Beijing’s recent decision to ban initial coin offerings has led to a surge in Chinese Bitcoin arbitrage, including online courses that cover offshore Bitcoin trading and the sale of arbitrage-related financial products
On September 4 the Chinese central bank issued the “Public Notice Concerning the Prevention of Cryptocurrency Issuance Financial Risk” (关于防范代币发行融资风险的公告) in conjunction with six other central government departments, prohibiting any individuals or organisations from engaging in ICO’s, as well as calling for the immediate suspension of all cryptocurrency financial activities.
The announcement led to the suspension of operations by a slew of China’s leading ICO platforms, as well as triggered a drop in domestic Bitcoin prices that has given ample opportunities for profit to arbitrageurs.
One Shanghai-based Bitcoin investor said to China Securities Journal that the pronounced price differentials between domestic and overseas cryptocurrency platforms enabled him to reap handsome rewards via arbitrage operations in under twelve hours from the afternoon of 4 September to 5 September.
Chinese arbitrageurs first purchase Bitcoins via domestic platforms and transfer them to overseas platforms, before cashing in their virtual currencies and placing the funds in offshore accounts.
Their earnings are equal to the price differential between Chinese and overseas platforms, which on the evening of 4 September rose to as much as 6000 yuan (USD$919.05) per Bitcoin, and was more than enough to compensate for the transaction costs involved in transferring Bitcoins between platforms and converting them into fiat currencies
Cryptocurrency arbitrageurs often make use of “robots” to conduct operations. They open accounts with multiple platforms, before using computer programs to automatically assess whether fleeting price differentials between different regional markets warrant an arbitrage operation, in which case this is also automatically launched.
While technically adept investors have long sought to profit from cryptocurrency price discrepancies, China’s recent ICO ban has led to a surge in arbitrage business and an exodus of virtual money abroad.
China Securities Journal reports that one Chinese investor named “Little A” recently began selling courses on how to transfer virtual currencies abroad, by establishing a fee-based information sharing group where she gathered information on overseas Bitcoin transactions.
Little A charges an annual fee of 200 yuan to join the group, and within two days of its establishment on 10 September earned 40,000 yuan (approx. $6127) from several hundred members hoping to learn more about offshore Bitcoin trades.
Other Chinese Bitcoin experts are releasing arbitrage products that promise to let the average investor benefit from the technical knowledge of seasoned arbitrageurs, with the prospectuses for such products promising annualised returns of as much as 40% and mandating no minimum threshold for investment.
Chinese Bitcoin enthusiasts are also cooperating with investors in other countries to engage in arbitrage operations. One Malaysian arbitrageur placed messages on a Chinese Bitcoin forum on 12 September seeking Chinese investors, in order to capitalise upon the higher prices for the virtual currency on South-east Asian trading platforms.