Can bitcoin succeed in China?

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Story highlights

  • Investors flocked to the bitcoin after positive comments from U.S. policy makers, pushing bitcoin's value above $1000
  • Much of the demand for bitcoin came from China, but trading volume has declined more than half since December
  • Chinese regulators banned financial institutions from doing business in bitcoins

Bitcoins are still a bit of a mystery to many of us. It is billed as a digital currency, but it's not regulated.

Still, more and more vendors are starting to accept it. In the U.S., the Sacramento Kings NBA team recently announced it will accept bitcoins for purchases of tickets or team merchandise.

Online retailer Overstock.com has also started accepting bitcoins. Virgin Galactic said it welcomes bitcoins for a $250,000 ride on its future space flights. A U.S. based company has already created bitcoin ATMs and plans to install one in Hong Kong.

Late last year, investors flocked to the bitcoin after positive comments from U.S. policy makers. That fueled a surge in the bitcoin's value above $1000.

Much of that demand came from China.

The wild price volatility was a red flag to independent economist Andy Xie. He told me on CNN's World Business Today, "It's not a currency. People who accept it are usually selling it for real money like for U.S. dollars or the Japanese yen.

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It's like you accept Chateau Lafite. There's a price for Chateau Lafite everyday but that doesn't make it a currency."

    The speculation surrounding this mysterious currency has led China's central government to squeeze the oxygen out of the bitcoin market within China. In December, Chinese regulators banned financial institutions from doing business in bitcoins.

    Then the central bank warned third party payment processors to stop clearing transactions for Chinese bitcoin exchanges.

    This forced BTC China, one of the biggest bitcoin exchanges in the world, to create a voucher system for buyers and sellers. In a phone interview, CEO and co-Founder Bobby Lee acknowledged, "Trading volume has declined more than half since December."

    David Shin, an investor in a new Canadian bitcoin mine, believes China is looking to protect its own currency.

    "Given their push to try and make the renminbi a global currency like the U.S. dollar, it is in their best interest not to have an outflow of renminbi into another asset class or currency like bitcoin that they can't control," Shin says. "So I view the last set of constraints that they've put on the exchanges as nothing more than speed bumps rather than 'Do Not Enter' signs on the road."

    As for the exchanges themselves, Lee says he is open to meeting with Chinese government officials and actually welcomes a regulated market .

    "It's the confidence in bitcoin that needs to be salvaged in China....Our objective is to develop a more sustainable bitcoin market with the support of government. We don't want to create a frenzied environment."

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