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Big in China; What's Different Now?

Published on November 16th, 2013 by george
By GEORGE ETTINGER - Nov. 16, 2013 What the hell is happening around here?  I don't even know how to tell you- I'll just show you.   [caption id="attachment_1570" align="aligncenter" width="900"]Source: CoinBase CoinBase, you obtuse runic horror!  What arcane secrets do you hold?!
[/caption]   The smattering of hieroglyphs you see above, loosely converted to the King's English, tells the mythical tale of a society of cryptocurrency holders and investors who woke up unusually rich one November morning.  ...but wait- didn't that happen on one April morning?   Recent Ancient History To make sense of this turn of events we have to look at history. This is not a new story; not quite.  Those of you not present during the spike in April can still see it on that chart.  It's that spike shape- the one in April.  That period represented a conflux of several bursts in publicity and investment for the currency, driving Mt.Gox rates up to the then-record of USD $266/BTC.  Purchases erupted in early April, driving new accounts at Mt.Gox up tenfold.  Servers buckled under the strain- but the strain of what?  "Our own success," as Gox said one day?  Or "constant attacks" by DDOS, as they claimed the next? Regardless of cause, Mt.Gox stumbled, and panic sales ensued.  The collapse of Gox servers and the collapse of Bitcoin prices both happened perfectly in tandem.  A price that had exploded from $100 to $265 in a matter of days now descended from $265 to $150 in a matter of hours.   [caption id="attachment_1579" align="aligncenter" width="620"]Adapted for children under the title "Clark Moody and the Terrible, Horrible, No Good, Very Bad Day." Excerpt from the children's book, "Clark Moody and the Terrible, Horrible, No Good, Very Bad Day."[/caption]   That evening of red ink was as good as blood in the water for the anti-Bitcoin pundits, who busted out the word "bubble" more times in one day (or in one sentence)  than Bazooka Joe saw in his whole life.  The takeaway for the layman was that Bitcoin was over, dead, done with.  It was a bubble whose time had burst- never mind that such a conclusion had been declared plenty of times before. The takeaway for those who held Bitcoin?  It was simple.  Something that was under $100 in March was still finishing April well over $100.  Bitcoin didn't inflate and implode in April- Mt.Gox did.  The Blockchain, it seems, was still marching forward.   The Assorted Disasters The cynicism train made plenty more stops before summer was out, because we humans are frail, neurotic wrecks for whom happiness is unnatural and must be destroyed. The federal seizure of Mt.Gox's Dwolla subsidiary- a major, if vague, event in May- finally blossomed into a hideous flower in August.  The event, which was essentially the shot-heard-'round-the-world regarding federal regulation of Bitcoin, went from qualitative to quantitative with the release of the actual seized values.  The Department of Homeland Security scooped up Mt.Gox's user's cash deposits to the tune of $2,915,507.40- a figure that's just three new cars shy of the more-pronounceable Three Million Dollars. This bit of information gave context to Mt.Gox's struggles; the company, still trying to catch its breath after April's frenzy, had millions of dollars in customer's funds borrowed by Uncle Sam.  Whether or not Dwolla's poor bookkeeping truly warranted the seizure, reality is reality, and the Feds' warrant warranted it just fine.  Those funds are gone and Gox had to make do without them.  Most notoriously, the ability of Gox users to cash out BTC and withdraw USD slowed to snail's pace... and the "cash goes in but doesn't come out" system may have had its own affects on Bitcoin prices in that time.  However the pieces fell into place, Mt.Gox's dominance over Bitcoin was finally slipping. October finally arrived and, not one to be left out, tried to match April's popularity with its own crisis: the shutdown of Ross Ulbricht's Silk Road.  This story, however, skewed in two directions: one on the outside and one on the inside.  These were not simply two sides of the same bitcoin, either.  Outsiders discussed doom and gloom for Bitcoin now that its supposed backbone of illicit drugs and dealings was broken.  Those with a better handle on the currency predicted the market would do what any free market does with a vacuum: compete to fill it.  In that spirit, Bitcoin simply chugged ever onward. Grimly, the market has moved on so quickly that it seems the end of Silk Road will only be memorable to Ulbricht himself.  The rest of the world simply kept turning.   Big in China, after all The turning of that aforementioned globe has a habit of making hours into days, an days into weeks.  With a few of those behind us, we arrive at today- and the titular Chinese situation. Bitcoin kept doing alright.  Then it kept doing really well.  Then, as early as October 21st, Bitcoin appeared to be starting an "insane surge."   [caption id="attachment_1584" align="aligncenter" width="298"]"Can you find one more relevant image to squeeze into the post?  It would really help the pace." the Editor asks.  "Of course.  I'm a professional," the writer replies. "The pacing seems uneven.  Can you find one more relevant image for the article?" - Editor
"Of course. I'm a professional." - Me[/caption]   If October was a surge, November is an all-out explosion.  It broke $266, the previous all-time high, on November 6, and didn't stop there.  At over $400 at the time of this writing (correction, $415.  Wait, correction correction, $430) it appears that Bitcoin is lashing out at the American dollar via deflatio ad absurdem.  These prices are borderline stupid. What, then, is the reason for it all?  Few places stop to discuss the how and why of it, but one mumbled word can be heard over the din; "China." The Genesis Block did the extra legwork and broke down the factors behind this boom.  It comes down to a perfect storm of culture, business, and Bitcoin intersecting at once.  Culturally, China has been pushing for independence from the USD- the "petrodollar"- for some time now.  The American dollar has been the lingua franca of global financial reserves for ages, and its fair to say they aren't happy with it.  Business wise, as if picking up this cultural ethic and running straight for the goalpost, Chinese corporation Baidu began accepting Bitcoin for their security products and other services. Baidu- approximated to be the fifth-largest website in the world- is China's answer to Google, and then some.  The scale of this cannot be understated.  Bitcoin's greatest hurdle has always been adoption.  Bitcoin needs to be USED as a currency to function as a currency, but its biggest use continued to be as a commodity.  Bubbles and eruptions of value have constantly arisen from pure speculation- people getting it just to see if it gains more value over the REAL currency they plan to use. This is the first spike in Bitcoin value that has ever been driven by application over speculation.  Baidu's dominance in China jumps that hurdle, flails with some air-time, and then collides with low-flying aircraft.  The demand for Bitcoin in China went from competitive to vicious, now with the potential to keep changing hands in real business instead of speculative hoarding.  This may blatantly be the biggest thing to happen to Bitcoin yet. That said, anybody busting out the champagne already is risking some grave disappointment.   Big Everywhere, or Big Nowhere The news that Baidu was accepting Bitcoin- that was October, the very beginning of our "surge."  Also, the Genesis Block previously pointed out that the going rate for Bitcoin on Chinese exchanges remains significantly higher than USD equivalents.  How do these connect? They connect in that the rest of the world started celebrating far too early.  For as international as Bitcoin is in principle, the exchanges we use are still highly regional.  The huge difference in values between the US and Chinese regions underscores this segregation.  Yet US and European BTC values are still soaring- soaring on speculation. That precious adoption and application of Bitcoin is, right now, still exclusive to the Chinese market.  Baidu does almost the entirety of its business at home!  The utility of Bitcoin for the average American citizen is about as small today as it was two months ago.  In some sort of bizarre economic echochamber, we are buying up Bitcoin in response to the other side of the world buying up Bitcoin.  There are countless ways this could go wrong... for all regions. First, there's no reason to believe that Baidu's adoption of Bitcoin is more than an experiment.  There was no implication they they needed to "buy in" to Bitcoin with any major investment in order to accept them.  Should the company change its mind and drop the currency, millions of Chinese BTC holders will lose application and have immediate cause to sell.  Those that were invested in Bitcoin for itself, not for spending, will still be fighting the urge to sell when the first price drops hit.  We all know how cascades like this can spread. Second, this represents a step towards politicizing Bitcoin, whether we like it or not.  If Bitcoin continues to soar in China and see further adoption, it will difficult to convince US regulators and pundits that it's not simply another piece of the Chinese economic arsenal.  Apoliticism is built into Bitcoin's DNA, but it just takes a few vocal congressmen to brand it something completely different. Third, my emphasis on China cannot ignore the force of the mainstream.  As CoinDesk reminds us, investors worldwide have been seeing Bitcoin more than ever thanks to headlines of Silk Road and Norway's overnight millionaire.  Any newcomers that those stories bring to the blockchain have stumbled into a market that was already rising and is going ever-faster.  It's doubtless this has driven speculative buyers as well. Speculation is always volatile, and application is valuable only to those who can actually apply it.  Ultimately, tipping the scales too far in any region's direction, especially in application, endangers it elsewhere.  These echoes carry.   Your Deposit on the Celebration Hall is Probably Non-Refundable I'm sorry for being such a downer.  I really am. ...but, this simply isn't going to be Bitcoin's hour of Victory.  This is still a milestone, but it may get worse before it gets better. The term "bubble" is thrown out as an epithet so often we forget how it really functions in an economy.  Meteoric rise like what we're seeing now is a trademark sign of a bubble.  For many of us, this frenzy is indirectly making us invest hugely overseas.  This could become a bubble that pops... or it could make too many enemies before it gets the chance.  The stakes are high.  Yet, despite those risks, there is a lot of good here. Baidu has taken a massive step into the unknown, and deserves our appreciation for it.  They have a lot of eggs in a single basket, and the pressure will be high. In the spirit of capitalism, any other region or market knows exactly what to do: compete!  If we want to preserve this growth, we need to keep gaining ground in Bitcoin utility.  More application means more support underneath this swelling structure, and less pressure on China to hold it up themselves.  More real business use of Bitcoin- not just hoarding and selling- will keep that structure afloat if other markets fail. There is never a need for worry or panic; just a need for caution.  Panic and greed in the face of all  these changes could drive these regions apart.  A bit of caution and diligence could, instead, make Bitcoin more inclusive and international than anything we've ever seen.

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