Bitcoin in China: Pure Risk Generator or Potential Investment Instrument?

Abstract

In December 2013 the People's Bank of China announced the restriction of Bitcoin from being involved in any services offered by financial institutions in China, fearing that the speculative risks inherent in Bitcoin is too new for Chinese investors and may endanger the national financial system. This article reviews the Bitcoin's evolvement both as currency and as investment asset around the world. Also, the regulatory treatment for Bitcoin in America is discussed. Then I used detrended ratios to compare the volatility of Bitcoin market and China's stock market, concluding that the risks inherent in Bitcoin are not unacceptable for Chinese investors. Moreover, I searched into the relationship between Bitcoin return and some fundamental economic variables, finding that Bitcoin doesn't have enough correlation with the national economic system to depress investors further during an economic downturn and that Bitcoin actually has excellent diversification benefit as portfolio component.