China trading ban is fueling rise of controversial crypto coin

Cryptocurrency investors better not take their eyes off China, even after regulators there started to crack down on digital assets.

In recent months, over-the-counter crypto trading in China has exploded, just as Chinese spot traders began buying nearly all of their Bitcoin with the stablecoin Tether, according to a study by researcher Chainalysis Inc. Tether was used in 99% of Bitcoin spot trades in China this year, almost completely displacing the yuan, while Bitcoin trading in markets like Japan and Korea is still mainly conducted through fiat, the researcher found.

About 40% of the top-50 crypto exchanges in terms of Bitcoin on-chain activity are located in the Asia-Pacific region, according to Chainalysis. In the first half of 2019, these exchanges accounted for 35% of all Bitcoin received. The region’s exchanges also dominate the trading in options and futures, with nearly 90% of the 2.36 billion contracts traded globally.

“People should be paying more attention to the price formation on the large Asian exchanges,” said Philip Gradwell, chief economist at New York-based Chainalysis. “There’s probably going to be a large amount of liquidity there that, for example, these OTC brokers will be providing. It can move very fast.”

Binance, the world’s largest crypto spot exchange, just launched a peer-to-peer yuan-trading service in China.

Tether began to dominate spot trading in 2018, right after the Chinese government prohibited its citizens from exchanging yuan for cryptocurrency directly through online sites and closed crypto exchanges. Since the 2017 ban, many people have been exchanging yuan for Tether via peer-to-peer trades or over the counter, which is legal in China. They would then use their Tether to buy Bitcoin and other coins.

Partly thanks to that rising demand, Tether’s market capitalization has tripled since the beginning of 2018, as the private Hong Kong-base company behind Tether issued more coins. The exact mechanism of the issuance is unclear. Earlier this year, Tether became the world’s most used cryptocurrency, surpassing Bitcoin, which has a market cap that’s nearly 38 times greater, according to CoinMarketCap.com.

Since the ban in China, over-the-counter crypto trading has been rising by leaps and bounds. Just 10 over-the-counter Asian brokers Chainalysis tracked received $877 million of Bitcoin in the year ended in September, up 52% from the prior 12 months.

“The size is just kind of astonishing,” Kim Grauer, senior economist at Chainalysis, said in a phone interview. Olga Kharif, Bloomberg