Cointelegraph spoke with Leon Li, CEO of Huobi — one of China’s ‘Big Three’ bitcoin exchanges — to discuss its new tool connecting bitcoin and the traditional stock market, why the Chinese yuan doesn’t actually comprise 80% of BTC trading, and how Beijing’s new policy is fostering Bitcoin startups in the country.
Bitcoin, China and the Stock Market Boom
In addition to Huobi’s recent partnership with “China’s MIT,” Tsinghua University, Li confirmed that the exchange is also looking for opportunities in the currently booming stock market and is launching a new trading platform named Caimao that will enable users to mortgage their bitcoin to borrow Chinese yuan, which are then used for trading shares listed on the Shanghai Stock Exchange.
The Shanghai Composite Index has more than doubled in the past 12 months, making it the hottest bull market in the world today, following Chinese monetary “easing” and the recently announced subsidies for FinTech (including Bitcoin) startups in the country.
While there has been no new policy directed at Bitcoin in particular since December 2014, “the environment is actually very flexible,” explained Li. He added:
“The Chinese government is giving a lot of leeway to bitcoin startups with their FinTech startup support initiative, which will have a positive effect on the industry and will add value to Bitcoin in China.”
However, Li also added that they do not expect any new announcements from Beijing with respect to cryptocurrency and instead are keeping a close eye on American regulators, as Huobi expects “the situation in the U.S. will strongly influence Chinese policy.”
Meanwhile, a significant fraction of its traders are “either already trading or want to trade in this stock market,” explained Huobi’s analyst Robert Kuhne. Thus, Caimao will serve as the “new bridge” between bitcoin and the conventional stock market.
The platform will work as follows:
- Deposit bitcoin to platform;
- Borrow up to 60% of CNY value of BTC deposits;
- Buy and sell shares listed on the Shanghai Stock Exchange via Caimao;
- Pay back borrowed amount plus interest;
- Withdraw initial bitcoin deposit plus profits (or minus losses).
The platform has a “sophisticated” risk management system, which operates on the same basic principles as Huobi’s risk management for bitcoin margin trading and bitcoin futures. In other words, forced liquidations will automatically be triggered when necessary to ensure that a trader's losses never exceed the CNY value of the BTC deposit.
“The key point of using this platform is that bitcoin holders who want to participate in the Chinese stock market can do so without having to cash out their bitcoin holdings,” added Kuhne. “There are many bitcoin holders who believe bitcoin will recover and make new highs in the future, so they do not want to sell at the current low price. But at the same time, the bull market in Chinese stocks is just too appealing to ignore.”
Indeed, Li noted that his company is seeing a significant share of Bitcoin traders quitting as “everyone wants to jump in the booming stock market.”
Goldman Sach’s 80% Statistic ‘Inaccurate’
In March, Goldman Sach’s released a report stating that approximately 80% of all BTC trading is conducted with the Chinese yuan. Li questioned this figure when asked about its accuracy.
“It’s not the correct number because there are a lot of zero-transaction-fee trades being done on Chinese exchanges including high frequency trading,” explained Li. “The data was collected by Goldman Sach’s from different exchanges, but these exchanges gather statistics on their own without any third-party audit or verification, so we don’t know how accurate this number is.” He added:
“The correct number should be around 40-50%. We believe this is a more accurate representation of BTC-CNY trading volume.”
It is no secret that China’s relationship with Bitcoin mainly revolves around mining and trading. With respect to bitcoin payments, Li reiterated that this was still prohibited in China, as was addressed in the aforementioned memo. However, trading is allowed, which explains why mining, investments and trading make up the largest share of bitcoin activity in the country, particularly when compared to neighboring nations, who are finding other use cases, such as remittances in the Philippines.
In fact, Huobi does not expect bitcoin payments to take off in China anytime soon, as the situation is “a lot different that in the U.S.,” where fiat transaction can incur significantly larger fees from third-party processors. Bitcoin payments in China, on the other hand, are not a good use case in the country, as popular services like Alipay (China’s PayPal equivalent) and Wechat offer zero fees for fiat payments, with China’s Central Bank (PBOC) serving as the clearing house.
Huobi therefore expects China’s affinity for mining and trading to continue, along with the emergence of many new Bitcoin startups that will be fostered by the state. However, the Chinese Bitcoin community will be keeping a close eye on how cryptocurrency will be treated in the U.S., and in New York state (the BitLicense) in particular, to get an idea of what to expect from Chinese authorities in the future.