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Is China Important for Bitcoin?

By Lior Cohen - Jan 16, 2014 at 11:30PM

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The recent rise in Bitcoin was dampened by the restrictions of China of its banks from holding the currency. Is China that important for Bitcoin’s success?

Despite the volatility in the price of Bitcoin, it continues to hover close to the $1,000 mark. Even the news of China's boycott of the virtual currency didn't dampen Bitcoin users and investors from holding on to it. Some analysts think that China's decision to keep Bitcoin off limits to its citizens could be a big setback from this currency's progress. But is China's role in Bitcoin's growth so important? What could slow down Bitcoin's popularity in the near future? 

It's not China, but the U.S
China's decision to restrict its banks from holding Bitcoin might slow down the spread of this currency, but Bitcoin's future won't rely on China's acceptance (or lack of it). After all, China has blocked several leading online companies most notably Facebook (META 2.03%) and several of Google's websites. Facebook has been banned in China since 2008. Despite China's decision to ban Facebook, the company's sales growth remained robust: In the third-quarter, Facebook's revenue increased by nearly 60%; its daily active users grew by 25% year over year. This staggering growth in users and revenue shows that even large online companies are capable of maintaining high growth rates without China. Further, Bitcoin's presence in the U.S isn't established enough to be concerned of China's or other countries' role in its progress. 

Looking back, it seems that the economic collapse of 2008 that followed with monetary easing measures by the Federal Reserve has lead many people to seek safe haven investments such as gold and silver. These circumstances have also contributed to the rise in demand for alternatives to the U.S dollar such as Bitcoin. Moreover, concerns over the potential devaluation of the U.S dollar may have been among the key factors in Bitcoin's rise in popularity in recent years. 

More companies are accepting Bitcoin including (OSTK -3.92%), an online retail company, that allows its customers to pay with Bitcoin. Overstock's revenue was roughly $1 billion in 2012, so the usage of Bitcoin on this site, which also uses PayPal and other forms of payment, is but a little drop in the ocean. But these steps are pointing in the right direction for Bitcoin fans. If more U.S companies accept Bitcoin, this will be enough to sustain its growth. 

Even though China might not hold back Bitcoin, there are reasons for concerns for Bitcoin users such as its underlying value; this issue was presented in Paul Krugman's recent article. The underlying value of commodities such as gold and oil is their economic usage (jewelry and fueling your car, respectively). The U.S dollar is an IOU from the Federal Reserve so U.S citizens can pay their taxes, and trade it for other currencies or gold (at least in theory). So if tomorrow all businesses ban Bitcoin, holders of the currency might find themselves with an unusable virtual coin.  

Besides the above-mentioned concern, Bitcoin's competitors such as PayPal, which is owned by eBay (EBAY 0.05%), are likely to impede its progress by offering a secure and easy alternative. One reason is the lack of funds Bitcoin developers have to insure the security of the virtual currency. On this front, PayPal, which had a net total payment volume of more than $44 billion in the third-quarter alone, is capable of allocating a lot of funds to insure its customers safety.  

In conclusion
There are many reasons for Bitcoin enthusiasts to be concerned over its future, but China plays a small part on this front. The top issues will continue to be the competition that Bitcoin has from PayPal and other online payments alternatives, its security, and the level of acceptance in the U.S. For now, as long as people continue to believe in Bitcoin, it will strive. Nonetheless, this currency remains a very risky investment with uncertain reward or any underlying value. 

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