2013-11-19

We Are Living In A Chinese World

The biggest story about Bitcoin doesn't really involve Bitcoin. It's the story of China's economic rise and how it is affecting the global marketplace.

Below is a chart of Bitcoin on Mt. Gox and on BTC China. Notice the volume scales are different because of the massive volume seen on Mt. Gox during the April price spike. BTC China has already surpassed Mt. Gox, but look at the changes in volume during this recent rally in Bitcoin prices.


Whatever is affecting the Bitcoin price, it is not U.S. dollar demand. This is more of a Chinese driven move. If one wants to know where Bitcoin is headed, look at CNY price charts and follow the news in China as closely as possible.

The bigger story though, as I said, is about China's rise, or what we could now dub its arrival. Bitcoins are flowing from West to East because of massive Chinese demand. If you hang around the fringes of the financial blogosphere, you've likely also come across another asset that is being said to flow from West to East: gold. If you cannot figure out what is happening with Bitcoin, you are going to be really surprised with what happens in gold in the coming years. China is the marginal buyer in Bitcoins today and they set the price. We have seen the same thing occur in red wines and art prices, in Palo Alto and Vancouver home prices.

The world pays a lot of attention to the American financial markets because U.S. markets are the world's largest and deepest. Bitcoin is still a fringe financial asset, but Chinese people's incomes are rising and they save far more money than Americans. Most American wealth is in paper assets such as stocks, whereas Chinese have a lot of paper wealth in real estate, but they are also generating new wealth at a rapid pace. American wealth is far more tied to asset prices, whereas Chinese wealth is growing steadily due to savings. American's (and Europeans, Japanese) ability to bid for assets is dependent on the value of financial assets. This is why a crash in global asset values shifts power from West to East, as relative wealth gaps close rapidly.

As for Bitcoin, on my Chinese Weibo on November 7 I said the target for this latest move has an end target over $1000. Bitcoin surpassed $1000 on the Chinese market today. I haven't come up with another price target yet, but it could still gain several hundred percent before this move ends. For now, I don't think $10,000 will happen (I'm wrong on my reading of the waves if it went that high) on this move and I'd be surprised if it got to $5000.

Here's the latest reform news in China. PBOC to ‘Basically’ End Normal Yuan Intervention, Zhou Says
The yuan’s trading band will be widened in an “orderly way” as China seeks to enhance the currency’s two-way flexibility, Zhou wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. The nation will phase out investment caps for both domestic and foreign investors, he added. A ceiling on deposit rates offered by local banks will be gradually removed as well, PBOC Deputy Governor Yi Gang wrote in the book.

“We will increase the role of market exchange rates, and the central bank will basically exit from normal foreign-exchange market intervention,” Zhou wrote. The central bank will “establish a managed floating exchange-rate system based upon market supply and demand,” he added.
These are reforms that were planned around 2005, before the Ministry of Finance, controlled by party insiders, pushed out the reform clique controlled PBOC. These reforms will accelerate the development of China's financial sector and turn it into a true competitor with the United States and EU.

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