China is the second-biggest and fastest growing Bitcoin market in the world, second only to the United States. This is a relatively recent development that can be traced to Cyprus’ financial crisis in spring of this year. When Cypriots and other depositors found out their accounts would be heavily levied in exchange for a national bailout, Bitcoin became a popular loophole to evade the tax. As a result, the price of a single Bitcoin shot from about $20 to $260 in a matter of days.
The price just as quickly receded, but not before news of the virtual currency hit airwaves around the world. In China, state media tend to pay extra attention to the financial happenings of the European Union, the country’s second-largest trading partner. After a 30-minute documentary on CCTV aired and a People’s Daily article was published in May—both with relatively positive outlooks—China saw its Bitcoin market explode.
From cult to currency
Most of the Chinese demand for Bitcoins still comes from speculative investors, though, according to the folks at ASICME, a Beijing-based Bitcoin mining equipment manufacturer. The month-old startup wants to get more people in China involved in Bitcoin, whether they be miners, consumers, or store-owners, says founder Yang Yaorui.
For Bitcoin to succeed, you have to have a lot of people using it. If all the mining is concentrated within those few people, then it’s just those few people making money, and it won’t grow. The idea of making a miner that anyone can buy and spread the coins out is actually good for the health of Bitcoin.
Assuming it becomes more popular, the price will rise and stabilize. But if average people don’t start using Bitcoin in their everyday lives, then the bubble many naysayers now predict is doomed to burst. That’s the problem Yang and his team aim to help solve. A mining system from ASICME via Taobao runs from 3,000 to 45,000 RMB (~$500-$7,500), relatively cheap compared to most other options in China. A prospective miner used to be able to soup up a desktop computer to mine Bitcoins, but increased difficulty has effectively made this method obsolete.
Mining is a complex process that I won’t bother to discuss in too much detail here. Put simply, these machines brute-force the encoded hashes containing the transaction history of every Bitcoin. It’s sort of like a lottery you can play as many times as you want and as quickly as your mining equipment can run. If you win, you earn 25 new Bitcoins. This is often done in collaborative groups called mining pools to improve the odds. The process simultaneously creates new Bitcoins and secures the entire system from fraud, such as using the same Bitcoin twice. As long as there are more legitimate miners than hackers, the miners will outpace the hackers. Currently, 11.5 million Bitcoins exist, with another 25 being added every 10 minutes or so. The most that can ever exist is 21 million, but that probably won’t be achieved until the 22nd century.
Most companies capable of making mining hardware in China keep it for themselves because they make more money mining with it than selling it. That narrows the options for buying reliable mining gear. Butterfly Labs in the US is expensive, and some customers in China reported an eight month wait before receiving their system. The top mining company in the country, run by an entity known as Fried Cat (I’m not making that up) out of Shenzhen, sells the equipment, but it’s also quite expensive. A company called Avalon used to sell mining systems but now only sells the required microchips, which come in minimum batches of 300 for a 8,000 RMB (~$13,000). They take months to arrive and you still have to solder them into actual hardware.
None of those choices are exactly viable for ASICME’s demographic: novice miners. The company says it sets its prices based on how many Bitcoins it can mine. Yang says the customer should be able to recoup his or her investment in a month (not including maintenance and electrical bills).
In addition to its hardware, ASICME is also working on a Chinese Bitcoin wallet, which was just released this week. The Android and iPhone app is free and open source, so users can verify that it’s safe. The app can be used to store Bitcoins and spend them online or in person. ASICME has no plans to monetize the app yet. Yang just wants his new business venture to be a long-term one.
Everyone else is too busy thinking how are they going to make money, but we’re busy thinking about how to get more people using Bitcoin.
Yang says his team will start working on more open-source software projects to make this a reality. He didn’t specify, but it looks like Chinese point-of-access software for vendors—effectively a Bitcoin cash register—might be in the pipeline. This, in combination with the wallet app, will hopefully allow China’s Bitcoin infrastructure to grow. At present, very few Beijing stores accept Bitcoins for physical transactions.
What about the government?
Yang says he thinks the possibility of the government making Bitcoin outright illegal is very low. As mentioned previously, even state media seem to have taken a liking to it.
On the other hand, a law passed back in 2009 says use of virtual money to purchase real-world items and the exchange of virtual money for RMB are illegal. The law mainly targeted QQ coins, a currency for online multiplayer games, to prevent gambling and other illegal behavior. The law doesn’t specifically mention Bitcoin, but it seems it could easily be applied to Bitcoin if the government chose to enforce it as such.
For now, the Ministry of Commerce, which passed the law, hasn’t said anything about Bitcoin. Even if it did, it would need the cooperation of the Ministry of Culture and the People’s Bank of China to really criminalize it. Yang says:
As long as it’s not illegal, we’re going to do it.
Still, Yang says he expects some regulation to come within the next year or so. Last week, we published an article about the rise and possible fall of China’s Bitcoin economy due to government regulation. But Chris Woods, co-founder of Bitcoin-supported online clothing store Bitfash, says not only is regulation inevitable, it’s necessary and beneficial.
Something’s gonna have to happen. We’re going to have to work with governments to get them comfortable, because this is compulsory for mainstream development for people to get comfortable.
Woods and Yang both spoke at Bitcoin Salon, an event put on by Pingwest that drew about 150 local enthusiasts in Beijing. Woods said they all have to help educate the government and media to get the right message out. Bitcoin gained a favorable reputation in China when it was used to donate to this year’s Sichuan earthquake victims. However, several media reports in the West have focused on individuals using Bitcoin to purchase illegal drugs. Woods says as long as the Bitcoin community advocates the positive image, regulation will help reduce volatility and gain the people’s trust. He says expecting the currency to continue completely unregulated is impractical.
ASICME is weird.
ASICME has about 40 employees; that’s big for a startup in Beijing. Only 10 or so actually build the mining hardware. Another 10 work on the software side. The other 20 are in sales, marketing, and business. Half of the team lives and works in-house. Yang rents five residences on two floors of an apartment complex where they eat, sleep, and work. Four to five employees sleep in the bunk beds of each dormitory-sized bedroom.
It’s a pretty odd setup for a Chinese startup, Yang admits. Yang is pretty odd himself, at least at first sight. He definitely stands out in China with his long hair and long goatee. But don’t let this former surf bum fool you. He has a pedigree as one of the original creators of Renren, the Chinese equivalent of Facebook.
As evidence of his methods, Yang says in its first month, ASICME has sold almost 2 million RMB ($326,000) worth of mining equipment. He also claims to have received some investment, although he wouldn’t say how much or from whom.
For now, the consensus on Bitcoin is that there is no consensus. No one really knows how it will evolve in the months and years to come. It could be a big bust due to lack of mainstream traction. Or it could revolutionize modern currency. Startups like ASICME, whether you call them brave or stupid, are putting all their chips on the latter.
(Editing by Willis Wee and Charlie Custer)