Hong Kong Altcoin Arbitrage Seminar

Bitcoin trading strategies are becoming more well known; however, other digital currencies (altcoins) are also gaining in popularity. BitMEX CEO, Arthur Hayes, will lead a seminar on how to apply simple arbitrage strategies to the altcoin universe.

Arthur will discuss the following strategies:

– Cash and Carry Arbitrage
– Create to Lend
– Altcoin Market Making
– ICO trading using derivatives

 

Date: 17 May 2017

Time: 7pm – 9pm

Location: The Hive, 23 Luard Rd, 21/F The Phoenix, Wanchai, Hong Kong

Cost: Free

Please RSVP using Eventbrite.

Bitcoin / USD Swap Funding Rate Calculation Changes

Due to the ongoing issues at various Bitcoin exchanges with regards to depositing and withdrawing fiat currencies, there has become no credible source for overnight USD and Bitcoin lending rates.

The BitMEX Bitcoin / USD Swap, XBTUSD, currently uses the Bitfinex overnight USD and Bitcoin lending rate in the funding rate calculation. Effective 21 April 2017 12:00 UTC, the interest rate component of the funding rate calculation will be fixed at a positive 0.03% per day.

To arrive at this number, we calculated the average difference between the Bitfinex daily USD and Bitcoin lending rates for a 12 month period ending 31 March 2017 to arrive at the positive 0.03% rate.

If the swap price does not trade at a premium or discount during a funding calculation period (currently 8 hours in length), longs will pay shorts 0.01%. This equates to a daily rate of positive 0.03%.

When the deposits and withdrawals of fiat and Bitcoin are operating normally, we will select an appropriate exchange from which to source overnight USD and Bitcoin rates.

A Statement on the Possible Bitcoin Unlimited Hard Fork

As proposed in the multi-exchange hard-fork contingency plan, there is significant doubt that a Bitcoin Unlimited (BU) hard fork could be done safely without additional development work.

In the case of a fork, we support the plan as proposed by Bitfinex, Bitstamp, BTCC et al.

It will not be possible for any exchange, including BitMEX, to support both chains separately. For these reasons, BU will not be listed or used as a deposit/withdrawal currency until replay protection is implemented and BU is not at risk of a blockchain reorganization if the Core chain becomes longer.

If the BU fork does succeed, we intend to take every possible step to ensure the safety and integrity of customer deposits on both chains. As BitMEX does not offer margin lending, there is no concern about Bitcoin in active positions at the time of the fork.

Notice Regarding Bitcoin/USD Products (Index, Tick Size)

Bitcoin / USD 30 June 2017 Futures Contract

The BitMEX Bitcoin / USD 30 June 2017 Futures Contract (XBTM17) listed today, 17 March 2017 at 12:00 UTC. This contract is similar to XBTH17, but uses a new index, described below.

.BXBT: The New BitMEX Bitcoin / USD Index

.BXBT is an equally weighted index using the Bitcoin / USD spot price from the following exchanges:

  • Bitfinex
  • Bitstamp
  • GDAX
  • OKCoin International

XBTM17 uses the .BXBT index. Any exchange that is down or displays stale pricing data for 15 minutes or more will be removed temporarily from the index. Once the price feed is operational at least 5 minutes, we will reinstate the exchange.

A page detailing each constituents’ individual price and history will be live soon.

The BitMEX Bitcoin / USD 31 March 2017 Futures Contract, XBTH17, will continue to use the existing Bitcoin / USD Index (Symbol: .XBT; Weights: 50% Bitstamp, 50% OKCoin International) until it expires.

The BitMEX Bitcoin / USD Swap, XBTUSD, will continue to use the existing Bitcoin / USD Index (.XBT) until 31 March 2017 12:00 UTC. It will then switch to the new index. This is the same moment that XBTH17 expires.

Increase to Bitcoin / USD Products’ Tick Size

Also effective 31 March 2017 12:00 UTC, the tick size for Bitcoin/USD products (XBTUSD, XBTM17) will change from 0.01 USD to 0.1 USD.

Bitcoin Algo Trading and Market Making Seminar

BitMEX CEO, Arthur Hayes, will lead an interactive seminar on the basics of algo trading and market making in the Bitcoin markets.

Arthur will touch on API connectivity through the use of an example python trading bot. He will also talk about the basic principles of market making Bitcoin spot and derivatives.

Participants should bring a laptop, and visit this GitHub repository for the example trading bot.

Date: Wednesday 22 March 2017

Time: 7pm to 9pm

Location: The Hive, 23 Luard Rd, 21/F The Phoenix, Wanchai, Hong Kong

Cost: Free

Please RSVP on Eventbrite.

BitMEX 2nd Anniversary Trading Awards Winners

The BitMEX 2nd Anniversary Trading Awards have concluded. It is time to announce the winners.

The winner of each category will receive a 2 Bitcoin prize.

Big Spender: Trader with the most Bitcoin turnover summed across all BitMEX products.

Username Bitcoin Turnover
XBOT 4,237.76 XBT
j8 2,354.87 XBT
1,894.32 XBT

Yacht Club: Trader with the largest net profit; this includes unrealised and realised profit.

Username Bitcoin Profit
Waverider83 15.14 XBT
douver 14.48 XBT
14.16 XBT

Shoot The Moon: Trader with the largest liquidation in Bitcoin notional terms.

The winning trader is trollboxer. Because this award is the result of actual money lost, we will not publish the size of the liquidation.

I’m Feeling Lucky: A random trader in the Trollbox.

The winning trader is habibi.

Thank you to all of our users for helping to make BitMEX the success that it is today. Stay tuned for similar promotions in the near future.

The Future Of Bitcoin In India

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Indian Prime Minister Modi’s cash grab has created fantasies of Indians rushing to acquire Bitcoin. While I do believe that India will be an important market for Bitcoin in the near future, the way in which they acquire Bitcoin will have profound implications on how Indian Bitcoin adoption grows.

Financial Repression

Indians do not trust the government or banks with their money. India’s population, like that of many developing countries, holds its wealth in the form of gold and property. Governments cannot print gold, and you always need a place live and farm.

A large percentage of the population does not have a government issued ID or bank account. They deal only in cash. Modi’s ban of 500 and 1,000 Rupee notes is causing havoc. The government will issue new 500 and 2,000 Rupee notes; however, in order to convert old notes into new, a person must first encounter the banking system.

Due to high CPI inflation and a weak Rupee (INR), Indians store wealth using gold. Gold in INR terms (XAU/INR) fell 8.13% over the past four years. Over the same time period, INR depreciated by 25.18% vs. the USD. Gold outperformed by over 17%.

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The government in its attempt to force as many people as possible to hold their wealth in INR, tax gold imports 10%. Gold smuggling is big business in India. According to The National:

In January 2012, the import duty in India was set by the previous government at 2 per cent, which was then doubled to 4 per cent in March of that year. A couple more hikes were introduced the following year, so that the import duty reached a record high of 10 per cent, which is where it stands today. This created an incentive for gold to be smuggled into India, to avoid paying the high duties and to reap greater profits.

 

About 175 tonnes of gold were smuggled into India in 2014, the WGC believes.

Bitcoin is weightless and borderless. If digital payments grow quickly in India, Bitcoin will become a preferred way to save. The question is, how will Indians actually buy Bitcoin.

Buying on Exchange

For most readers, if you want to buy Bitcoin, you transact on your preferred exchange. For countries with little or no currency restrictions, it is quite easy to buy Bitcoin. The most liquid Bitcoin currency pairs are XBT/CNY, XBT/USD, and XBT/JPY.

When exchanges open in a new country, they import liquidity from abroad. The most important consideration for the exchange is the supply of Bitcoin. Given that there are very few if any local companies mining Bitcoin, supply will come from traders sourcing it from the USD and JPY markets. They will not source from China, as CNY is not freely tradable.

Here is the flow of how a trader will supply Bitcoin to India:

  1. Hold USD working capital offshore on a large Bitcoin exchange, for example purposes I will use Bitstamp.
  2. Offer XBT for sale in INR terms on a local exchange.
  3. When someone purchases XBT with INR, immediately buy XBT using USD.
  4. Then convert INR to USD and repatriate abroad to Bitstamp.
  5. Repeat the process.

If capital can flow freely between INR and USD, this is allows India to instantly access a large pool of Bitcoin liquidity. Unfortunately Indians cannot freely convert INR into USD.

The Reserve Bank of India (RBI) allows a person to convert $250,000 worth of INR into a foreign currency each year. The big caveat is that you may not use this allocation to buy foreign exchange abroad.

This restriction makes it virtually impossible for trading businesses to import sufficient liquidity into India.

The RBI may allow an exemption for Bitcoin exchanges to import USD Bitcoin liquidity into India. But that exemption will definitely come with heavy taxation. The RBI raised the gold import duties as the country’s current account deficit worsened and the INR weakened. They will not allow another currency free from their control to suck INR liquidity out of the banking system.

Due to a lack of supply, Bitcoin in India trades at a substantial premium. BtcXIndia is one of the only operating exchanges I could find that reports trading volume. 24 hour turnover is a 170 XBT. The current premium vs. the Kaiko BitMEX Bitcoin / USD Index is 12.14% (54,000 XBT/INR, USD/INR 67.74, XBT/USD 710.86).

Given the current monetary policy regime, the only way to increase the supply of Bitcoin in India is to produce it locally through mining.

Mining Bitcoin in India

The reason why China is the world’s largest market for Bitcoin is mainly due to the large supply of it being produced in CNY terms. Chinese traders do not need to access USD liquidity offshore in order to acquire Bitcoin. If they had to buy Bitcoin from overseas miners, it would be difficult due to China’s currency restrictions.

China has cheap electricity, labor, and manufacturing. India also possess cheap electricity and labor. India is not a global powerhouse in the production of computer chips, but those can be imported from China.

From one mining contact, I am told that the average price per kilowatt hour for electricity in China is $0.025 to $0.045. I don’t know if Indian industrial mining farms could achieve prices that low. When I mentioned the prospect of mining in India, the same contact said it could work with Himalayan hydropower.

Mining capacity in India will be brought online only if the demand for Bitcoin is so high it pushes XBT/INR to a substantial premium over XBT/USD. This could be due to heavy taxation, or a dearth of traders willing or able to sell Bitcoin for INR.

If the premium is greater than the higher cost of electricity and the chip import costs, then mining will start domestically in India. If Bitcoin catches on, Indian farms will begin producing and fabricating their own chips much like the Chinese do today.

The most crucial component is demand. Without the demand for an electronic store of wealth, a price premium will not develop. No premium, no mining. The 12% premium is encouraging, but with only 170 Bitcoin traded in the past 24 hours, the demand isn’t yet sufficient to coax entrepreneurs to build new mining farms in India.

The nature of Indian financial regulations require supply to be provided through mining. It takes time for the market to produce signals to would-be miners to begin building a farm. India will be an important market eventually, but this process will take time.

Important Notice Regarding BitMEX Zcash Futures

This notice is meant to clarify common questions users have about the BitMEX 30 December 2016 Zcash / Bitcoin futures product.

When Does Zcash Spot Begin Trading?

The genesis block is scheduled to launch at 13:00 UTC today. Many large digital currency spot exchanges have indicated they will open Zcash trading shortly afterwards.

Due to its mining reward system, the supply of Zcash will be severely limited. As a result it may be very difficult to buy physical Zcash. If you instead desire economic exposure on the long or short side, the BitMEX Zcash futures contract may be suitable.

Can You Buy Zcash on BitMEX?

BitMEX only offers a Zcash / Bitcoin futures contract, ZECZ16. Users cannot buy and sell actual Zcash on BitMEX.

ZECZ16 Contract Details:

Contract Value: 1 ZEC
Quote, Margin, and Settlement Currency: Bitcoin
Settlement Index: To Be Determined
Expiry Date: 30 December 2016 12:00 UTC
Leverage: 2x

Full ZECZ16 Contract Details

What Exchange Will Be Used for the Settlement Price?

By 1 December 2016, we aim to announce the settlement exchange(s). We will base our decision on which exchange(s) are leading the market in terms of Zcash / Bitcoin trading volume. This decision is at our complete discretion.

Is ZECZ16 Freely Tradable?

From now until 12:00 UTC, the price of ZECZ16 may not go below 0.391884 XBT (Limit Down), or above 1.175652 XBT (Limit Up).

After 12:00 UTC, all trading limits will be removed. ZECZ16 is then free to trade at any price where buyers and sellers meet.

How Is ZECZ16 Valued?

All long and short positions in ZECZ16 will be valued using the last traded price.

What Happens During Liquidation?

ZECZ16 is classified as highly speculative. As a result, it is margined according to the Auto-Deleveraging System.

Please read the Auto-Deleveraging guide for more information.

Trading ZECZ16 Is Extremely Risky

If you are not comfortable with the inherent risks in trading a new digital currency, please do not trade ZECZ16.

If you have any questions, please reply to this email. (support@bitmex.com)

The Guide to Zcash, The Digital Currency That Aims to Dethrone Bitcoin

zcash-logo-1

Zcash is the most anticipated new digital currency of 2016. Zcash aims to create a form of electronic money that is truly a bearer instrument.

One impediment to Bitcoin’s use as electronic cash is that all transactions are viewable on the public blockchain. Bitcoin’s fungibility has become an issue as a result. Some people and businesses (mainly exchanges) will not accept Bitcoin if certain addresses touched or will touch those coins in the past or future. Transaction censorship goes against the core of values of Bitcoin.

Zcash is the latest coin that attempts to create a digital currency where no knowledge of the inputs or outputs of the cryptographic signature are require for verification. This is called a Zero-Knowledge Proof. DASH and Monero are two other digital currencies that attempt to solve the same problem using different cryptographic methods.

The hype surrounding Zcash is deafening. The Zcash development team is held in high regard. They have secured investment from notable Bitcoin venture capital firms such as Pantera, Fenbushi, and The Digital Currency Group. Bitcoin luminaries such as Roger Ver, Erik Voorhees, Barry Silbert, and Li Xiaolai have invested their personal capital. Conformational bias is important in evaluating why investors choose one project over another. If the leading figures of the Bitcoin industry are investing, it must be good, right?

Unfortunately Zcash is not holding an Initial Coin Offering (ICO) to distribute ZEC amongst investors. ZEC is the three character currency code for Zcash. ZEC will be distributed through mining rewards just like Bitcoin. Unlike Bitcoin that was an unknown and unproven concept when it launched, the genesis block of ZEC is highly anticipated. The short supply of ZEC paired against ravenous demand, has and will lead to a price spike.

Zcash Mining

A ZEC block is produced every 2.5 minutes and 12.5 ZEC are awarded to the miner who creates that block. Bitcoin currently produces blocks every 10 minutes, and the block reward is 12.5 BTC. The Zcash team opted for a “slow start” to the mining process. For the first 20,000 blocks (approximately 34 days), only 125,000 ZEC will be created vs. an expected 250,000 ZEC. That leads to an average 6.25 ZEC created per block.

On December 1, 2016, the block reward will revert to 12.5 ZEC per block. By January 1, 2017, the total supply will stand at approximately 348,200 ZEC.

The Zcash team took a total of $3 million worth of outside investment. In order to reward initial investors and pay for operational expenses, during the first 4 years 20% of all ZEC produced will go to the Zcash team and initial investors. The effective supply by January 1, 2017 will be 278,560 ZEC. I will use this as the total supply for the price predictions I will make.

Zcash Trading

BitMEX Zcash Futures ZECZ16
BitMEX ZECZ16 Orderbook, Chart, and Recent Trades

In order to provide price discovery on the future value of ZEC, BitMEX launched the first and only trading product on the ZEC/BTC exchange rate. The ZECZ16 futures contract expires on December 30, 2016 12:00 UTC based on that day’s exchange rate for immediate delivery.

ZECZ16 allows traders to go long or short ZEC with up to 2x leverage. The contract’s listing price on September 15, 2016 was 0.024790 BTC, and now trades at 0.195 BTC, a gain of almost 700%. During that period, 8,590 ZEC (1,675 BTC, $1.08 million) were traded.

The unique feature of ZECZ16 is that traders do not need to own ZEC to trade this futures contract. Using only Bitcoin, any trader can buy and sell ZEC using leverage. This is very important because it will be very difficult to buy, and and almost impossible to short physical ZEC due to the restricted supply. Many miners will not immediately sell the ZEC they produce in hopes of rapid price appreciation. That reduces the amount of ZEC publically available for sale.

The BitMEX ZECZ16 futures contract represents one of the easiest and most liquid ways for any investor to gain exposure to ZEC.

Zcash Future Price

If ZEC is a superior coin to DASH and Monero, then a portion of the funds invested in those two coins will shift to ZEC. The market capitalisation of DASH plus Monero is $154 million. Bitcoin’s market capitalisation is $10.31 billion. DASH + Monero’s market capitalisation is 1.50% of Bitcoin’s. The below table describes what the ZEC/USD price could be on January 1, 2017 depending on what percentage of DASH + XMR funds move into ZEC.

 

% of DASH + Monero ZEC/USD ZECZ16 % Difference from Current Price
10% $55 $126 -56.08%
25% $137 $126 +8.60%
75% $277 $126 +119.62%
100% $554 $126 +339.24%

 

Even a relatively small amount of money that chases the small supply of ZEC will lead to a price bubble. It is not inconceivable that ZEC touches price parity with Bitcoin in the near term. These economics are not lost on traders, and that is why the ZECZ16 contract is up over 700% since it’s launch in mid-September.

On Friday October 28, 2016, the genesis block will launch. Expect a frenzied scramble for any and all ZEC that becomes publically available for sale.

Getting Bitcoin Away From Its Bad Name – Buying USD, A50 Futures with Bitcoin

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The following is a translation of a recent Hong Kong Economic Journal article about BitMEX.

For Bitcoin to be a real currency, it requires more applications. In recent years, more and more Bitcoin based futures trading platforms have emerged for investors to trade Bitcoin against USD, JPY and even the A50 index.

Arthur Hayes, who worked at Citibank as a fund manager, is also a Bitcoin trader. He was conducting Bitcoin arbitrage trading strategies, and made money doing it. He saw Bitcoin’s potential, and therefore started a P2P futures platform called, BitMEX, in Hong Kong. All trades are denominated in Bitcoin, and the platform earns revenue from trading fees.

Investors only need to deposit Bitcoin to trade USD, JPY, A50 and other cryptocurrencies such as Ethereum on BitMEX. PNL is also in Bitcoin. No fiat currencies are used for trading. Investors must buy Bitcoin through other exchanges first, before trading on BitMEX.

Rise of Bitcoin Financial Services

BitMEX has gained over 80,000 users all over the world in just 2 years, and reached 1.5 billion USD of turnover. However, Arthur pointed out that Bitcoin is still not commonly known, most BitMEX users are tech savvy people or people in the IT field. With the rise of Bitcoin, more and more people treat Bitcoin as an asset. Financial services such as investment, deposit taking, and insurance will gradually be introduced. “A lot of people who are un-banked can use Bitcoin or other digital currencies to invest with more flexibility” Arthur pointed out.

Since Bitcoin is divisible, the contract size can be quite small. The contract on Bitcoin / USD is worth 1 USD of Bitcoin. Investors with a fraction of a Bitcoin can easily trade on the platform. “Our contract size is small, and doesn’t have unlimited downside. Users in South East Asia and China who have accumulated a small amount of capital can’t invest in the mainstream markets because the number of products they can trade are limited due to the high buy-in cost.” Arthur mentioned.

Small Buy-in Price Attracts Global Investors

He also indicated that Bitcoin is globally traded. This could attract overseas investors to trade. BitMEX can easily expand with this business model. With June’s volatility in the financial markets, Arthur also saw plenty of investors rushing into the Bitcoin market to protect their wealth.

BitMEX will provide a Chinese interface in the coming year and gain access to the Chinese market. “Over 90% of trades now are happening in China, the largest Bitcoin mining farms are also in China, we believe Bitcoin products will be very successful there!”

Futures are somewhat complicated for the average joe, with the risk of losing all of invested capital by using leverage, some users are on the fence about investing. Arthur plans to wrap contracts into fixed-return Bitcoin products to attracts new investors. He expects BitMEX will reach 1 billion USD turnover in 2017 .

How To Trade Factom

The hottest new altcoin on the block is Factom (FCT). Factoid is the token used to power the Factom protocol. Although technically incorrect, BitMEX calls the token as Factom. Now that Factom is freely tradable, this post will explain the different ways to express bullish and bearish views on this new cryptocurrency.

Spot Trading

Buying and selling Factom on a spot basis is quite simple. The most liquid Factom currency pair is Factom/Bitcoin (FCT/XBT). Poloniex is the leading exchanges by volume.

Buying Factom

To buy Factom, send Bitcoin to the exchange and exchange it for Factom. This must be done on a fully funded basis (i.e. there is no leverage).

Selling Factom

If you hold physical Factom, you can exchange it back for Bitcoin. Selling Factom you don’t possess is not possible.

Leveraged or Derivatives Trading

For most of the readers of this blog, leveraged trading / speculating presents a more interesting way to trade Factom. With the exception of Bitcoin and Litecoin, leveraged or derivatives trading on altcoins was not possible. BitMEX recognised that Bitcoin traders would like to speculate on Factom with leverage and using only Bitcoin as margin.

BitMEX recently launched the FCT7D, a weekly expiring FCTXBT futures contract. Each FCT7D contract represents 1 FCT. The contract expires each Friday at 12:00 GMT on the FCTXBT exchange rate. All margin, profit, and loss are conducted in Bitcoin. The maximum leverage allowed is 10x.

Buying Factom Futures

BitMEX Factom futures contracts allow traders to speculate on the future value of the FCTXBT exchange rate. A trader who wishes to go long 1,000 FCT, must buy 1,000 FCT7D contracts. The beauty of FCT7D is that it requires Bitcoin as margin. The maximum leverage is 10x. If the FCT7D price is 0.005, the trader must post 0.5 Bitcoin as margin (1,000 Contracts * 0.005 FCTXBT * 10%). If the price rises to 0.006, the profit is 1 Bitcoin = (0.006 – 0.005) * 1,000.

Selling Factom Futures

Short selling, or selling something you don’t possess is usually impossible with altcoins. Using FCT7D, traders are able to placed leveraged bearish bets on Factom as long as they own Bitcoin. For example, a trader who wishes to go short 1,000 Factom, must sell 1,000 FCT7D contracts. Again only Bitcoin is required for margin. If the FCT7D price is 0.005, the trader must post 0.5 Bitcoin as margin (1,000 Contracts * 0.005 FCTXBT * 10%). If the price falls to 0.004, the profit is 1 Bitcoin = (0.004 – 0.005) * -1,000.

Placing leveraged trades, and shorting Factom using only Bitcoin is only possible with BitMEX’s FCT7D futures contract. FCT7D Contract Description

Start Trading Factom Now

China Hosing Market On Leverage – Translated From CaiXin

0308a   A couple has a house in Beijing. I put the house under my wife’s name and fake a divorce. Now that the house is worth 7 million, I make her to sell the house to me for 10 million using a down payment of 3 million and a mortgage of 7 million. This way we can both live in the same house, and get an extra 7 million. Perhaps we could invest this 7 million and pay back the mortgage!

If the price of the house falls, we can just default and let the bank take our house, which is equivalent of liquidating our house at the peak. If the housing prices continue to rise, we can earn the difference. Many people in Beijing, Shanghai and Shenzhen are doing this, and this is how the subprime mortgage crisis begins.

 

The housing market has become the hot thing, even Dama (the middle aged woman) on the way to work are looking at house prices. And what’s special is that the “get-rich-quick in real estate cheat” (the quoted lines above) are all over social media. I guess I am outta my mind.

Currently, what this “cheat” is trending on social media networks. However, a house worth 7 million but getting a 7 million mortgage is actually a zero percent down payment. This is similar to the subprime mortgage crisis of 2008 where banks in America were lending to low income people with 0% down payment.

Perhaps some might be excited to see this piece. But this might not be logically correct.


Time for facts

1、Banks have risk management teams, and it is not a guarantee that a mortgage will be granted!

If you want to buy a house that is guesstimated to e worth 7 million at 10 million, this is far more expensive than similar properties in that area. It doesn’t take a genius to notice the problem here. Moreover banks are for-profit, their employees have a standard policy for granting mortgages. They certainly don’t want bad debts over their books. To control risk, banks will also guesstimate if the price is reasonable. If you are smart, the bank’s gonna be smarter than you.

China is a country where a good relationship gets you anything. Is that the case? Yeah, you can try to bribe the loan officer, but the cost might be too high. With the anti-corruption trend in China, no one knows if this will still work.

Perhaps  we can sell it at 7.5 million instead of 10. But morally, getting divorced for that small amount of money isn’t worth the price. You know how troublesome relatives get once they know this… right?

 

2、Do you know how financially sound you have to be to get a 7 million loan on a 10 million property?

 

Let the real estate agent tell you! When you apply for mortgage, the bank need to justify your ability to repay, you are required to submit proof of income. You might say that you could provide a fake one. But once the bank finds out what you are doing, your personal credit is ruined. Coz who will lend to a liar!

Even accounting for all the discounts you get, you are going to pay back 30 thousand per month on that 7 million mortgage. Most banks requires the repayment amount to be less than 50% of your monthly income. This means you must have a 60k post-tax monthly income to get that mortgage.

Are you sure that you have that income level? If you are a successful person, it is not worthwhile for you to do all of this to earn the difference. Coz the last thing you need is money!

3、Do you think getting 7 million in cash is the end of the story? NOPE! Now you have to pay the interest on the  10 million loan.

How can you be certain that your 7 million is going to grow? You need at least 4% APR to cover the interest from the mortgage.

You can invest in financial products (eg: Lufax), but with recent reserve ratio reduction and other monetary policies, do you think interest rates on these products will remain high? Do you really trust your money invested in these high yield products? Can’t you see what happened with E-ZuBao (The p2p lending scheme, which turned out to be a beautifully marketed ponzi scheme)?

By that time, not only have you lost 7 million, but you still need to pay back your loans. Your money is gone, your wife is gone too! Why risk it?

4、Do you know that’s a crime?

Cashing out like this is not a good strategy. If you are doing this, you’re pretty much a gambler. What you need to know is that you are committing a serious crime.

China is a society with Rule of Law, and the government is putting serious effort in banishing financial crime. If you have a look at the Criminal Law of China, this falls in to the category of Financial Fraud.

What is a Loan fraud? By lying to banks or other financial institutes for the purpose of obtaining a loan for a large sum of money, you may be prosecuted for no more than 5 year behind the bars and penalty of 20-200k CNY. For even greater fraud, the sentence could be up to life imprisonment and confiscation of all assets.

Do you think you could get away with this?That’s a crime! Got it?

When the property market is booming, perhaps only the rich should speculate. If you can’t afford it, then don’t invest. If you are rich, don’t use leverage. If you are brave and rich, have fun gambling. But once the bubble bursts, you will definitely lose more than having money in the stock market crash.


Time to analyse the risk

Leverage on housing market

Many have been predicting the market will crash. China’s housing market has finally entered the crack up boom phase. Just like A-shares SZ index climbed to 5000 last year, the big traders are conducting arbitrage; while other investors are being short-squeezed resulting in them using leverage in an attempt to make back what they lost. The PBoC’s recent action is just giving greater leverage to investors!

The craze of the housing market originated from Shenzhen. In 2015, new property prices grew 47.5%, which was greater than the 42.6% growth for second-hand ones. While in Hong Kong, the housing market has softened. What a weird phenomenon. From the beginning of the year, first-tier cities’ property prices have grown like Shenzhen’s. What the heck is happening?

Centaline Property data shows that in 4Q15 second-hand housing prices fell 6.9% in Hong Kong, its biggest quarterly decline in seven years. On January 20 2016, Henderson Land’s new Mid-Levels luxury property 帝汇豪庭 announced its first pricing numbers, which were down 30%. At the same time, land prices fell more violently. On February 12 the Hong Kong Lands Department’s first auction since the Chinese new Year, the residential area in Tai Po Area sold for 19.8k per square ft., which is down by a whopping 70%. This is half the price of Beijing’s 6th-Ring.

The falling land prices in Hong Kong is due to the negative view of China and Hong Kong economy. Li KaShing is leading the charge by divesting his property holdings in Hong Kong and shifting capital to other places around the world. This macro view should have been the similar in Shenzhen. What’s different:

1: Commercial banks in Hong Kong are privately owned, and have gone through multiple recessions. They are sensitive to the risk of default. While China’s commercial banks are controlled by the state. They haven’t gone through the pain of a housing crash.

2: HKD can be freely exchanged, the the market can create an equilibrium quicker than in Shenzhen.

 

According to a friend that is familiar with Hong Kong and Shenzhen, The reason why only Shenzhen had rising new development property prices is because the whole pump is initiated from foreign capital and Hong Kongers. Those who sell the properties are the bosses of a foreign company, where those who buy the properties are the employees of the company. All they need is to sign a working contract and income proof for them. The boss will pay the down payment, then the bank will  lend 70-80% to the boss. This is equivalent to ~70% LTV (loan to value) if the house price had risen. This ratio is far higher than a normal mortgage LTV of 50%. After the bosses receives the cash, they will use their company to shift the cash out of China and convert to USD, and wait for the CNY to devaluate. Their employees get a free mansion to live in. Who cares what happens next.

Because of this, housing prices in Shenzhen have risen in an unhealthy way. Some are FOMOing into the market, some are squeezed. This is similar to those who bought stocks when the Shanghai Composite was above 5,000 last year. As a result, Shenzhen housing prices have gone mad.

 

According to the data from PBoC, in 2014 the outstanding mortgages reached 529 Billion Yuan in Shenzhen, above the 452 Billion Yuan outstanding in Beijing. The mortgage to total lending ratio in Shenzhen reached 22.41%, 1.7x and 2.25x that of Shanghai and Beijing respectively. Since the new housing policies in September 2015, leverage has risen even higher in Shenzhen . Leverage increased 7.5, 11, and 16.3 Billion over the next three months.

This abnormal way of pumping the market and cashing in from mortgages has spread across first-tier cities in China. In September last year, the PBoC and CBRC jointly announced “Notice further improve differential housing credit policy related issues”,  which reduced the down payment for first time buyers to 25%, and allowed commercial banks to adjust to a minimum of 5%.

In Feb 26 this year, Zhou XiaoChuan said the logic of adding leverage to housing market is sound. He also said the housing market has great potential, and the personal mortgage loans to total bank loans ratio is still quite low. Therefore, down payments could be further reduced. The PBoC can also provide more power to the banks and let them decide the down payment and interest rate.

 

Property is the biggest portion of  citizens’ wealth, ~50%, the rise of housing prices means that the purchasing power of  CNY had fallen relatively. With the PBoC still trying to not devalue the CNY and reducing reserve ratios, commercial bank loans reached 2,510 billion. There is now more pressure to devalue the CNY.

Rising housing prices are very attractive. A lot of cash in China is going to push the housing market higher, preventing citizens from converting cash into USD, which reduces the pressure on the FX reserve balance. In addition to the approximate $ 1.1 trillion of short-term debt of which about $ 1 trillion is pledged to foreign investment products, as of 2016 China’s central bank announced foreign reserve balance of $ 3.23 trillion, and even accounting for bad debts it is still insufficient to cover the FDI (foreign direct investment) outflows.

The boom of housing market locks up a great amount of cash, which reduces citizens’ Gold, Silver, etc. buying power. If CNY greatly devaluates in future, citizens will have no means to escape.

All in all, 2016’s housing market boom is similar to the stock market in 2015. The differences are:

1: Market cap of the housing market is 10x of stock market

2: Not many people used leverage in the stock market, but 3-5x leverage is typical for the housing market. A 50% fall would bankrupt many more investors, compared to the stock market crash last year.