Economics of Liberty Headline News

Has China Cornered the Bitcoin Market?

by Aya Katz

Bitcoin is a digital currency that is designed to be beyond the reach of any government. Because Bitcoin is abstract, it can be based anywhere and nowhere. It was designed so that small home computers could mine digital coins, and no one person or entity would dominate the market. Yet according to a recent New York Times article a handful of Chinese companies now control 70% of the market in Bitcoin:

…despite the talk of a borderless currency, a handful of Chinese companies have effectively assumed majority control of the Bitcoin network. They have done so through canny investments and vast farms of computer servers dispersed around the country.

Bitcoin was designed by an unknown founder going by the name of Satoshi Nakomoto. The digital currency is “mined” by computers, but it requires an electrical input which is the bottleneck of production. In China, large server farms are set up next to power plants, sometimes “borrowing” electricity directly from the source. Through a series of shrewd investments, now only four companies in China control the majority of Bitcoin transactions worldwide, with most of the transfers going through only two Chinese Bitcoin outlets.

This April, when an American delegation went to China to discuss proposed changes in the Bitcoin protocol in order to make processing transactions more efficient, the Chinese Bitcoin companies were able to veto all the proposed changes.  Their motive: by slowing down transactions they are able to collect a kickback from those willing to pay for faster processing.

For an international currency to be entirely dominated by a few companies in one country is not ideal, but it also shows the pragmatic underpinnings of the free market, which is less subject to ideology than profit motive.

“No Chinese person is pushing for Bitcoin because it’s libertarian or because it’s going to cause the downfall of governments,” said Mr. Lee, who moved to China after growing up in Africa and the United States and studying at Stanford. “This was an investment.” (Source: New York Times.)

The question for those who bought Bitcoins in order to maintain the value of their money is how long it will be possible to rely on the digital currency once it becomes a monopoly.

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