December 19, 2013 12:00 am JST

Bitcoin's luster dims as China clamps down on virtual currency

HONG KONG -- Bitcoin is losing some of its shine, due in part to tougher regulations in China.

     Chinese demand had provided much of the fuel for the skyrocketing value of bitcoins over the past few months. Then, on Dec. 6, Baidu, China's largest Internet search company, said it would stop accepting them as payment. Baidu's decision came a day after the People's Bank of China, the central bank, barred financial institutions from handling financial transactions in bitcoins.

   According to transaction data from Mt. Gox, an online exchange, 1 bitcoin was worth less than $600 at one point on Dec. 7, a drop of more than 50% from its record high of $1,240 reached three days earlier.

Once bitten

A legion of Internet users in China has embraced Bitcoin, which was the brainchild of an anonymous computer programmer. Unlike conventional currencies, bitcoins are not issued by a government or other central authority. Instead, they are created, or "mined" in computer servers according to an algorithm at a fixed rate. The total number of bitcoins in circulation will eventually hit the upper limit contained in the algorithm, at which point no more will be made.

     In theory, this should help them maintain value. Bitcoins can also be transmitted instantly and anonymously around the world, computer-to-computer, circumventing traditional financial institutions and their transaction fees. This is part of their appeal.

     BTC China, founded in 2011 as the country's first Bitcoin exchange, is now the world's largest Bitcoin trader by volume, accounting for one-third of the global total. According to another Chinese trading platform, Bitcoin is popular with women, who use the virtual currency to make expensive purchases such as gold and even property. This helps buyers evade China's strict financial regulations. 

     Until recently, China's central bank did nothing to impede the use of bitcoins, other than keep a wary eye on the market. Yi Gang, the bank's deputy governor, even said people who are interested in the virtual currency could explore and trade in it.

     Meanwhile, Chinese consumers are finding more ways to spend their digital coins. Baidu used to accept bitcoins as payment for some services. Some Chinese property developers let people buy condominiums with them. The currency itself is also an inviting target for financial speculators in a country with a sluggish stock market and tightening rules on real estate purchases.
     But Bitcoin's freewheeling market and anonymity have attracted imitators and raised concerns about illegal activity. Another brand of virtual money, Q Coin, offered by social media and e-commerce company Tencent Holdings, has raised eyebrows in China. Users of Tencent's services have been reselling their Q Coins on online auction sites. Critics warn that unregulated digital currencies could be used to launder money.

Breaking the bank?

Created in 2009, Bitcoin is a "cryptocurrency" -- a decentralized digital form of money based on cryptography. There is no single administrator or watchdog managing Bitcoin, let alone a government or central bank. Transactions in the currency are direct from one user to another. Those who deal in bitcoins operate at their own risk as far as finding trustworthy counterparties, protecting their online wallets and avoiding scams.

     Earlier this year, 1 bitcoin traded for $10-20. But after the debt crisis in Cyprus raised the possibility that deposits on the island would be frozen or subject to levies, money began flowing into the virtual currency.
     Despite the recent pullback, bitcoins were trading around $710 in mid-December, up more than 250% from early November, when the currency began taking off. With new buyers continuing to crop up, it may be too early to declare Bitcoin's bubble a bust.