How Reliant Is Bitcoin on China?

According to recent reports, 80 percent of Bitcoin’s volume is due to Chinese yuan transactions. That is a huge amount, and likely due to the continued restrictions the Chinese government places on the convertibility of the yuan. But as China continues to take steps to liberalize the yuan, will Bitcoin’s appeal in China wane? And if it does, what effects will that have on the future viability of Bitcoin?

Bitcoin’s ability to serve as both a currency and as a payment system has greatly helped in its adoption around the world. People who otherwise might not have had access to the financial system are able to use Bitcoin to get around barriers that have been placed in their way. And in the case of the Chinese, Bitcoin enables people to get around those barriers and interact internationally.

But it’s only a matter of time before the Chinese government fully liberalizes the yuan. The government wants the yuan to become part of the IMF’s currency basket, which will likely require the yuan to become freely floating on international exchanges. And with yuan clearing banks being established in Australia, France, Canada, and other countries around the world, it will become easier for yuan-holders to do business internationally. Some analysts expect that full yuan liberalization will occur within the next three to four years. If this happens, and more Chinese are able to do business through the regular banking system, it could very likely lead to a collapse in the number of Chinese seeking to transact in Bitcoin. And if that is the case, what happens to the future of Bitcoin?

Certainly there is an increasing amount of government control over financial transactions in the West, and particularly in the United States. But there are no outright capital controls and there is still a relative amount of freedom to move money around within and without the country. Governmental authorities have also taken a dim view of Bitcoin, seeking to put pressure on banks and payment processors not to do business with anyone involved with Bitcoin. The number of Americans currently willing to cut themselves off from the financial system due to involvement with Bitcoin, or willing to operate on parallel tracks through both Bitcoin and the financial system, is therefore relatively small. Will Bitcoin therefore be relegated to a tiny niche?

As with anything, it’s hard to say with any certainty. Certainly the fact that Bitcoin seems to have established itself firmly within China bodes well for the future. Even with full yuan liberalization, Bitcoin’s first mover advantage and foothold in China could cause it to become entrenched, if not as a currency, then at least as a payment system. That would certainly bode well for Bitcoin’s long-term survival. But if Chinese use of Bitcoin drops precipitously, others elsewhere would have to step into the breach to make up for that lost transaction volume. At this point, it’s hard to imagine where those new transactions might come from. It will be worth keeping an eye on the number of yuan-denominated transactions within Bitcoin. If the number of Chinese using Bitcoin drops, and the number of Bitcoin transactions drops accordingly, that could pose a threat to Bitcoin’s long-term survival.