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Behind Bitcoin's Wild Ride: the Japan Factor

The Wall Street Journal logo The Wall Street Journal 5/26/2017 Paul Vigna

Bitcoin fever has hit Japan, and it’s helping the virtual currency go parabolic.

Despite a volatile week in which the virtual currency fell $400 in a few hours Thursday but still rose on the day, bitcoin has kept streaking to fresh highs. It was up 15% for the week and is up 110% since the end of March. Friday afternoon, it traded at $2,268, down from its all-time peak of $2,792 set Thursday.

One of the leading causes: new regulatory policies for bitcoin in Japan is giving businesses and investors a fresh push to use the digital currency. The move is partially the result of the nation’s experience with the 2014 collapse of Tokyo-based Mt. Gox, a trading site where 850,000 bitcoin went missing after a cyberattack.

“People gained a lot of confidence in bitcoin as a legal currency,” said Yuzo Kano, the founder and chief executive officer of BitFlyer Inc., a Tokyo-based bitcoin exchange backed by big Japanese banks. “We see new joiners on top of existing buyers.”

The new Japanese rules enacted by the Financial Services Agency went into effect April 1, establishing bitcoin as a legitimate payment method by putting rules on businesses in the industry. They include minimum capital requirements, segregating customer accounts, and monitoring potential criminal activity.

Trading of bitcoin in Japanese yen has surged to 31% of overall trading, according to data from research site CryptoCompare. That is roughly equal to bitcoin trading in dollars and ahead of bitcoin trading in Chinese yuan, which used to be the biggest market, and South Korean won, an expanding market.

Bitcoin, an alternative to paper money in which trades match up over computers without the involvement of banks or governments, is a natural fit for the Japanese, said Mike Kayamori, the CEO of digital-currency exchange Quoine, the nation’s third largest by volume.

The foreign-exchange market and yen trade is central to the Japanese, he said.

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Japan is the world’s third-largest economy, and the yen is one of the world’s most-traded currencies. Technology and foreign exchange are two major businesses in Japan, and bitcoin allows investors to combine both in one product.

When Quoine launched 2½ years ago, Mr. Kayamori said, the startup had trouble even getting bank accounts. Once regulators at Japan’s Financial Services Agency began their regulatory push, he noticed a change. “The potential is there,” he said. “Japan will be the biggest bitcoin market globally.”

The flood of new money in Japan is resulting in price quotes on Japanese exchanges that are in some cases hundreds of dollars higher than on other exchanges. That gap is resulting in arbitrage opportunities—buying cheap on one exchange, selling at a profit on another—and helping to push the price up.

Japan’s experience contrasts with a loss of trading volumes in China. For several years, bitcoin trading in China was unregulated. Without any rules, or even trading fees, Chinese bitcoin exchanges were completely unrestrained. At its zenith, more than 90% of all bitcoin trading was occurring in China. That changed over the past year, as the People’s Bank of China forced the three biggest exchanges to adhere to anti-money-laundering rules and implement trading fees. The bank then forced the exchanges to halt bitcoin withdrawals.

Much of the trading has since moved to Japan, where some Japanese businesses are now starting to accept bitcoin. A discount airline, Peach, said it would begin accepting bitcoin. Others include utility Nippon Gas Co. and electronics retailer Bic Camera Inc.

Individual investors in Japan who like bitcoin’s anonymity and profit potential are also looking to buy.

“These days, you hardly get any interest even if you put money in the bank,” said Hiroshi Matsuzaki, a 50-year-old who sells housing fixtures. “So I decided to put money bit by bit into virtual currency.” He’s looking to buy more, but is hesitant given the volatility.

Chizuru Suzuki is coming into bitcoin for the second time. The 51-year-old web-content creator first invested in the currency in 2013, but became dubious after losing track of her bitcoin. Now, she is again buying small amounts on price dips and taking profits when it rises. “I expect the price will fall at some point and that’s when I will buy it again,” she said.

Some argue that bitcoin prices have rallied too fast. “The party will end as Asian [prices] come back into line with Western markets,” said Charles Hayter, CEO of CryptoCompare.

Japan already had one moment in the bitcoin sun, and it ended poorly. When bitcoin was first stretching past a small enclave of tinkerers and coders, the first major exchange, Mt. Gox, was based in Tokyo. At its height, Mt. Gox was handling more than 70% of all bitcoin trading around the world. But the exchange collapsed in 2014, and creditors are still trying to recover funds.

With the new oversight from the FSA, though, this go-round could be different. “The bitcoin casino days are gone,” Mr. Kayamori said, “and everybody says that’s a good thing.”

Write to Paul Vigna at paul.vigna@wsj.com and Chieko Tsuneoka at chieko.Tsuneoka@dowjones.com

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