The impact of Chinese enthusiasm for bitcoin in recent months has been felt by effectively all market participants. Since the beginning of October, bitcoin’s exchange rate has climbed roughly 950% vs most government fiat, largely driven by CNY markets. Equally as interesting are the aggregate habits of Chinese market participants visible via a number of non-traditional sources and the signals those metrics may send.
Daily XBT/CNY trading volume in China has climbed from approximately 10K XBT per day in early October to more than 150K per day more recently. The drivers of that volume is likely a mix of general interest, low barrier to participation due to relatively lax regulatory encumbrance, and sustained free trading at most of China’s largest exchanges.
PBOC Addresses Bitcoin
This morning, the People’s Bank of China issued initial guidance on digital currencies, significantly limiting the scope of interaction financial institutions can undertake with the digital currency for the time being and requiring bitcoin websites to register under existing telecommunications and internet service guidelines.
Similar to US precedent, the PBOC did not attempt to outright ban bitcoin, but rather took the first steps towards greater regulation of the business entities that make of the economic infrastructure. The result was a roughly 35% sell-off in XBT / CNY markets, from 7,000 to 4,500 CNY, before settling around 6,000 CNY.
Measuring China’s Adoption Trends
Looking at a number of metrics related to the underlying technology supporting the bitcoin network and its use, a number of other patterns emerge. In particular, trends in downloads of the original bitcoin client and connected nodes offer insight into the newest market participants.
In November, China had what looks to be the most monthly downloads of the original bitcoin client of any country so far to date with 190,000; roughly double that of the US for the month. Software downloads are not necessarily indicative of anything in particular – they aren’t needed to buy/sell bitcoin, to own bitcoin, or to mine bitcoin. Yet, when put into context, the implications become clearer.
At this phase, the relatively cumbersome process of downloading, installing and running Bitcoin-Qt generally makes sense under one of two conditions. The first is the relatively experienced user who wants to tinker on their own projects or simply support the distributed nature of the network by adding greater redundancy to the block chain distribution. This person has spent enough time to gain at least a cursory understanding of the space.
The second alternative is someone who, in a rush to enter the market and start using bitcoin, downloads the ‘official’ bitcoin software and begins running it, rather than taking the time to explore alternatives. The surge in downloads occurring immediately after the largest market ramp indicates many of the new Qt users fall into the latter category.
While bitcoin client downloads are by no means a definitive measure of bitcoin penetration into a region, massive trend changes like the one shown above are surely a reasonable proxy for general sentiment shifts. The effect on the network is pronounced as well and can send an ongoing signal after the download is registered.
The chart below shows the number of nodes connected to the bitcoin network from China, as approximated by Bitnodes. According to the data, the increase in Chinese nodes occurs simultaneously and proportionately with the client downloads shown above – both jumped roughly 10x relative to October levels and have since begun to level off or even decrease.
The massive surge indicates that activity was spread across a large number of players, rather than concentrated to the financial institutions most affected by the remarks from the PBOC. Notably, the decrease in connected nodes began before the latest news – we will be watching to see if the announcement impacts the trend.
While downloads appear to be a lagging indicator of price movement, the relationship to node activity has yet to be seen. A decrease may signal the newer, less experienced node operators described above exiting the market and no longer having a need for storage. It could also mean they’ve found better alternatives. That said, the ranking of the Bitcoin Wallet in the Android store has followed a similar path: rising dramatically through November and more recently beginning to taper off.
As the first instance of all of these data sets being available and directly tied to dramatic price movement, the implications have yet to be seen, but may well turn out to be another valuable trend to watch.