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What a Bitcoin Is Really Worth in India and China

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Bitcoin might be in a bubble, but in some less fortunate parts of the world, it offers a way out. That's worth something.

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The Bitcoin saga took an unpleasant turn this December when China's central bank banned financial institutions from dealing in the virtual currency. Bitcoin was enjoying a surge of popularity in the country; by the end of November, Chinese exchanges were responsible for almost two-thirds of worldwide traffic. The central bank's decision sent the currency tumbling.

Last week, Indian regulators joined the fray. Preferring ominous warnings to outright prohibition, the Reserve Bank of India issued a public advisory on the dangers of Bitcoin. The meaning was clear enough. India's largest exchange was promptly shut down, and its operator raided by local authorities.

Why the crackdown? The People's Bank of China explained that Bitcoin isn't a currency "in the real meaning of the word," and cited the risk of money laundering. India's central bank objected to Bitcoin's volatility and its lack of "backing assets."

The larger problem, though, may be Bitcoin's mobility. Virtual currencies are borderless. They can be acquired in one country and exchanged immediately in another. Since they're not "real" money, they can get around foreign exchange laws. And, since they're not backed by assets, there's no easy way for governments to control them.

Consider that Chinese citizens are forbidden from taking more than $50,000 out of their country in any given year. This policy yields strange results, such as the fact that, in 2012, 17 million Chinese made the pilgrimage to Macau. It wasn't gambling that attracted them but rather gambling chips, which can be converted to foreign currency and then sent abroad. Capital flight has remained a problem for China in 2013, with the country's new premier leading a campaign against corruption and the Fed's taper creating weakness throughout the developing world. For wealthy Chinese, Bitcoin was a way of avoiding the expense – and the raised eyebrows – of a trip to Macau.

In India, Bitcoin was an alternative to smuggling gold. The rupee's terrible performance this year has led many Indians to run for the exits. India's government responded by locking the doors. In August, gold imports were slapped with heavy restrictions and capital controls were tightened, preventing money from being sent or invested abroad.

Perhaps this explains Bitcoin's appeal, and why it's seen as a threat, in China and India. Neither government has much recourse, but while China can prevent Bitcoin from being used commercially – Alibaba (OTCMKTS:ALBCF) and Baidu (NASDAQ:BIDU) were forced to stop accepting it as payment – and India can shut down the exchanges, neither country can do anything about the "mining" of Bitcoins. This activity requires only computer hardware and a Web connection. Once mined, Bitcoins are utterly beyond the reach of regulators.

The virtual currency might be many things. It might be in a bubble, as Alan Greenspan told Bloomberg in early December. (It might also be the next evolution of Paypal (NASDAQ:EBAY), as Bank of America (NYSE:BAC) argued the very next day.) Holding Bitcoins can be dangerous, with the price swinging by as much as 40% in a month. Paul Krugman thinks they're evil. But in some parts of the world, Bitcoin can be a way out; and if we're going to make sense of the crazy ride that it's been on this year, that's a good thing to remember.

See also:

What Bitcoin Arbitrage Can Teach Us About the Crypto-Currency

Did Amazon Slash Its Way to a Profit?

BlackBerry Users Can't Stop, Won't Stop


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