Who has been driving the crypto boom? Individuals in Asia

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A man walks past a board showing exchange rates of various cryptocurrencies in Seoul. Photo: Reuters / Kim Hong-Ji

There is no doubt that 2017 has been the figurative Big Bang for digital currency markets. Until last Friday’s selling frenzy, Bitcoin had made a meteoric rise of 1,800% since the beginning of the year.

It tumbled last week below US$12,000 to put it on track for its worst week since 2013. Other cryptocurrencies, such as Riot Blockchain and Overstock.com, also struggled.

But even with Friday’s decline, bitcoin is still more than double from its price at the start of November. Its smaller siblings have also exploded on to the highly volatile cryptocurrency scene, inflating the financial universe at breakneck speeds.

With almost daily news coverage on mainstream media and heavyweight financial institutions now paying attention to virtual currencies, the question arises of where the impetus is coming from. And according to a Wall Street Journal report, the answer is millions of individual investors in Asia.

Recent attention has been focused in the US on three major exchanges, the Chicago Board Options Exchange, CME Group, and TD Ameritrade. They have been offering Bitcoin futures contracts for the first time. But the real stimulus behind cryptocurrency trading, which is measured by volumes, originates in the East.

Chinese investors began the surge, before Beijing issued regulations on cryptocurrency exchanges in September. Then the impetus shifted to Japan, and particularly South Korea. Research firm CryptoCompare claims that investors in Japan, South Korea and Vietnam were responsible for 80% of the total trade volume in virtual currencies at the end of last month.

Previous bubble-like buying fevers such as the dot.com boom in the late 1990s attracted large institutional investors, with retail traders entering at the later stages. This time around it is individuals that are getting in early and the financial titans are remaining guarded.

Chief market strategist at online trade platform IG Group, Chris Weston, told the WSJ: “Bitcoin is one of the few markets we’ve ever had in history where you’ve seen these astronomical gains around the world and the retail investors in Asia are the ones driving it. It feels like this whole thing is being driven by the average Joe, who isn’t nearly as financially literate as a professional fund manager.”

“If we let things continue, I feel that it will lead to some serious distorted or pathological phenomenon”

Individual wealth has been on the rise in the region, particularly in China and South Korea. This has empowered individuals investors to seek more lucrative opportunities beyond the traditional stocks, bonds and real estate. Asians also appear to be more at ease with the concept of digital currencies, especially the millennial generation who grew up with technology, smartphones and virtually unlimited internet access.

The fervor for Bitcoin in South Korea has led to wild price discrepancies between exchanges. During Bitcoin’s first surge to record highs on December 8, where it topped $18,000 on US exchanges, South Korean exchange Bithumb had the digital asset priced closer to $25,000.

According to Cedric Jeanson, founder and CEO of the Bitcoin-focused hedge fund BitSpread, “Every market had its own local rules and that creates all different types of discrepancies.”

There has been some backlash from regional governments as they clamor to crack down on this digital party. China was once the leading country for cryptocurrency trading, being responsible for over 65% of
all the Bitcoin issued on any given day.

Mega factories in the People’s Republic still churn out as much as 80% of the global supply of Bitcoin and as a result it has become virtually impossible for individuals to mine it.

Regulation of exchanges and a ban on initial coin offerings (ICOs) has dampened spirits slightly in China, where the government is slowly warming to virtual currencies again and is reportedly working on its own state crypto coin.

Meanwhile, South Korean regulators have been sending mixed messages. As with China, Seoul has made moves to regulate its exchanges in which over 25% of the global trade in cryptocurrencies is made.

An electric board shows the exchange rate between the South Korean Won and Bitcoin at a cryptocurrencies exchange in Seoul, South Korea, on December 13, 2017. Photo: Reuters / Kim Hong-Ji

An electric board shows the exchange rate between the South Korean Won and Bitcoin at a cryptocurrencies exchange in Seoul on December 13. Photo: Reuters / Kim Hong-Ji

Prime Minister Lee Nak-yeon has warned about the risks of trading, and the chairman of the country’s Financial Services Commission, Choi Jong-ku, recently told reporters that the government would not officially authorize any new cryptocurrency exchanges or introduce Bitcoin futures trading.

“If we let things continue, I feel that it will lead to some serious distorted or pathological phenomenon,” he said.

ICOs are currently prohibited and stricter identity requirements for participants have also been put in place but these measures have yet to quell the Korean craving for digital coins.

Authorities in India have also made moves to investigate and regulate virtual currency exchanges. Income tax officials recently launched a countrywide investigation into illegal Bitcoin exchanges, which came after the India’s Reserve Bank issued its third public warning about the risks of cryptocurrencies. According to local press reports, raids were carried out on exchanges in Mumbai, Bengaluru, Pune, Hyderabad, Gurgaon and Delhi.

Indonesia, like Vietnam a couple of months before it, has gone a step further and banned digital currencies outright. Last month, its central bank, Bank Indonesia, appealed to vendors and merchants not to accept Bitcoin transactions, stating that it would not be held responsible for any losses incurred. The bank went on to warn that Bitcoin could potentially be used to violate existing regulations on terrorism, money laundering, prostitution, and drug trafficking.

Cryptocurrency exchanges are currently freely open for trade in Japan,  Singapore, Hong Kong and Thailand, although regulation is likely to follow in 2018 as the market expands. Data showed the total cryptocurrency market was worth a staggering $600 billion, up over 3,300% from the $18 billion it was valued at back in January. And Asians are hungry for more.

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