Asia’s drive to adopt, embrace and expand on the cryptocurrency revolution has attracted innovative businesses and venture capital to the continent, as robust optimism paves the way for total market domination. As it stands now, there are primarily two approaches to cryptocurrencies: a more hesitant approach that can be seen by some countries, and a positive one, like that adopted by Japan and South Korea. Indeed, these countries have absorbed the market without much real competition, but this period won’t last forever. When China closed its local cryptocurrency exchanges late last year, an underground ecosystem of bitcoin “mules” and peer-to-peer platforms sprung up to allow bitcoin trading to thrive, away from regulators’ watchful eyes, but in a matter of months, the premium for bitcoins in China has fallen to around 7 percent or less as a flood of bitcoin mules, who physically carry cash across borders for the trades, has swamped the arbitrage business. Cryptocurrency funds and individual computer-assisted traders have also piled into the market.
The boom has eaten away the spreads and shown how fast the galloping cryptocurrency markets can change course. “The market’s kind of taken a downturn; there is less general appetite in this space,” said John DeCleene, an assistant fund manager running the fintech and cryptocurrency investments at Overseas Chinese Investment Management. While the West has a propaganda machine campaign against cryptocurrencies currently, in the East we might argue, they are years ahead. In the west you can’t use credit cards to acquire them and even Facebook has outright banned all Ads about them. Cryptocurrencies are based on modern cryptology technology rather than on physical materials, like precious metals or paper money. Bitcoin and other existing cryptocurrencies are managed by a network of computers scattered around the world with no central authority unlike conventional fiat currencies, which are controlled by central banks. The great Sir Isaac Newton may have revolutionised our knowledge of the world but he still had his blind spots. He was sucked into the great mania of his day, the South Sea Bubble and lost a lot of money. “I can calculate the motion of heavenly bodies but not the madness of people,” he ruefully reflected. In retrospect, he should have pondered the popular saying that was used to define his law of gravity: “What goes up must come down.”
Investors in bitcoin are learning this old truth. The price of the cryptocurrency peaked in December 2017 at somewhere over $19,000 but started collapsing from the start of this year. Perhaps the best way of understanding bitcoin is through a model of how bubbles operate. The classic model, developed by Hyman Minsky and elaborated by Charles Kindleberger, a historian who studied bubbles, has five stages: displacement, boom, euphoria, financial distress and revulsion. The displacement is some technological development that can be used to justify a “new era” railways, canals, the internet or blockchain. A boom then occurs and drags in more and more investors; at some stage, we reach euphoria, where the boom is widely known to the public and there is talk about those who made millions from the trade. In the euphoria stage, people buy because others are buying and because they anticipate being able to sell quickly at a higher price. For a while, this trend is self-reinforcing. At some stage, however, doubts set in; some people decide to take their profits while they can. Once the price starts to fall, the psychology starts changing. People who bought early and were counting their millions suddenly see a dent in their wealth (and it is worth noting that you are not really rich unless you have got into the asset class and out again). Other people may have bought above the current price and are bitterly regretting their mistake. Bargain hunters jump in and temporarily drive the price higher but it doesn’t last.
Bitcoin arbitrage thrived last year as the cryptocurrency grew more volatile and some governments stepped in with rules to curtail trading. The simplest geographical arbitrage involved buying bitcoin in unregulated markets such as Thailand, or ones that have legalised bitcoin trading such as Japan, and selling them in banned markets such as South Korea, China or India.
A second form occurred between exchanges, when nimble-footed traders bought cryptocurrencies cheaply on lesser-known exchanges and sold them for a profit on more liquid and widely used platforms. There were huge price differences to exploit. In early January, when the price of bitcoin was $17,600 on Bitstamp, the Luxembourg-based digital currency exchange, it was being quoted at 25 million won ($23,630) in South Korea, implying a 34 percent “kimchi premium”. As China’s ban expanded from an initial prohibition on issuing new cryptocurrency to a shutdown of exchanges, premiums rose and traders quickly found new ways of doing business. The arbitrage funds operate much like retail traders, buying and selling cryptocurrencies simultaneously on two different platforms, but on a much larger scale. That allows them to profit from smaller spreads. Some retail traders, including Li, have turned to lesser-known cryptocurrencies such as Tether, which bills itself as being pegged to the U.S. dollar. As China’s restriction extended from an underlying forbiddance on issuing new cryptographic money to a shutdown of trades, premiums rose and merchants rapidly discovered better approaches for working together. The arbitrage reserves work much like retail merchants, purchasing and offering cryptographic forms of money at the same time on two unique stages, however on a substantially bigger scale. That enables them to benefit from littler spreads. Despite the fact that that is an amount, it is far not as much as what distraught brokers made before the end of last year. This is not the first time that cryptocurrencies are responding in such a manner especially after some resistive measures by governments. This time around, the popular narrative is that this market behaviour is as a result of the most recent regulatory pressure from China and South Korea. The president of Netcoins, Michael Vogel said that this is borne out of the fact that these Asian countries have been among the earliest adopters of cryptocurrency, and this is often why negative news in Asia (or perceived negative news) can cause panic selling in other parts of the world.
“We have seen this many times, however, it is important to remember the irony though; Bitcoin hit all-time high price months after China first proclaimed its reluctance to embrace Bitcoin”, says Vogel. Repeated events have shown how significant the Asian community is to the blockchain industry. Having led the way in the early adoption of the technology, and natural factors such as population, which by extension influences the market size have placed the region in a prominent position within the industry. For how long this will continue remains to be known, but the power of Asia in the current crypto industry can no longer be taken for granted.
Writer is Staff Reporter Melange for Europe & Coordinator Center of Pakistan & International Relations (COPAIR)