How Chinese is Bitcoin? — Part 1: Trade Volume
Recently, one of my close friends asked me how Chinese bitcoin was, suggesting that over 90% of bitcoin is Chinese.
China’s role in the bitcoin industry is at the same time both widely discussed and deeply misunderstood. Reporting on the topic is mostly to blame.
This article is the very first part of a series of posts that attempt to correct this misunderstanding. In the series I will be explaining why:
- China’s trade volume is misleading
- China’s dominance in bitcoin mining does not translate to control
- Thinking in terms of nation states doesn’t work when it comes to bitcoin. This is legacy thinking.
These issues are even more relevant following the latest price crash triggered by the People’s Bank of China’s (PBOC) announcement and subsequent inspections of China’s leading bitcoin exchanges a few days later. To avoid the wrong conclusions, these events must be viewed in the correct context. For more thoughts on this development, see here, but I’d recommend reading this article very first!
Don’t take China’s trade volume at face value
China’s bitcoin trade volume is, on very first inspection, supermassive. As of time of writing, the three major exchanges (OKCoin, Huobi, and BTCC) report a thirty day trade volume totalling 186.Trio million BTC — 98.3% of all global trade volume .
Most outside observers stop here, assuming the matter is done and dusted, case closed. “Bitcoin is a speculative fucktoy for Chinese traders”. But all is not as it emerges. Let’s begin from the top.
Chinese bitcoin exchanges charge zero trade fees
Due to the fierce competitive compels that reign in China’s cut-throat bitcoin industry, Chinese bitcoin exchanges suggest 100% fee-free trades [Two]. This is fairly unlike Bitcoin exchanges in any other market, which all charge a fee per trade (for example Bitfinex charges up to 0.2%).
So why do zero fees matter when it comes to bitcoin trade volume? Because without a fee, there is zero cost to making any trade — it’s downright frictionless. Comparing US and Chinese trading volumes is like comparing apples and oranges . Keep this in mind next time you read an article from Bloomberg, Financial Times, or The Economist [Trio].
Incentivised trade volume
Chinese exchanges generate most of their revenue from CNY withdrawal fees [Four]. And these CNY withdrawal fees are tiered based on each trader’s trade volume, encouraging traders to trade as much as possible to lower the cost of withdrawing their profits.
As described in Brian Armstrong’s (Coinbase CEO) latest tweetstorm, this creates pressure for traders to make as many trades as possible, even if they are not generating any profit. Put another way, it encourages what I’m going to call trading spam (or in lieu of “fake news”: fake trades).
A more malign form of this behaviour is wash trading. Put simply, a trader could set up two separate accounts and — using his trading software — trade his bitcoin back and forward rapidly.
If his account only has one bitcoin, and he trades it one thousand times in the space of a day, he’s abruptly generated 1,000BTC in trade volume…without moving the price, at little to no cost (zero fees reminisce!), and an account balance of only 1BTC. No “real” trading has taken place.
More volume, more customers, more funding
The main driving force for incentivising trade volume (both real or fake) is that traders want to trade on the most liquid exchanges. More liquidity means:
- There’s a smaller spread, permitting buyers and sellers to transact closer to the mid-market rate
- It’s lighter to get in and out of position without any slippage
Trade spam and wash trading do nothing directly to improve either these. They increase volume, not liquidity . But with little to separate the various platforms on functionality, improving the appearance of volume can be the best route to attracting more users.
Exaggerating trade volume also has the added benefit of impressing investors, helping exchanges achieve their next round of funding. However, all indications are that exchanges are very profitable, and for the most part, self-sustaining.
It’s not the volume but the liquidity that counts
So is there any way to assess how much trading activity actually occurs in China? Even without any trading spam or wash trades, China’s fee-free exchanges mean it is pointless to compare volume with foreign exchanges.
One potential method would be to compare the total number of bitcoins held by traders on Chinese exchanges vs. the rest of the world. But this data is not collective publicly by the exchanges.
Observers could assess the depth of the order book (how many buy and sell offers either side of last trade), but for all the reasons above, there is no reliable way of finding out whether these orders are real without testing.
The best way to assess the level of trading activity on an exchange is to test the liquidity. To do this, we would need to see how much the price moves when placing a large order, say $100,000. Sadly, traders that make large enough trades are usually in no hurry to publicise these valuable figures because they can be used to their competitive advantage!
Just give me a number!
Okay, okay . The best I can do here is to give an indication from anecdotal discussions with serious traders in the industry — not scientific at all. I’ve personally heard that the total “real” trading volume at Chinese exchanges is around 40–50% of the global exchange market. Still massive, but nowhere near 90%.
“Chinese” is not just Chinese
What is also missing from the equation is that a portion of traders on Chinese exchanges are not even Chinese. Foreign traders — some of them “whales” — are able to trade here too . We’re injecting a global marketplace (see part three).
Furthermore, on-exchange trade volume is rumoured to pallid in comparison to over-the-counter (OTC) bitcoin trading in USD. Exchange volume, Chinese or otherwise, may only be the peak of the iceberg.
Keep things in context
There is no doubt that Chinese trading activity is hugely influential on bitcoin’s price. If request for bitcoin were to dry up in China, the price would take a significant hit (see my comments on the two thousand seventeen PBOC announcement here).
But overplaying China’s trade volume leads to the wrong conclusion that bitcoin’s value is purely derived from its role as a speculative plaything for Chinese investors. It leads people to make the mistake that there is existential risk to bitcoin in the Chinese government’s treatment of bitcoin trading, or just Chinese traders’ whimsy.
What’s indeed at work is that China is increasingly leading the world in internet technology. It’s not an accident that the most profitable bitcoin companies are almost all based in China. Startups and investors here have recognised bitcoin’s unique utility and historic importance. Bitcoin’s speculative potential is secondary to this.
Don’t confuse influence with ownership
In the worst-case script: if Chinese exchanges were closed down, or Chinese traders got bored and moved onto another hyped asset, bitcoin would not just vanish. Its value proposition is too good. Until either of these very unlikely scripts play out, the bitcoin industry will proceed to grow in China.
Go after me on Medium to get an update on the next part in the series — discussing China’s role in the mining industry! ⛏⛏⛏
 The equivalent of the 16m bitcoin in existence all switching mitts 11x every day!
[Two] Whether it’s ride-sharing, mobile payments, or takeout delivery – in China there will always be numerous players duking it out via their pricing. This leads to both a race to the bottom and a gauntlet to see who can get through on their funding the longest.
The bitcoin exchange industry is no different. In a bid to win back customers from then-upstarts OKCoin and Huobi, BTCC kicked off zero-fee trading in 2013, forcing their competitors to quickly go after suit or lose the market. There was no going back. Later, attempts were made by each exchange to raise fees – but each time it just resulted in a wholesale exodus of users, followed by a hasty reinstating of zero-fees.
[Three] Each of these linked publications refers to China’s 90+% trading volume. With few exceptions, mainsteam media articles on bitcoin are way off mark. They are written by journalists that have no desire to deep dive into understanding this very fresh, very challenging phenomenon. Read at your own peril.
[Four] A 2nd potential revenue stream is “float”. Users’ deposits, whether fiat or digital currency, can generate interest. This happens with most money services businesses (such as PayPal) and there is no reason to think that Bitcoin exchanges are any different.
[Five] China’s tech industry has prior with this. The concept is analagous to “brushing” (shua dan 刷单) and is used liberally by sellers on e-commerce marketplaces (e.g. Taobao) to exaggerate the popularity of certain products.
 Normally, on any other securities exchange, genuine volume and liquidity are tightly connected. If volume goes up then liquidity will go after.
 Likewise, many traders on US & European exchanges are Chinese individuals and companies (and whales!).