Did Chinese Traders Flocking to MMM Ponzi Cause Bitcoin Bubble?

Currently at 2620 CNY ($414), the "China premium" is now roughly 6.5% higher than the $380 mark on USD exchanges.

Bitcoin (BTC/USD) on Wednesday had its strangest trading day in 2015, perhaps in years, when it swung by 20% in either direction in a matter of hours.

Wednesday was unique from the half dozen or so flash crashes we’ve seen over the past two years. This was a rare occasion when the drama happened on the upside, and where so much of it transpired over a 24 hour period.

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When all was said and done, bitcoin gravitated back to $400, the plateau from where its rise accelerated and where its current trading range is centered.

Note, however, that on the major Chinese exchanges (Huobi, BTCC and OKCoin), bitcoin continues to trade at an extravagant premium to elsewhere. Currently at 2620 CNY ($414), the “China premium” is now roughly 6.5% higher than the $380 mark on USD exchanges. Similar premiums were experienced during the most intense periods of the bubble, a phenomenon suggesting that Chinese traders were pulling the market higher.

A Financial Times (FT) article suggested that the rise was catalyzed by Chinese flocking to a Ponzi scam orchestrated by a Russian fraudster and former parliamentarian, Sergey Mavrodi, called MMM.

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According to the article, the scam is a “social financial network” which requires prospective members to buy bitcoins in order to join. The bitcoins are distributed to other members as “mutual aid”. Members are promised a 30% monthly return, and a 10% bonus for recruiting new members. Testimonials on YouTube and elsewhere have made it seem too good to pass up. Mavrodi, according to the article, was previously jailed for fraud.

If true, this wouldn’t be the first digital currency-based Ponzi scam targeting the Chinese. GemCoin, which is now under investigation, also targeted Chinese investors. They were drawn by the alleged approbations of a former mayor, who was forced to resign from his councilman position.

The FT article implicitly suggests that the Chinese investors hungry for bitcoin pushed prices higher. It describes the reported scam in greater detail, as well as bitcoin’s volatility, but does not expand upon the claimed link between the two.

Uncertainty Abounds

Interestingly, a Reuters report takes the opposite approach. It suggested that the scam was responsible for bitcoin’s sharp decline after the rise to $500. The theory is that bitcoin’s renewed exposure to shady dealings haunted investors, for many of whom the MtGox-inspired price crash of 2014 and similar ugly episodes are still fresh in their minds.

The report did not propose a cause for the rise until the very end, when it noted that BTCC has re-enabled bank deposits- a feature not available since 2013. As an aside, it did offer an interesting tidbit: Blockchain.info CEO Peter Smith believes bitcoin will fall back to the $250 range.

Perhaps more drama next week will shed more light on what happened. China seems to be the best bet when observing the aforementioned premiums. China reportedly fueled the great bitcoin bubble of November 2013. Chinese retail traders took local stocks on a roller coaster during the past 12 months. China was also viewed as the source for litecoin’s 300% bubble during June-July, though these things are difficult to verify.

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