Welcome back China?

Monday 01 June 2015

Recent days have seen some unusual activity in the alt markets, and it’s coming from China.

The impact of the Chinese market on crypto can hardly be overstated. Few bitcoiners who have been around more than 18 months can be unaware that the huge run-up to $1,200 was fuelled largely by Chinese money, and that when the Chinese government hamstrung the exchanges by preventing banks working with them formally, money flowed back out again and the bubble burst. (There is some question about the role of the ‘Willy’ bot on Gox, too, but the wall of money from China cannot be discounted.)

Falling money

Is a stack of Chinese money about to drop into the alt market?

Since then, the Chinese stock market has been doing rather well. There is some evidence that the long crypto bear market, particularly across the altcoins, was caused by Chinese speculators withdrawing money to put into stocks, and given that the Shanghai composite rose 50% since March alone it’s understandable why.

Until now.

Analysts have long been concerned that the Chinese stock markets were overheating, and that their economy is not looking as robust as it was even a few months back. It seems they weren’t wrong: on Thursday 28 May, the Shanghai Composite crashed 6%, one of its biggest falls in 15 years. And, just like bitcoin, when the rise has been that meteoric, there’s only one way to go. The writing is already on the wall, it’s just a question of when and how far it will plunge.

Good for the alts

What’s interesting is that a number of cryptocurrencies have seen staggering gains in recent days. Over the last couple of weeks several alts have posted rises almost every day, sometimes in the double digits. Litecoin, Dogecoin and Nxt have all lifted around 50% since mid-May, and BitShares has doubled. And the activity is being led by Chinese exchanges, particularly BTC38. Volumes are very high compared to other exchanges, and they lead on price, too (which is then arbitraged with the others).

As ever, there is some question about the veracity of the figures coming from the Chinese exchanges. Rumours swirl that much of the activity is fake, and that BTC38 simply want to establish themselves as the new kid on the block. However, the volume is more ‘real’ than that of some Chinese exchanges, which charge no trading fees and can simply buy and sell back and forth between bots to give the illusion of activity. And it’s having quite an effect on the market - or, at least, part of the market.

No love for bitcoin

Whilst some alts have posted double-digit rises, bitcoin remains languishing where it was, around a fifth of its all-time high or around $240. The Chinese, it seems, are reluctant to dip their toes back in that pond.

There are a number of possible reasons. One is simply that many speculators were badly burned when the last bubble burst. Why go back to something that took such a large slice of your wealth before?

Another is the psychology of Chinese investors. There have been many crazes for Chinese speculators - including garlic, which was the best-performing commodity in 2010. But it’s not about underlying utility, it’s simply about money. Scarcity is attractive for the Chinese, who don’t have many ways to invest their money. Garlic, salt, bitcoin. They’re alternative forms of gold. And once you’ve done it once, it’s passé. Who’s going to invest in garlic again?

Lastly, bitcoin has a small market cap compared to other commodities, but it’s still large compared to the alts. Bitcoin is almost 50 times larger than Litecoin and 250 times larger than Nxt. The smaller the market cap, the higher it rises for the same amount of money. Pick the right underdog and you could do very, very well indeed.

Of course, there’s a winner and a loser for every transaction, and anecdotally some 80 percent of daytraders lose money overall. There’s always a greater fool - until you find the greatest fool and there are no more buyers. Then, as we saw with bitcoin in December 2013, it’s a long way down.

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