, Bitcoin trading volume increased and the price fluctuated between 5,000 and 6,000 yuan.

Li Lin had not considered the policy risks too much before, but later the market interpreted the document optimistically. On the one hand, it stated that Bitcoin cannot exist as a currency, but it also acknowledged that "Bitcoin is a specific virtual commodity." "This recognizes the trading status of Bitcoin, which is actually good for us, and it is reasonable and legal as a commodity trading platform." Li Lin did not care too much.

The real test was yet to come. Ten days later, the news that the central bank had interviewed third-party payment platforms such as Alipay and Tenpay and banned them from settling transactions with Bitcoin kept coming out. At that time, third-party payment was the main way to top up investment platforms such as Huobi.com. The suspension of service caused the price of Bitcoin to drop sharply to around 2,000 yuan. Li Lin felt that this matter was serious.

In fact, before receiving the news, various Bitcoin platforms had already switched to YeePay, which the central bank had not yet interviewed, for recharge. But YeePay later notified Huobi: "We will stop at 12 o'clock, and give you two hours to prepare."

"Since the policy says that Bitcoin can be traded, but the third-party payment channel has been suspended to prevent money laundering, what other ways can we continue?" In an emergency, Li Lin's immediate reaction was to not use the channel, and users directly transferred money to the company account through online banking or offline counters. Two hours later, Huobi.com changed the main recharge procedure to bank card recharge. Although it had a great impact on the user experience, this method ensured that the transaction could continue.

However, this decision brought a lot of trouble to the operation. In the past, using third-party payment was simple and efficient, but now it requires manual confirmation and corresponding adjustments to the back-end process. During that period, Huobi’s customer service phone kept ringing. Users didn’t know how to operate, how to transfer money, how to fill out forms, and how to prove that it was their own money, which were all prone to errors.

Li Lin had no choice but to train customer service staff in batches, and Huobi’s customer service team quickly increased from 10 people to 30 people.

Because of this, Huobi.com was the first in the industry to provide 24-hour manual service to ensure that users can recharge smoothly. Now, this recharge method is still the most effective. Li Lin said that operating a trading website is not easy. The trading platform must also ensure that the trading system is programmed and efficient, and has a security firewall. At the beginning of last year, the world's largest Bitcoin trading platform Mt.Gox went bankrupt due to the theft of a large number of Bitcoins, which once caused controversy in the industry about the credit and security of the trading platform.

"When third-party payment was available, these were all done by third-party payment. Now trading platform websites can only build their own account abnormality monitoring and detection systems, as well as real-name authentication and other security protections. This is a huge challenge for trading platforms."

This became another opportunity for Huobi to grow rapidly. Compared with other platforms (such as Bitcoin China and OKCoin), Huobi's quick response kept recharges smooth. Huobi's market share increased and soon exceeded 50%.

As a US report explains, Bitcoin is popular in China because it "attracts traders who hope to profit from its volatile value and young investors who do not have the money and expertise to invest in real estate and stocks." After the wealth effect disappeared, capital and investors' interest in Bitcoin waned, and many small Bitcoin startups that could not find a direction for development or lacked money went bankrupt.

This also means that large platforms will have more opportunities. Foreign platforms such as Coinbase and Bitpay are still receiving financing and growing gradually. Huobi.com has also received angel investment from Zhen Fund and a tens of millions of US dollars A round investment from Sequoia Capital.

After the trading became relatively stable, Huobi.com began to expand its industrial chain in the second half of 2014. "Trading is only one link. In fact, users' multi-level needs were previously completed on different platforms. If they are connected, it will be very good for user experience," said Li Lin.

The embarrassment of the Bitcoin industry is that many early users were interested in it because of the money-making effect, not because of its application value, and the application value is still in its early stages.

As a platform, Li Lin believes that what can be done is to open up the thinking, expand the industrial chain around Bitcoin, develop more application scenarios and develop financial products around its investment attributes.

Now, Huobi's overall positioning has become a basic service provider for the digital currency industry. For example, it can mine and buy mining machines upstream, put Bitcoin into wallet custody, and then do some financial management and appreciation like Yu'e Bao.

Since the end of 2014, Huobi.com has invested in developing independent products in these areas. For example, in terms of deposit business, in order to ensure the security of Bitcoin, Huobi.com acquired China's first multi-signature Bitcoin wallet "Quick Wallet". The multi-signature technology is similar to corporate online banking. One person cannot withdraw money with a U-shield, and another person is required to confirm. There is also a Bitvc comprehensive digital currency investment platform that has developed some financial products around Bitcoin, including futures and "Yubibao".

These are still independent products, and Li Lin expects to integrate them before September this year. However, the market itself is limited, and the current share of these businesses is not high. In the context of the cooling of the Bitcoin market, Huobi's daily transaction volume is less than 100 million yuan, and the number of daily active users is only 1/5 of the same period last year.

This low tide is in stark contrast to the current bull market in the A-share market. Huobi.com is also trying to expand its business with the help of the A-share market and create more application scenarios for Bitcoin. Recently, Huobi.com has joined hands with Caimao.com, a stock financing service provider, to launch a business of using Bitcoin as collateral for A-share financing. By taking advantage of the characteristics of Bitcoin, traders can avoid exchange rate conversion through a cross-border income swap model. This allows foreign Bitcoin holders to directly invest in the A-share market, while domestic Bitcoin holders can also invest in overseas capital markets.

Li Lin himself is quite cautious about the domestic Bitcoin market. "It is not reliable to estimate that China accounts for 80% of the market based on the false data reported by various companies. I estimate that China accounted for 50% last year, but only 20% to 30% this year. Because the volume in the US dollar zone is constantly increasing, China is shrinking."

With the change in the activity of the domestic market, Li Lin's next focus is to expand overseas business and launch the US dollar version of the trading platform Bityes to participate in the European and American markets with active global transactions. He still believes that Bitcoin is a business with long-term prospects.