China, Bitcoin, and Forex Trading

In October, China banned the use of cryptocurrencies along with bitcoin mining because of its association with money laundering and excessive energy usage. The decision came as coal prices in China were at historic highs. China's electrical consumption is the world's largest and it grew 10 percent in 2021—the “fastest annual growth for any major economy in the recorded history of the industry” according to energy analysts Wood Mackenzie.

The country faced power outages because of a lack of capacity numerous times in 2020 and the they have turned towards more coal consumption to remedy it while limiting coal imports. The country is set to build 43 additional coal plants in the coming years.

Once the bitcoin ban came into effect, coal prices dropped from their historic highs on the Australian coal exchange and bitcoin prices dropped as well.

Bitcoin and other cryptocurrencies are often accused of enabling illicit activities, but it’s hard to say to what degree. The Internal Revenue Service (IRS) recently announced $3.5 billion in crypto seizures last year, much of it related to the dark web drug marketplace, Silk Road, as well as so-called mixing services—cryptocurrency sites used for mixing illicit funds with legitimate funds to obscure their origins.

China was a large source of bitcoin and other crypto transactions. A year prior, in October of 2020, mainland China represented 55.6 percent share of all hashrates—a measure of the total computing power of crypto networks—according to the University of Cambridge Bitcoin Electricity Consumption Index. Since the ban, the U.S. now leads with over 1/3rd of all hashrates.

There's reasonable evidence that China's love affair with crypto was connected to foreign currency exchange. Crypto networks allow transfer of capital to bypass the fees of standard wire transfer networks, and trading in the renminbi yuan (RMB) took off following the creation of bitcoin markets in 2010.

Prior to 2005, the currency was not significantly traded in forex markets. It wasn't until 2005 that China reformed the RMB exchange rate regime to use a floating exchange rate that yuan trading existed in any significant way. But it was once crypto markets came online in 2010 that it really took off, and trading volumes have increased 72 percent since, second only to the Bahrani Dinar—although by total volume, it is still far below that of the U.S. dollar and the Euro.

According to numbers from China’s State Administration of Foreign Exchange, foreign exchange settlements went from $115.2 billion a month in October, 2011 to $22.19 trillion total transactions in November of 2021. Compare that to between 2008 and 2009 when foreign exchange settlements actually decreased in volume.

While forex markets exist throughout the world, they aren't necessarily traded on central exchanges like the New York Stock Exchange. Forex trading requires wire transfers to move capital to the specific forex market.

In general, forex trading has consistently grown over the last two decades, evolving into a 6.6 trillion dollar a day market according to Bloomberg News.