SHANGHAI, April 03 (INP): When China closed its local crypto currency exchanges late last year, an underground ecosystem of bitcoin “mules” and peer-to-peer platforms sprung up to allow bitcoin trading to thrive, away from regulators’ watchful eyes. Li, a Canada-based Chinese banker in his 20s, is one of these underground traders. He buys cryptocurrencies in other markets and sells them at a premium to investors in China, who cannot otherwise get them. At the height of the frenzied demand for bitcoins in January, when prices of the digital currency were hovering close to $20,000 after a 20-fold jump during 2017, Li and other traders were able to sell bitcoins in China for 30 to 40 percent more than they cost elsewhere. But in a matter of months, the premium for bitcoins in China has fallen to around 7 percent or less as a flood of bitcoin mules, who physically carry cash across borders for the trades, has swamped the arbitrage business. Cryptocurrency funds and individual computer-assisted traders have also piled into the market. The boom has eaten away the spreads and shown how fast the galloping cryptocurrency markets can change course. “The market’s kind of taken a downturn; there is less general appetite in this space,” said John DeCleene, an assistant fund manager running the fintech and cryptocurrency investments at Overseas Chinese Investment Management. “It is too many players entering this market, but also less of the hype we saw in December-January, when people were paying a 30 percent premium because they expected 10 times gains overnight.” DeCleene launched a $5 million Singapore-based global fund in November to invest in cryptocurrencies, blockchain-related equities and some exploratory arbitrage trading. He said it has generated a 58 percent return so far. Bitcoin mules Bitcoin arbitrage thrived last year as the cryptocurrency grew more volatile and some governments stepped in with rules to curtail trading. The simplest geographical arbitrage involved buying bitcoin in unregulated markets such as Thailand, or ones that have legalised bitcoin trading such as Japan, and selling them in banned markets such as South Korea, China or India. A second form occurred between exchanges when nimble-footed traders bought cryptocurrencies cheaply on lesser-known exchanges and sold them for a profit on more liquid and widely used platforms. There were huge price differences to exploit. In early January, when the price of bitcoin was $17,600 on Bitstamp, the Luxembourg-based digital currency exchange, it was being quoted at 25 million won ($23,630) in South Korea, implying a 34 percent “kimchi premium”. As China’s ban expanded from an initial prohibition on issuing new cryptocurrency to a shutdown of exchanges, premiums rose and traders quickly found new ways of doing business. At first, it was limited to closed groups on the popular messaging platform WeChat and meetings at bars, where potential bitcoin buyers could meet sellers. Then peer-to-peer platforms such as CoinCola, websites belonging to former Chinese exchanges Huobi and OKCoin, and even the retail platform Taobao became hubs for “over-the-counter” (OTC) cryptocurrency trading, conducted outside of formal exchanges and far more difficult for regulators to police. “The big Chinese traders are all using CoinCola or going direct to each other through other OTC platforms,” like WeChat or AliPay, said Christian Grewell, a professor of business and interactive media arts at NYU in Shanghai who has lectured extensively on cryptocurrencies and blockchain technology. Inp/khan