“If you had told most people that the vast majority of Chinese trading volumes were going to disappear and Bitcoin was going to hold over $1,000, people would not have believed you just a month-and-a-half ago,” ARK blockchain products lead Chris Burniske tells Bitcoin.com. “That bitcoin’s value is potentially more supported by its transacting volume than its trading volume is counter to the narrative that bitcoin is supported mostly by speculation.”
Indeed, it appears the Bitcoin market is adjusting to new regulations from the People’s Bank of China (PBoC) regarding areas like trading fees, margin restrictions and anti-money laundering (AML) and know your customer (KYC) policies.
Many Bitcoiners have held their breath, their eyes towards China, in anticipation of what the future brings.
Some market participants anticipate more regulations are forthcoming. Mr. Burniske believes, regardless of whether increased regulation is forthcoming, trading volume will likely pick up again as more institutional traders come online amid excitement over things like a potential Bitcoin ETF, which some suggest could be approved by the Securities and Exchange Commission this year.
“When you look at 2016, the ratio of trading volume on exchanges to transacting volume on bitcoin’s blockchain was ten-to-one,” the ARK Invest blockchain specialist imparts. “A lot of critics say bitcoin has an inflated value because of speculation. But, what we’ve seen as a result of the change in Chinese regulation regarding exchanges is a significant slowdown in trading volumes globally. Right now there is more transaction volume than trading volume.”
Mr. Burniske describes how a currency fulfills three core value propositions: a means of exchange, store of value and unit of account.
“It’s important that bitcoin continue to grow as a means of exchange,” Mr. Burniske argues. “Thus far in February, roughly 16% more bitcoin have been transacted on a daily basis than traded.”
He summarizes: “You have an inversion in how Bitcoin is being used, and a significant decline in trading volumes. Nonetheless, the price has been stable.”
What was the source of Chinese exchange volumes? About this, there has been much speculation.
“The most likely hypotheses for what was going on with China is algorithmic trading,” says Mr. Burniske. “There were zero fees and good liquidity. Trying to shave off small gains via algorithmic trading doesn’t necessarily provide much support to Bitcoin’s value-proposition, so losing that trading volume is not necessarily that important for Bitcoin in the long-term.”
What is important is how the Bitcoin ecosystem and price has responded.
Immediately after the PBoC actions, there was a negligible spike in Bitcoin’s volatility. But, since then, the volatility seemingly normalized. The bump that takes place in ‘Jan-17’ below represents the bump in volatility as the PBoC made its recent announcements. As you can see, the market barely shuddered.
“While it might be too early to reach a conclusion, an early hypothesis is declining trading volumes in China will be replaced by another geography,” Mr. Burniske suggests. “Japan comprises now roughly 60% trading volumes, whereas before 90% went through China. The Japanese markets have shifted, as well, and you can see patterns that would suggest these are algorithmic traders. Either way, these trading volumes may not be as important as people previously imagined.”
He adds: “Bot traders are shifting to Japanese markets.”
What do you think of Bitcoin transaction volume playing an increased role in Bitcoin amid the shakeup in China?
Images courtesy of Shutterstock, ARK Blockchain
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