Trading, fees, margin and volumes

Due to the global and decentralized nature of bitcoin, the markets on which you can trade bitcoins are open 24 hours a day, 7 days a week. There are not just one or two markets where you can trade bitcoins, but dozens of different markets that are spread all over the world. Likewise in China. Many of the Chinese exchanges used to apply a different revenue model than the Western exchanges. This had a major impact on volumes played on Chinese exchanges.

Western exchanges often charge a fee per trade: this means that you pay a small percentage (for example 0.25%) of the amount you trade per trade. Chinese exchanges did this differently. They did not charge a fee per trade – it was free to trade bitcoins. Instead, the Chinese exchanges made money by lending bitcoins or Chinese yuan so that users could engage in margin trading.

Margin trading is a form of trading where you can trade five, ten or up to a hundred times your actual balance. For example, you borrow yuan, euros or dollars from the exchange to buy more bitcoins, for which your actual balance serves as collateral. If you have 1000 on an exchange, it is possible to buy bitcoins with, for example, five times as many euros (= 5000). This means five times as much profit (or loss!). To borrow the money from the exchange, you pay a small percentage of interest per day that the loan is held.

As a result of trading without fees on the Chinese exchanges, trading volumes there were many times higher. For example, where Western exchanges traded 10,000 bitcoins in a 24-hour period, this was in the millions at Chinese exchanges. After all, charging a fee per trade inhibits people from trading back and forth endlessly: your balance is slowly running out. When this brake is not there, one can trade unlimited without directly costing money. This creates false volumes: it is not clear how many of the millions of bitcoins that are traded can actually be counted as real trades.

The new situation in China

In recent weeks, a new situation has arisen in China. This was a result of an inspection by the People’s Bank of China (PBOC), China’s central bank, of various Chinese bitcoin exchanges. From translations of press releases from the PBOC it can be deduced that the PBOC will put more focus on monitoring the bitcoin exchanges.

Due to the increased oversight by the PBOC, the major Chinese trading platforms (BTCC, OKCoin, Huobi) have stopped margin trading. This way of trading would lead to excessive price fluctuations. As a result, the exchanges are forced to introduce fees per trade (BTCC, OKCoin, Huobi): the income from providing loans for margin trading will disappear.

The difference in volumes with and without fees (source):

The introduction of fixed fees per trade also puts an end to the inflated and opaque volumes on the Chinese exchanges. When the fees were introduced yesterday, this was immediately visible in the trading volumes on the various trading platforms, as shown in the image above.

Positive

The message from the PBOC is actually positive: the Chinese exchanges may have to stop offering margin trading and charge fees as a result, but as long as they follow these rules, the PBOC approves the operation of the exchanges.

In addition, it will become more transparent for everyone what the actual trade volumes are worldwide, which gives a better picture of the activity per region. The distribution of the volume across the various exchanges has already changed considerably in the past 24 hours compared to before the introduction of fees. It becomes clear that the share of trading volume of the Chinese exchanges does not differ much from that of the Western exchanges.

The difference between the old and the new situation is shown in the images below.

Volume per exchange for the past month (source):

Volume per exchange for the last 24 hours (source):