China bitcoin arbitrage ends as traders work around capital controls

Wed Dec 11, 2013 7:17am EST
 
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By Gabriel Wildau

SHANGHAI (Reuters) - The price gap between bitcoins trading in Chinese yuan and those sold for other currencies has evaporated in recent days, highlighting the porous nature of China's capital controls.

Chinese bitcoin chat rooms buzzed last month as investors noticed that the digital currency as sold on China's biggest exchange was more expensive, in dollar terms, than bitcoins traded abroad using dollars, creating a tempting arbitrage play.

Traders could earn profits by buying bitcoins using dollars on a foreign exchange such as Mt. Gox, reselling them for yuan at the higher price on BTC China, the main local exchange, and finally converting the yuan back to dollars.

"Insane bitcoin. If you've got dollars, hurry and do arbitrage," a user called 'foxtree' wrote on Weibo, a Twitter-like micro-blogging platform, on November 19, the day the gap peaked at more than 30 percent.

A key driver of the price gap was China's capital controls, which make it difficult for speculators to swap yuan proceeds from the sale of high-priced Chinese bitcoins into dollars.

"Certainly a portion of the premium on BTC China was a result of the fact that any coins sold would be in RMB, which isn't the most portable currency," said Zennon Kapron, head of Kapronasia, a Hong Kong-based finance and technology consultancy, using an alternate term for the Chinese currency.

"So if you did trade that market, getting your money back into another currency is more difficult," he said.

RAPID EVOLUTION   Continued...

 
Bitcoins created by enthusiast Mike Caldwell are seen in a photo illustration at his office in Sandy, Utah, September 17, 2013. REUTERS/Jim Urquhart