Bitcoin Spawns China Virtual IPOs as U.S. Scrutiny Grows

Eager to profit from growing demand for the digital currency, Sun has invested more than $3,000 in a company called 796 Xchange Ltd., an online exchange for trading stocks and other financial instruments related to Bitcoin, where initial public offerings are also being held.

He’s part of a small but growing group of investors in China who have put the country into contention with the U.S. as the biggest downloader of the virtual money that’s being used to buy a growing range of goods and services online. While intensified scrutiny by U.S. regulators casts doubt on the currency’s future there, China’s Bitcoin industry is expanding.

“What’s worrisome is that a lot of people could be just treating it as a speculative investment,” said Peter Pak, head of trading of BOCI Securities Ltd. in Hong Kong. “In China, the stock market, property and bond market are all not so good, so people get really excited when they hear of a new investment that generates high returns.”

Sun’s outlay of about 28 Bitcoins -- or $3,108 -- for more than 400 shares in 796 Xchange has returned about 46 percent since the stock’s Aug. 1 debut on the company’s own website. The benchmark Shanghai Composite Index (SHCOMP) has only gained about 2 percent during the same period.

 

‘Expensive to Crack’

Bitcoin is similar to other currencies -- say, the Mexican peso -- except it’s not controlled by any government and the total number is capped at about 21 million coins. Computer users can “mine” them by solving mathematical puzzles -- uncovering the hidden series of letters and numbers that matches up with security keys specified by the computer programmers who invented Bitcoin in 2009. As more are mined, the puzzles get harder, and therefore more expensive to crack.

Sun turned to shares of Bitcoin companies after initially trying to mine the currency crunching algorithms on souped-up PCs at his office and home. He gave up after a month, concluding that his computers weren’t up to the task.

“Simple desktops can no longer dig them up,” he said.
There are about 11.5 million Bitcoins in circulation, according to Blockchain.info, which tracks the virtual currency. At today’s price of about $121, there’s still $1.15 billion to unearth. The inherent scarcity of Bitcoin that was intended to help secure its value has also attracted early investors --

Cameron and Tyler Winklevoss, the twins known for their claim to have co-founded Facebook Inc. (FB), own about 1 percent of the currency in issue.

Bigger Drills

Prices have been volatile, with the value of one Bitcoin varying from $84 to $266 in the span of one week in April, according to Tokyo-based Mt. Gox, the largest exchange that allows Bitcoin to be traded for dollars, euros and other currencies.

More advanced miners use specially designed gadgets that cost as much as 86 Bitcoins, about $10,407, in order to mine the digital currency.

Labcoin, managed by Hong Kong-based ITec-Pro Ltd., also began trading its shares this month in a virtual market. The seller of virtual-mining equipment had a market value of 20,000 Bitcoins, or about $2.4 million. Another company that sold shares is Myminer, which operates “mining farms” in China, where it says the low cost of power to run computers gives it an edge. BTC Garden, a Shenzhen-based Bitcoin miner, withdrew its IPO this month, citing a dispute with an investor.

Hong Kong-incorporated 796 Xchange offers an online stock market for Bitcoin companies, as well as futures, financing and IPO services, all priced in Bitcoins, according to its website.

Regulatory Probe

BTCChina.com, China’s most popular Bitcoin exchange, lets traders to use the payment systems of more established companies. That includes Tencent Holdings Ltd. (700), the nation’s biggest Internet company, and Alipay, an affiliate of Alibaba Group Holding Ltd., the No. 1 e-commerce company. Other Bitcoin trading platforms popular in China include FXBTC.com and Btctrade.com.

China briefly overtook the U.S. in monthly downloads of Bitcoins in May, and now ranks second, according to SourceForge.

In the U.S., the Securities and Exchange Commission sued a Texas man over claims he operated a Bitcoin Ponzi scheme. New York’s Department of Financial Services this month sent subpoenas to 22 digital-currency companies to determine whether new regulations should be adopted, according to a person familiar with the matter.

The lack of regulation, which has drawn scrutiny from U.S. regulators, is why Bitcoins are taking off in China, where the government controls the flow of money overseas and keeps a tight rein on what it views as undesirable behavior.

‘Bitcoin is Freedom’

“The advantage for Chinese users to use Bitcoin is freedom, people can do something without any official authority,” said Patrick Lin, system administrator of Erights.net and owner of about 1,500 Bitcoins. Lin said he’s sticking to the currency itself, rather than IPOs, in part because of weak regulation.

“The Bitcoin world is just like the Wild West -- no law, but opportunity and risk,” he said.
The China Securities Regulatory Commission didn’t respond to a faxed query on whether it’s looking at new rules regarding Bitcoin. So long as it remains small, the industry may continue to fly below the radar screen of a Chinese government more preoccupied with a faltering economy and social stability.

“If the circulation of Bitcoins is still confined to a small circle of people, it won’t be something on the Chinese authority’s priority list,” said Edward Au, co-head of Deloitte China’s public-offering group. “They already have too much to cope with.”