BITCOIN AND THE JAPANESE RETAIL INVESTOR by Maksym Grinenko Graduate Programme for Transcultural Studies eighth generation Heidelberg University A dissertation submitted in fulfllment of the requirements for the degree of Doctor of Philosophy under the supervision of Prof. Dr. Harald Fuess Prof. Dr. Hans Martin Krämer July 29, 2019 Abstract The objective of this research is to examine the Bitcoin rally of 2017 as it occurred in Japan and establish a greater context for why it was the Japanese retail investors that propelled the nation to being the largest trader of the cryptocurrency at the end of the year. This dissertation begins with the examination of the technical and economical properties of Bitcoin by classifying it as fulflling two roles: that of a means of payment and that of an investment commodity. Following that is a description of Bitcoin’s roots and the history of its non-speculative usage. These chapters serve as a base for examin- ing the cryptocurrency’s role in Japan. The third chapter examines the Japanese retail investor and the Japanese retail investment landscape with a focus on the question of the low rates of risk-asset participation in face of a favorable investment environment. Historical context is drawn upon to argue that the present situation, wherein most fnan- cial assets are kept as cash, is rather the result of the historical path dependence than the present-day conditions in which Japanese retail investors operate. The fnal chapter addresses the question of high-risk activities in the form of gambling and margin trading by a group of predominantly middle-aged men and connects this propensity to engage in zero-sum games with Bitcoin’s success in Japan. The author argues that the solitary practice of high-risk fnancial activities enabled by trusted institutions is separate from the general savings tradition that sufered shocks following the low interest-rate regime and that it was the high-risk gambles that became the primary cause for the popularity of Bitcoin. The dissertation concludes with the argument that the success of Bitcoin in 2017 had been in no small part achieved precisely by inverting the hard-line libertarian values of its creators and making it a centrally-held commodity ofered by a banking-like institution with a strong public presence. Formatted in accordance with the Graduate Programme for Transcultural Studies (GPTS), Student Style Sheet, Humanities Version (February 2013) 120,000 words (within 10% error) at 1.5 spacing Contents List of fgures vi List of tables vii Introduction 1 1 What is Bitcoin? 8 1.1 Introduction . 8 1.2 Terminology . 9 1.3 Technical . 9 1.3.1 Transaction process . 11 1.3.2 Double-spending . 13 1.3.3 Usage . 17 1.3.4 Post-Nakamoto additions . 19 1.4 Economical . 22 1.4.1 Functions, money and intrinsic value . 22 1.4.2 Decentralization . 31 1.4.3 Scalability and efciency . 35 1.4.4 Irreversibility and costs . 43 1.4.5 Permanence, transparency and unconditional propagation . 50 1.4.6 Inherent defation and zero-sum games . 54 1.5 Vulnerabilities . 62 1.5.1 Technical . 62 1.5.2 Legal . 65 1.5.3 Social . 68 1.6 Conclusion . 73 2 Historical overview 77 2.1 Ideological background . 77 2.1.1 Cypherpunks . 77 2.1.2 Nakamoto emerges . 88 2.1.3 The Global Financial Crisis . 91 2.2 Silk Road, crime and bitcoin as money . 97 2.3 Mt. Gox, crypto-pickpockets and crypto-bank robbers . 107 2.4 Degrees of moral ambiguity . 128 2.5 Conclusion . 133 iii 3 Japanese securities landscape 137 3.1 Scope of research . 137 3.2 A brief history . 139 3.2.1 Tokugawa to recent times . 139 3.2.2 Performance during the Heisei Era . 157 3.2.3 Concluding remarks . 185 3.3 Behavioral fnance biases . 186 3.3.1 Disposition efect and its causes . 187 3.3.2 Familiarity and home biases . 188 3.4 Investment environment . 190 3.4.1 Structure of household fnancial assets . 191 3.4.2 Barriers to entry . 200 3.4.3 Tax-advantaged plans . 212 3.5 Financial literacy . 221 3.5.1 Heartaches by the number . 225 3.6 Conclusion . 227 4 Bitcoin’s role within Japan 231 4.1 Gambling . 231 4.2 Margin accounts . 236 4.2.1 The scope of Japanese margin trading . 237 4.2.2 Who is Mrs. Watanabe really? . 238 4.2.3 Recent developments in the application of leverage . 241 4.2.4 Mrs. Watanabe’s problem . 243 4.2.5 Conclusion . 247 4.3 Interim . 249 4.4 Bitcoin: Being one’s own bank . 251 4.4.1 Relationships of trust . 251 4.4.2 Relationships of distrust . 253 4.4.3 Summary . 255 4.5 Bitcoin: Money of tomorrow . 257 4.6 Bitcoin: Not investing more than one could aford to lose . 262 4.6.1 Relationship between popularity and price . 262 4.6.2 Emergence of the bubble . 264 4.6.3 Setting the table . 272 4.6.4 Japan becomes a major Bitcoin player . 276 4.6.5 Mrs. Watanabe’s new cloth? . 282 4.6.6 Beyond Watanabe . 289 Conclusion 303 Bibliography 308 iv List of Figures 1.1 Transaction execution . 12 1.2 Blockchain visualized . 14 1.3 Bitcoin block reward halving clock. 58 2.1 NASDAQ and S&P 500 during the Dot-Com Bubble . 87 2.2 Nominal and infation-adjusted price of gold . 95 2.3 Wannacry ransomware . 103 2.4 BitConnect rewards . 117 2.5 Post-BitConnnect community threads . 119 3.1 Japanese equity distribution . 144 3.2 Real GDP growth rate 1956–1998 . 146 3.3 Dollar–yen exchange rate . 151 3.4 Japanese and American discount rates 1970–1989 . 153 3.5 Equities returns . 159 3.6 All S&P 500 trades during the Heisei Era . 160 3.7 All DAX and KOSPI trades during the Heisei Era . 162 3.8 All Nikkei 225 trades during the Heisei Era . 163 3.9 30-day price volatility of equities . 164 3.10 Risk-adjusted total returns of equities . 166 3.11 Dividend playout ratios of equities . 167 3.12 All CPI-adjusted total return trades during the Heisei Era . 171 3.13 Price-earnings ratios of equities . 172 3.14 Earnings per share on equities . 173 3.15 Normalized earnings per share on equities . 174 3.16 Price-book ratios for equities . 176 3.17 Japan and United States fxed income performance . 178 3.18 Japan and United States bond 30-day volatility . 179 3.19 All Bloomberg-Barclays and Nomura BPI trades . 180 3.20 Japan and United States CPI-adjusted fxed income performance . 181 3.21 All CPI-adjusted Bloomberg-Barclays and Nomura BPI trades . 181 3.22 Japan and United States REIT performance . 182 3.23 Japan and United States REIT 30-day volatility . 183 3.24 Japan and United States REIT CPI-adjusted performance . 184 3.25 Property price index . 185 3.26 International comparison of households’ fnancial assets . 192 3.27 Households’ fnancial assets over time . 193 v 3.28 Households’ cash instruments . 194 3.29 Households’ claims and entitlements . 196 3.30 Insurance premiums to GDP in 2016 . 197 3.31 Population distribution by settlement size . 201 3.32 Online trading accounts and equity volume . 203 3.33 Transaction fee by size and brokerage . 208 3.34 SBI Securities opt-out screen for special accounts . 211 3.35 Aggregate NISA and Tsumitate NISA compositions for 2018 . 214 3.36 Japan Airlines Co., Ltd. (JAL) shareholder gifts . 223 4.1 A Japanese online banking interface . 233 4.2 Pachinko and pachislot players by gender and sex . 234 4.3 Pachinko parlors in Japan . 235 4.4 Meta Trader 5 interface . 244 4.5 Interest in Bitcoin . 262 4.6 Correlation of Bitcoin’s price to Google searches . 263 4.7 Trade volume by currency.