TOKYO • Japan's army of retail investors, no strangers to high-risk bets in the past, have emerged as a major force in bitcoin's spectacular rally, now accounting for an estimated 30 to 50 per cent of trading in the cryptocurrency as it spikes to record highs.
Once sceptics, Japanese retail investors have been attracted by the digital currency's volatility and inefficiencies in pricing that create opportunities to make money on arbitrage between exchanges.
"When I first heard about bitcoin a few years ago, I thought it was a fraud," said Mr Yoshinori Kobayashi, 39, a former stock trader who took up bitcoin trading 21/2 years ago. "But I tried it out after I had come to know some people making money on it. I bought it at 60,000 yen (S$716), which quickly became 80,000 yen and I started to regret I hadn't started earlier," said Mr Kobayashi, who believes bitcoin is on a long uptrend but took some profits last week.
The spectacular surge in bitcoin, up more than 16-fold this year to above US$17,000 (S$23,000), has drawn comparisons to the 1970s gold spike or Japanese shares' rally in the 1980s' go-go era. Both of those delivered massive gains to Japanese retail investors before plunging sharply.
According to data compiled by Jpbitcoin.com, a Japanese bitcoin website, yen-based bitcoin trades reached a record 4.51 million bitcoins last month, almost half of the total of the world's major exchanges of 9.29 million bitcoin.
Industry officials say not all yen-based bitcoin trading is done by Japanese retail players, as some hedge funds now trade bitcoin in the yen to take advantage of price differentials between the yen and US dollar prices.
Still, many industry officials estimate Japanese account for somewhere between a third and half of global bitcoin trade. Japan's global share of the bitcoin market jumped after a clampdown this year by Beijing saw bitcoin trading in yuan almost entirely disappear.
Japan's approach to bitcoin has encouraged retail investor interest.
The Japanese government in April granted cryptocurrencies legal status as a means of settlement and in September officially recognised 11 digital currency exchanges.
Also in September, the tax agency issued clarification that revenues from bitcoin will be treated as income, from which trading losses can be deducted. That eased concerns that profits from bitcoin might be taxed like gambling, where gains will be taxed but losses will not be regarded as costs.
Trading at major Japanese bitcoin exchanges grew to 4.51 million bitcoin last month from 1.19 million in April. In dollar terms, it has surged to US$35.4 billion last month from US$1.45 billion in April.
A lack of major institutional investors is providing retail investors a rare chance to become dominant players, with primitive pricing leaving opportunities for savvy traders, market participants say.
Even within dollar-based exchanges, it is not uncommon to see a price in one exchange 10 per cent higher than that in another exchange, for example. Then there are often gaps of over 10 per cent between yen-based bitcoin prices and dollar-based prices.