Bitcoin rollercoaster hits China, challenging supervision

Bitcoin investors in China might have passed the most restless two nights of their lives as the virtual currency price rose from a little over 3,000 yuan (492.3 U.S. dollars) to nearly 7,000 and dropped back to 3,500 yuan from Tuesday to Wednesday on the country's biggest trading platform.

High investment risks have begun to concern them, despite huge returns.

Bitcoin, a form of digital e-money stored in a virtual wallet, bypasses banks, allows users to remain anonymous and came to the Chinese public eye in April this year, when movie star Jet Li's One Foundation received a donation of several hundred Bitcoin to help quake-stricken Sichuan.

The "currency" has been heating up ever since, especially when China Central Television reported on the evening news of October 28 that Canada has set up the first Bitcoin ATM machine. Investors went even crazier when the country's largest Bitcoin trading platform, BTC China, received an investment of 5 million U.S. dollars on Monday.

The platform's daily volume of business has exceeded 10,000 Bitcoin, or over 200 million yuan now.

While some applaud creativity and the revolutionary character of the "crypto-money," many consider it a new kind of investment. Only a few noticed the high risks behind the Bitcoin craze and drew back, as industry researchers and insiders, economists and sociologists looked on.

CURRENCY, DERIVATIVE OR BUBBLE?

"Bitcoin is hardly a revolutionary product," said Zhang Yuewen, associate researcher at the Institute of Finance and Banking, the Chinese Academy of Social Sciences.

Zhang said in essence, Bitcoin trading is no more than privately manufactured money circulating on the internet.

"Some communities issue vouchers for residents to use as a means of payment within the community, and the community for Bitcoin is the worldwide web," said Zhang.

Some economists share Zhang's opinion, thinking it is all too early to define Bitcoin as a new currency.

"Bitcoin is accepted by a few platforms and websites for payments, one of the fundamental functions of a currency," Zhang said.

"The value of Bitcoin does not rely on the economy of any country or the financial performance of institutions. All that counts is market confidence," said Gao Chaoxin, an investment manager with the Beijing-based Yeequn Investment & Holdings Ltd.

Gao said lack of liquidity, a small market and low recognition mean Bitcoin may not last long. Investors who entered the market early rode on too many rollercoasters.

"It's 'tulip mania' all over again," said Ye Liming, president of an asset management company in the city of Wuhan.

Ye said such wild price fluctuation is normally not good for ordinary investors.

Liu Bo, a graduate student majoring in computer science, said he bought five Bitcoin for 600 yuan each earlier and had earned more than 20,000 in the past few days, but he won't stay in the market.

"It's too scary. Speculators are too crazy," Liu said.

Despite concerns, many more Chinese have swarmed into the market.

Ling Kang, vice president of BTC China, said the platform's users have more than tripled and daily volume has risen more than five times.

As one of the earliest Bitcoin owners in China, "Chang Jia" said he has 2,000 Bitcoin in hand, but won't sell yet.

"Every day I wake up to find more than 10,000 yuan added to my account and Bitcoin value will continue to rise," he said.

Some economists said Bitcoin has heated up at a time when Chinese people are searching for new investment channels.

"Inflation has made people worry. Investors bought Bitcoin to battle RMB devaluation," said Ding Zhaoyong, professor at Economics School of Jilin University.

"Bitcoin has become a financial derivative now. It's highly risky and uncontrollable," said Ye Tan, a financial commentator.

HOW TO REGULATE?

Although industry insiders, economists, sociologists and investors have diverging forecasts on Bitcoin's future, they all agree government supervision is what the market needs.

Most Bitcoin transaction platforms have servers overseas, and they are not registered at local industry and commerce administrations.

"If platform operators abscond with the money, there is no way for Bitcoin owners to retrieve their assets, even if they bring the case to court," said Zhu Rong, a Bitcoin investor.

Gao Chaoxin is worried that without supervision, the craze will end up in a situation that everyone in the market loses.

Ling said transparency is the current priority.

"The government could borrow regulations for third party payment platforms, requiring investors to provide real names when buying and selling Bitcoin on registered platforms," Ling said.

Ling added that any transactions involving withdrawal of large sums of real money should be recorded in order to protect investors' rights.

Ding Zhaoyong said it is difficult to find current laws and regulations that can be applied to Bitcoin trading.

"The government may refer to laws about e-commerce to define fraud when disputes occur," Ding said.

Zhang suggests a relevant government department consider Bitcoin as a virtual product and regulate trading activities according to normal contract law.