Despite the Chinese government’s crackdown on initial coin offerings (ICOs) and cryptocurrency exchanges, local traders have invested in Bitcoin with a huge premium during its recent rally.
As Cryptocoinsnews previously reported, the Bitcoin price achieved a new all-time high at $5,920 last week, moving closer to the $6,000 region. Analysts including billionaire hedge fund investor Mike Novogratz predicted the Bitcoin price to surge even further in the mid-term, as an increasing number of institutional investors engage in cryptocurrency and Bitcoin trading.
When the price of Bitcoin was rapidly approaching the $6,000 mark and broke through $5,800, local investors and traders in China rushed to invest in Bitcoin, regardless of the imposition of a nationwide ban on cryptocurrency exchanges that requires leading Bitcoin exchanges such as OKCoin and Huobi to halt their services by the end of October.
On October 13, Bitcoin trades in the Chinese market facilitated by OKCoin and Huobi were processed at over $6,013, as the demand for Bitcoin from local investors began to surge. While leading Bitcoin markets such as Japan, the US, and South Korea processed trades at around $5,800, Chinese investors were purchasing Bitcoin with premiums in the range of $200 to $300.
Reasons For the High Premium
Until late 2016, the South Korean Bitcoin market demonstrated a massive premium in contrast to major markets like the US, because of its limited liquidity. At the time, the South Korean cryptocurrency exchange market was dominated by Korbit and Coinone, and Bithumb, currently the world’s largest cryptocurrency exchange by trading volume, were yet to evolve into a major platform in the South Korean market.
Consequently, South Korean investors traded Bitcoin at a rate that was around 5 to 10 percent higher than the global average price.
In June, South Korean fintech company BitHolla CEO Alireza Beikverdi explained:
“Unlike China, which has massive mining operations taking advantage of an accidental government subsidy in the form of overinvestment in underused infrastructure and cheap energy, there is no mining activity to speak of. Therefore, Bitcoin and Ethereum must be imported from abroad, driving up the domestic premium in Korea.”
More to that, the strict capital controls and financial regulations imposed by the South Korean government which heavily restricts the outflow of capital from within the country to overseas markets contributed as a factor to the demonstrate premiums in the South Korean Bitcoin market.
Since then, the South Korean cryptocurrency exchange market has grown significantly. The South Korean Bitcoin market is the third largest in the world by trading volume, while its Ethereum market is the largest market internationally, with over 32 percent in market share.
Due to the closure of major Bitcoin exchanges, in spite of the Bitcoin mining centers in China that produce a large supply of Bitcoin, liquidity in the Chinese Bitcoin market is restricted and limited. As such, when the price of Bitcoin spikes and the demand for the cryptocurrency rises, unstable markets like China inevitably experience high premium rates as a result.