Need to Hide 200 Million Yuan? Use Bitcoin Instead

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Since October 10th, the first trading day in China after Golden Week, the PBOC has weakened the Yuan by over 1.00%. USDCNH is approaching 6.80. CNH is the offshore and freely tradable version of the restricted onshore CNY.

China recently published its 3Q16 GDP. Surprise, GDP grew at 6.70% exactly what analysts expected. If you believe any economic data from any government globally, I have some Paycoin to sell you. The data point of most interest is China’s monthly FX reserves. Goldman Sachs analyst MK Tang estimates that capital outflows in September accelerated to US$78 billion up from US$32 billion in August. He also stated that the official number released by China was bogus.

The PBOC needs to sequester as much capital inside China as possible to mitigate the massive amount of credit being extended by the nation’s banks. As of September the Banking Regulatory Commission reported China’s domestic banking assets totaled CNY217.3 trillion (US$32 trillion), which is up 14.7% YoY. [Zerohedge] They have been closing the gates since August 2015. SCMP reports that SAFE closed 56 illegal underground banks involving more than CNY1 trillion.

To make matters worse, Xi Jinping’s anti-corruption drive has rich comrades running scared. If they look hard enough, almost every wealthy person could be convicted of some sort of graft. What is worse is that the “law” changes to fit the prerogatives of the party. If you do not fall in line with Xi Jinping, you will be made an example of. As a result, government officials and wealthy citizens desperately try to spirit their capital outside of China.

A recent story illustrates the plight of rich Chinese officials. Wei Pengyuan, the former vice chairman of the National Energy Administration’s coal department, was charged with accepting bribes. Police seized CNY200 million (US$29.5 million) worth of cash from his apartment. [Zerohedge]

The conduits through which cash moves abroad are being shuttered. Desperate officials have turned to hiding vast amounts of cash in their primary residence. One problem in China is is the largest denomination bill is worth 100 CNY. This was deliberately done to make it very hard to hold large amounts of wealth outside the government controlled banking system.

Wei’s stash of cash weighed an estimated 1 ton. Wealthy Chinese need a store of wealth that is outside governmental control, and easily portable. Enter Bitcoin. Many people perceive China’s appetite for Bitcoin to be predicated on a desire to get money out of the country. Getting the wealth out of the country is proving to be very tough, therefore the more important concern is hiding in plain sight.

Bitcoin is weightless, and can be accessed using any internet connected device. As of December 2015, China had 620 million users of internet connected mobile devices. Bitcoin can be purchased in as little as 30 minutes from one of the large Chinese Bitcoin exchanges. Bitcoin / CNY is the most liquid pair globally. Put all these factors together, and it is a no brainer for wealthy individuals to store a portion of their wealth in Bitcoin.

Bitcoin purchased need not ever be converted into USD. Bitcoin can be the final destination of wealth for Chinese citizens. When viewed in this light, the China premium for Bitcoin could rise to levels not seen since 2013. In 2013, the China premium reached a high of 40%.

The main stumbling block is education. However, with more and more wealthy comrades meeting a bullet for economic graft related offenses, their life could depend on learning.

 

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 .

200 Swipes: A New Way Chinese Avoid Capital Controls

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The phenomenon of Chinese money fleeing China is causing asset prices around the globe to skyrocket. The most preferred asset is foreign property. A recent statistic said that Chinese buyers accounted for a third of all residential home purchases in Vancouver.

Massive capital flight is a big problem for the Beijing. The war chest of foreign reserves is being depleted quickly, and the PBOC will need all the firepower it can muster to soften the blow from rising non-performing loans (NPLs) held by the banking sector. To stem the outflows, various measures were introduced.

Previously a popular evasion method was to buy insurance policies in Hong Kong with China UnionPay cards. Bus loads of mainlanders arrived in Hong Kong and formed long queues outside of Prudential and AIA. Health and travel insurance policies were favoured because comrades could purchase policies exceeding the $50,000 yearly FX limit legally.

To stop the bad behaviour a limit of $5,000 per transaction was instituted on overseas UnionPay transactions. What do you do when you have a million dollar policy but have a low transaction limit? You continuously swipe your UnionPay card until you pay the policy’s premium.
Bloomberg sheds more light on the swipe happy Chinese:

A Chinese firm that brokers insurance policies, Henan-based Hong Kong Easiness Wealth Management, is offering travel to Hong Kong, including free airfare and accommodation, for mainland Chinese to buy insurance products. Those buying policies valued at more than 500,000 yuan ($77,000) get a first-class ticket plus two nights in a five-star hotel. Such a purchase would require at least 15 card swipes. A first group of four couples was to arrive in Hong Kong on Tuesday to buy critical illness insurance with a 100,000 first-year premium from AIA, while a higher-spending trip was scheduled for May, said Li Yida, the company’s owner.

“We will guide them through the whole process and swipe cards with them,” he said. “We’ve told them to bring more than one credit card, as they will be able to try more cards if one of them is not working.”
Other family members of Ng’s client who purchased the HK$28 million in policies traveled to Hong Kong during the weekend after the electronic transfer ban to purchase their own policies worth HK$10 million, requiring an additional 200 swipes of their credit cards, Ng said. The swiping process for the family took about two days each time, he said.

Earlier this year, the State Administration of Foreign Exchange (SAFE) stopped reporting certain monetary statistics that allowed for analysts to understand if reserves were growing or shrinking accurately. Many analysts believe China’s reserves decline by $100 billion per month due to capital outflows. The same analysts believe that once the reserves dip below $2.7 trillion, China is in trouble. This is due to cash pledged for various projects and initiatives. China’s FX reserves were $3.3 trillion at the end of 2015. At the current burn rate, China will be short on cash by the summer of this year.
When governments stop producing certain economic figures, they usually have something to hide. Whether it’s swiping a UnionPay card 200 times to buy gigantic insurance policies, faking import invoices, or buying foreign assets at any price, Chinese individuals and companies are shedding CNY at a record clip.

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The China A50 Index (index members are the largest 50 China A share stocks) is up almost 10% since mid-February. BitMEX’s China A50 Futures contract gives investors the ability to go both long and short China with 25x leverage by using Bitcoin. China still has a few months before cracks could start appearing once more. To ride the bullish momentum, buy the April China A50 contract, A50J16. For bears, A50J16 represents one of the only ways go short China with leverage.

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.

Crypto Trader Digest – Feb 22

China Loves The Crack Pipe

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Beijing and economic analysts agree that China’s economy needs to wean itself off debt based GDP growth. The transformation of the Chinese economy requires hard political choices. Economic rebalancing cannot happen without some stakeholders feeling acute pain. Someone must pay for the losses due to the over extension of credit over the last decade.

In the past Beijing opted for inflation and currency debasement. This time around, many thought that Beijing would finally inflict pain on the state owned enterprises who benefited the most from cheap credit. However the latest new loan figures suggest Beijing continues to smoke the pipe. Banks extended 2.51tn CNY in January, a new record. Unfortunately more loans are producing less and less nominal growth.

Banks lend at the behest of the government. If new loans are surging, it is because Beijing has chosen the path of least resistance. Looking back to the 1990’s, Beijing dealt with banking sector losses with crippling inflation and a massive devaluation of the Yuan.

This time around China is not an Asian backwater, but the second largest global economy. There are now various ways for investors globally to express a view on the Chinese economy through different investment products. BitMEX traders can now express direct bets on the direction of the Chinese economy. The BitMEX China A50 Index Futures contract (A50G16) allows traders to bet with leverage (up to 25x) on the Chinese stock market. The good thing about the A50 index is that it is comprised mostly of banks and real estate developers. The A50 index is very sensitive to investors’ views on the future of the Chinese banking system, which is precisely the sector that will lead China to oblivion or nirvana.

China’s New Credit Surges to Record on Seasonal Lending Binge

Grexit : Armageddon :: Brexit : ?

NOTE ALTERNATE CROP Mayor of London Boris Johnson salutes from the deck of the tall ship Tenacious, which is moored at Woolwich, in east London, as part of the month long Totally Thames festival.

While Greece was on the verge of liberating themselves from Euro hell, the mainstream media (MSM) began scaring the world as to what would happen if the Greek people voted for financial freedom. In the end, the sheep and their shepherds were sufficiently scared back into line. This bought the pro-EU crowd a few precious months.

EU politicians have always feared referendums where the people were actually asked if they wanted EU membership. Each time it appears that they will vote No, the MSM bombards the airwaves with the consequences of leaving the EU. The big daddy of of them all, Britain, is set to vote in late June on whether to remain in the EU. Germany is the biggest daddy, but they are about the only country that has benefited from the debt-vendor financing that is EU economics.

I give credit to British politicians for abstaining from adopting the Euro. But now the plebs must vote on whether to remain in the political union with all it’s benefits(?). David Cameron put on a good show by taking the fight to Brussels and demanding concessions if he was to publically support continued membership in the EU. Boris Johnson (the Mayor of London) has hailed this is a once-in-a-lifetime opportunity to ditch the EU. Oh yeah, it’s going to get interesting.

A Yes vote is not a forgone conclusion. A No vote would be catastrophic to the EU. The countries that would actually benefit the most from exiting the EU would find renewed strength to oppose their country’s membership. PIGS, Portugal Italy Greece Spain.

Last summer presented empirical evidence that Bitcoin reacts positively to the possibility of a EU and Euro breakup. One of the best ways to express an out of the money view on Brexit and ultimately the acceleration of the EU’s demise is to purchase June Bitcoin volatility. Buying the BitMEX June futures contract (XBTM16) vs. short selling spot is a great way to isolate the Bitcoin volatility component. XBTM16 expires one day after the Brexit vote on June 23rd. If Brexit odds begin rising, Bitcoin will begin to rally sharply. This is a classic Buy the Rumor, Sell the Fact. As the fear of breakup intensifies, traders will begin purchasing safe haven assets like Bitcoin and Gold. The fear to reality spread will be highest just days before the vote, and that is the perfect time to unwind the trade.

Boris Johnson backs Brexit as he hails ‘once-in-a-lifetime opportunity’ to vote to leave EU

The Price Is Everything

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I was beginning to lose faith in the function of the Bitcoin price to force economically prudent actions by the miners. My faith was restored this weekend during the Bitcoin Roundtable in Hong Kong. BitMEX remains neutral on Bitcoin Classic vs. Core. What we do want is stability in the protocol so that users may use Bitcoin as a common form of collateral to trade financial derivatives.

The largest miners and exchanges met in Hong Kong and discussed a roadmap for a block size increase in conjunction with the Bitcoin core developers. Early Sunday morning, they released the Bitcoin Roundtable Consensus. The price began its ascent Saturday afternoon as roundtable participants tweeted updates on the progress of the meeting.

Once the official communique was released, the price spiked to a high of $451 and 2,995 CNY. Core will release Segregated Witness, and commit to a hard fork in January 2017 with a block size increase of 2 MB to 4 MB. More importantly, the participants committed to not supporting Bitcoin Classic. The participants represent 80% of the network hashing power. Classic needs 75% of hashing power consensus to be activated. If the participants stick to their word, Bitcoin Classic is dead on arrival.

In the end, the motivating factor was the Bitcoin price. Given the global financial system wobbles, Bitcoin should be well above $500. However at the time when Bitcoin could be shining, the community is mired in trench warfare over how to increase network capacity. Those with the most to lose, the miners, finally got their act together and organised a meeting with the Bitcoin core developers and came to an understanding.

The price is the most important signal as to the health of Bitcoin. That one number pronounces Bitcoin a success or failure in real time by collating the buying and selling preferences of millions of people instantaneously. Bitcoin is an open source project, and this is not the last time crisis that it will face. Hopefully at the next fork in the road, the miners will react more quickly to secure their economic interests.

Bitcoin Roundtable Consensus

 

Trade The China Stock Market With BitMEX And Bitcoin

China’s stock market is one of the most difficult markets for non-Chinese to access.  Even for normal Chinese investors, trading with leverage both on the long and short side is almost impossible. BitMEX is committed to providing investors access to global markets using Bitcoin.

BitMEX’s China A50 Equity Index Futures Contract allows investors who possess Bitcoin the ability to speculate with leverage, long or short, on the Chinese equity market.

How Does It Work?

The China A50 Equity Index comprises the 50 biggest companies in China. The index is priced in CNY. However, investors using the BitMEX product will receive 0.0001 Bitcoin (XBT) per 1 CNY move in the index.

This is great for investors because if the China stock market rises by 10% and you are long, your futures contracts will be worth 10% more as well. The same is true if you are short.

What Are The Trading Hours?

The China stock market is open daily from 09:15 to 11:30 and then 13:00 to 15:00 Beijing Time (GMT + 8). Even though the stock market is only open Monday to Friday for 4 hours and 15 minutes, the BitMEX China A50 futures contract trades 24/7.

How Does Settlement Work?

The BitMEX China A50 futures contract has monthly expiries. The contract expires based on the closing price of the BitMEX CHINA A50 Index to two decimal places. The closing price of the index is calculated using the last traded prices of the 50 index members. The settlement date is the 2nd to last business day in China of each month.

Your profit is determined by the difference between your entry price and the settlement price. For example, if you bought 100 A50G16 (February 2016 expiring) contracts at 10,000 CNY and the settlement price was 11,000 CNY, your profit would be 10 XBT or (11,000 CNY – 10,000 CNY) * 0.0001 XBT * 100 Contracts.

Is There Leverage?

The BitMEX China A50 futures contracts allow investors to trade with up to 25x leverage. If you want to go long 100 XBT of China, you only need to deposit 4 XBT of equity. Because of the high leverage, the BitMEX China A50 futures contracts are margined according to the Dynamic Profit Equalisation system.

How Do I Get Started With BitMEX?

If you don’t have a BitMEX account, Register Here. Once you have registered, go to your Deposit Page and you will be given a unique deposit address where you must send Bitcoin. Once BitMEX has received your Bitcoin, it will be credited to your account and you can begin trading.

Crypto Trader Digest – Jan 18

Bitcoin Hearnia

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The New York Times article about Mike Hearn’s ragequit from Bitcoin tanked the price 20% in 24 hours. Hearn called Bitcoin a failed project due to the failure of the community to adopt his BitcoinXT solution to the block size debate. He then threw all his toys, said he’s done with Bitcoin, and “sold” his stash. Slowly then quickly the price dumped to a low of $350.

Did Hearn reveal any new flaws in Bitcoin? No. The difference is that the New York Time wrote about it, and he was a core developer. When the New York Times writes something negative about Bitcoin emanating from a long time Bitcoiner you have to take notice. But after the knee-jerk reaction to go short 100x, you must evaluate whether any new information has entered the market.

Without a larger block size, Bitcoin could be relegated to a settlement currency that’s too expensive for small transactions. Hearn argues that this is a bad thing. Bitcoin is used primarily as collateral that can be accessed by anyone with an internet connection. Bitcoin is digital gold. We don’t carry around 1oz gold coins, nor do most people send around 1 Satoshi. If Bitcoin ultimately is only used for larger transactions, that doesn’t diminish its central role as a global form of collateral.

The Chinese own the majority of the hashing power. Nothing new here. Chinese internet sucks. Yeah, I’ve been there and agree, but I haven’t heard any Chinese miners cite that as a concern. Also, nothing new here.

Hearn attempted to craft a solution to the block size issue. Unfortunately it wasn’t gaining traction as quickly as he would liked so he declared Bitcoin dead. Bitcoin’s strength is the consensus mechanism by which changes must be made. If you are bearish Bitcoin because one or two men couldn’t immediately change the course of the project on their timetable, you have missed the entire point of Bitcoin. If Hearn thought trying to steer the course of Bitcoin was tough, I can’t wait to see how he handles dealing with large financial institutions at R3. R3 is an organisation that is bringing together large financial institutions to craft blockchain solutions. I look forward to a followup article in 2 years when he ragequits R3.

Will Hearn quit Bitcoin forever? I highly doubt it. Hearn wants the block size to be increased. How better to galvanise the community to adopt a solution than hitting everyone where it hurts. If a New York Times article drops miners’ revenue and retained earnings by 20% in 24 hours, they will make finding a solution a priority.

What should traders do? Bitcoin is ruled by sentiment. This article is still propagating. Even though the price rebounded sharply from $350 to $380, this is not over yet until… Until the PBOC resumes devaluing the CNY. A break below $350 will lead to a retest of $300. While I believe China’s CNY devaluation is the most important bullish factor in 2016, nothing moves in a straight line.

Capital preservation is rule #1. Outright positioning longer than a few hours will be tough until the PBOC shows its hand again. Spread trades are like those mentioned in the previous section are more prudent. The Bitcoin frown will not be turned upside down while this story is making the rounds.

A Bitcoin Believer’s Crisis of Faith

How To Trade Chinese New Year

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China has a tough road ahead in 2016. Faced with collapsing world trade and a banking system bloated with bad loans, they have no choice but to export deflation abroad. That means lowering domestic interest rates, and weakening their currency.

The problem for China is that everyone knows the CNY is heading lower. Rich and poor comrades are rushing to front run the PBOC. The widening of the CNY vs. CNH spread was the perfect example. The PBOC is closing all obvious channels by which Chinese capital can escape. They need every Kuai to help rectify their gigantic credit bubble.

Looking through monetary history, central banks and governments like to unveil massive monetary policy changes during the weekend or bank holidays. The PBOC is quite lucky; the Chinese New Year holiday presents an excellent opportunity to massively devalue the Yuan and cut interest rates without the threat of capital flight. The Chinese banking system and capital markets will be closed from February 7-13. During Chinese new year, all things financial come to a halt. The PBOC has free reign to duck hunt dormant capital with impunity.

The PBOC will schlong (I hope The Donald retweets this) the CNY by devaluing it 5%-10%. That is my prediction. The next question is: if you share my view, what trades are appropriate?

The no brainer trade from August 2015 until last week was to short USDCNH. CNH is the offshore and unrestricted flavor of the RMB. The CNY is the onshore and restricted version. The PBOC is determined to stamp out large short sellers of CNH. They began heavily intervening in the spot market causing overnight CNH interest rates to spike. Shorts must pay overnight to borrow CNH. Today the PBOC imposed reserve ratio requirements on Mainland banks who hold CNH offshore. This further restricts supply, as banks cannot lend freely to willing speculators.

Institutional investors have access to CNH NDFs (non-deliverable forwards) and CNH currency options. The majority of readers cannot trade these products. Don’t be sad, that’s why there is Bitcoin. Below are my top Chinese New Year trades.

Long XBTCNY vs. Short XBTUSD Spot

For those who can deposit CNY onto a Chinese exchange, sell CNY vs. buy Bitcoin onshore in China. Then sell Bitcoin vs. buy USD on your prefered margin trading platform. You need to use a margin trading platform where you can borrow Bitcoin with which to short. The Bitcoin risk cancels out, and long USD vs. short CNY remains.

Due to the banking holiday, the CNY must be in China before February 7th. Also you will not be able to add additional size to the position until after Chinese New Year.

Long Weekly BitVC CNY Futures vs. Short Weekly BitMEX XBT7D Futures

The BitVC futures settle based on the CNY price of Bitcoin on the major Chinese exchanges. The BitMEX weekly futures settle on the TradeBlock XBX Index, which represents the major USD Bitcoin exchanges. Again the Bitcoin risk cancels out, and traders are left long USD vs. short CNY. The advantage of this strategy is that margin can be posted solely in Bitcoin. You can upsize the trade during the bank holiday period if it is going in your favor.

Long BitMEX March XBTH16 Futures vs. Short BitMEX Weekly XBT7D Futures

This is a volatility and interest rate play. If the devaluation occurs, Bitcoin will rally sharply. Forward expectations for price and volatility of Bitcoin will increase. Because the March future has more time value than the weekly future, it will appreciate more.

If the expectation is for CNY to devalue and Bitcoin to rally, why not just go long Bitcoin? There are no guarantees in life. Using spread trade strategies limits risk, but also the upside. If the devaluation doesn’t come to pass, the losses will be much less than an outright long position.

Yuan Borrowing Rate Surges in Hong Kong: What You Need to Know

China Said to Put Reserve Rule on Offshore Bank Yuan Funds

BitMEX Arbitrage Webinar Lesson 3

Thank you to everyone who tuned into Lesson 2 last Wednesday. Lesson 3 will air this Thursday 21 January 03:00 GMT.

Lesson 3 Topics:

  • Constructing Futures Term Structure
  • Curve Steepeners
  • Curve Flatteners

Lesson 3 Live Broadcast Link

Lesson 2 Recording

Lesson 3’s slide deck and spreadsheets will be provided on our blog and via email prior to Thursday.

 

Crypto Trader Digest – Jan 11

Yuan Devaluation Math

China FX teller_0

MingPao, the most widely read Chinese language newspaper in Hong Kong, reports that Shanghai residents are queuing up at FX dealers to convert RMB into USD before further devaluation occurs. Simon Black reports that Chinese are buying .com domain names as a way to legally transform RMB into more stable currencies. Reuters reports that PBOC policy advisors suggest a 10%-15% sharp and immediate devaluation.

No one in China is under any illusion that the CNY will hold steady. But I thought China was Scrooge McDuck rich? Wrong.com; China’s official FX reserves total $3.3 trillion. However, analysts believe that $2.8 trillion of that is pledged to other liabilities. Coupled with over $100 billion per month of capital flight and rising banking non-performing loans (NPLs), China is out of cash.

Kyle Bass of Hayman Capital Management believes shorting the Yuan is the slam dunk trade of 2016. The effects of the most aggressive credit expansion since the 2008 GFC are bearing spoiled fruit. Bass warns that China’s “neutron bomb” is its banking system. The state owned banks (SOE) were forced to lower underwriting standards to lend to SOE’s for a variety of industrial products that are not profitable. The rise in NPLs must be absorbed by the central government via the banking system. Bass notes a rise of the official 1.5% NPL ratio to 20% would result in a $3.0 trillion charge.

Aggressive currency debasement and interest rate cuts are the only policy levers left. As the citizenry realises that jobs will be lost and prices will rise, they will search for anything that holds value and or can be sold abroad to receive a stable currency.

The price of Bitcoin is set in Yuan. The Bitcoin premium has compressed lately. In Q1, expect increased volatility and the beginnings of actual cash from China finding its way into Bitcoin. To date, most of the price action has come from speculators front-running this tidal wave of Yuan. When cash buyers return to Bitcoin after a 2.5 year hiatus, the price action will be legendary.

Patient traders should begin accumulating positions in longer dated BitMEX futures contracts. Buying March 2016 (XBTH16) or June 2016 (XBTM16) are great ways to benefit from rising volatility and price.

Pressure on China central bank for bigger yuan depreciation: sources

China Finds $3 Trillion Just Doesn’t Pack the Punch It Used To

For Kyle Bass This Is “The Greatest Investment Opportunity Right Now”

Meanwhile In Shanghai Residents Form Lines To Sell Yuan, Buy Dollars

Here’s the ultra-clever way that Chinese are circumventing capital controls

Chinese Capital Markets Timetable

Bitcoin will react to movements in both the Chinese FX and equity markets. Any serious trader should know the key opening and closing times of these respective markets.

All times are Beijing local time, GMT + 8.

Daily PBOC USDCNY Fixing

The PBOC fixes the inter-bank USDCNY rate each morning at 9:15am.

CNY Onshore Trading Hours

9:30am to 11:30pm

CHH Offshore Trading Hours

CNH trades 24/5

China A Share Market

9:15am – 9:25am Call Auction

9:30am – 11:30am Continuous Trading

1:00pm – 3:00pm Continuous Trading

PBOC daily fixing

Live index prices from the Shanghai Stock Exchange

Bitcoin Implied Yuan

image (11)

An interesting relationship appeared to me while I was looking at XBTCNY, USDCNY, and USDCNH. If we derive the Bitcoin implied USDCNY rate by dividing XBTCNY by XBTUSD, does this implied Yuan follow the CNH movements? Remember that CNH is the offshore Yuan, and generally is a leading indicator of where USDCNY will fix onshore as trading of USDCNH is not as manipulated by Beijing as USDCNY. To get a clearer picture, I graphed the spread between the Bitcoin implied Yuan and CNH against the daily change in the XBTCNY price.

The graph above shows this relationship. The two variables track well until this past weekend. The Bitcoin implied Yuan is trading cheap to CNH. Given the CNH level and expectations of further devaluation, Bitcoin is trading cheap in China.

The appropriate trade is to go long the Bitcoin premium in China and hedge out the Bitcoin price risk. To do that, sell BitMEX 50x leveraged weekly Bitcoin / USD futures (XBT7D) vs. buy XBTCNY. XBT7D trades at a premium; therefore the trade has positive carry. For users who do not have CNY with which to buy Bitcoin, BTCC allows users to wire USD into their HK bank account and they will change into CNY and allow you to trade.

BitMEX Arbitrage Webinar Lesson 2

24x10 - Bart

Thank you to everyone who tuned into Lesson 1 last Friday. Lesson 2 will air this Wednesday 13 January 03:00 GMT.

Lesson 2 Topics:

  • Cash and Carry Arbitrage
  • Volatility Arbitrage

Lesson 2 Live Broadcast Link

Lesson 1 Recording

Lesson 2’s slide deck and spreadsheets will be provided on our blog and via email prior to Wednesday.

 

Crypto Trader Digest – Jan 4

BitMEX In 2016

el_nino

El Nino ain’t got nothing on BitMEX. BitMEX is bringing the fire in 2016. We have a long list of development items and we aim to deliver on them in a timely fashion. First up: new order types. This month we will add:

  • Stop Market Orders
  • Trailing Stop Orders
  • Hidden Orders
  • Iceberg Orders
  • One Cancels The Other (OCO) Orders

Please keep providing your feedback. BitMEX aims to be the most trader-friendly platform in Bitcoin.

Arbitrage Webinar

terry-crews-trading-floor

As the general knowledge about derivatives trading grows, traders begin using more sophisticated strategies and instruments. BitMEX is committed to educating traders about the uses of Bitcoin derivatives. I will be hosting a series of Webinars in January that will go through the basics of futures trading and arbitrage strategies. Lesson 1 will cover these topics:

  • Differences between Spot, Margin, and Futures trading
  • Differences between Quanto and Inverse Futures
  • How to price Quanto and Inverse Futures contracts

Lesson 1 will air this Friday January 8 at 03:00 GMT. The slide deck and example spreadsheets will be made available on Thursday. Q&A will be allowed during the presentation. If you are unable to view the Webinar live, a recording will be posted on our YouTube channel afterwards.

We will post links in the site chat and BitMEX Blog.

2016 Themes

Forecasting the future price of Bitcoin is a fool’s errand. Many pundits will throw out bold predictions on both the up- and down-side. However, successful traders position their portfolios to benefit from the overarching themes or narratives of the current moment. In this week’s Crypto Trader Digest, I will lay out three major themes that will shape 2016 and the trajectory of Bitcoin.

China Devaluation Dance

fire-dancing

China is Bitcoin. The majority of hashing power is located in China, and the majority of trading volume occurs on XBTCNY. Failure to properly interpret PBOC monetary policy could prove fatal.

China is the largest consumer of raw commodities and energy. Once consumed, China produces low cost goods that the world enjoys. The big problem for China is that the majority of this trade is conducted in USD. Commodities are priced in USD and many buyers purchase China’s goods with USD because they do not hold Yuan (CNY). As a result, China has a large portfolio consisting mainly of US Treasuries. As BNP Paribas and many other companies and countries have experienced, if you transact anywhere globally using USD you are essentially Washington’s bottom bitch. After the Century of Humiliation, China is not keen on being beholden to Washington.

China has begun to liberalise the trading of the Yuan, and has set up trading hubs across the globe to trade CNH. CNH is the offshore version of CNY. CNH behaves more according to market forces than CNY. Currently the two are not fungible for most actors. China has begun signing large deals priced in Yuan rather than USD. The expanded use of CNH means that onshore CNY will follow CNH rather than the other way around.

At the same time, the PBOC is beginning to allow market forces to weaken its currency. A weaker CNY allows China to become more competitive vs. other global exporters. The sea change began in August 2015. The PBOC in one week devalued the CNY by 4%, and sent a message that the strong Yuan period was over. Over the past 4 months, CNY has gotten weaker and weaker. The PBOC sets the onshore rate each morning, however CNH trades at a much weaker level as traders expect the devaluation to continue.

In addition, the PBOC has clarified that it looks at the CNY vs. a basket of major global currencies, not just against the USD. The CFETS RMB Index shows that the CNY has actually appreciated over the past 12 months. In 2016, the PBOC must become more aggressive in the pace and size of devaluation in order regain lost ground. Given the vast amount of QE that the ECB and BOJ have engaged in, the PBOC has a lot of work to do.

The writing is on the wall, and those with a vast hoard of legal and illegal wealth are running for the exits. Hundreds of billions of USD fled China in 2015. The PBOC has begun enforcing capital controls to stem the tide. Bitcoin remains open as a legal channel through which capital can flow from China to the rest of the world. Given the relative illiquidity of Bitcoin, even a minuscule amount of capital choosing this channel will completely re-rate Bitcoin to much higher prices.

The ingredients of lower domestic CNY interest rates, a weaker CNY, the greater importance of offshore CNH, and the desire to preserve CNY denominated wealth point to Bitcoin trading higher in CNY terms. Traders must continue to watch the China Bitcoin Premium, the daily PBOC CNY fixing, and the spread between CNY and CNH.

Capital Controls Are Coming … For Everyone

fedprison

Physical banknotes are the bane of governments globally. They are an anonymous bearer instrument. Taxing and monitoring physical cash is a tall order for most governments. Due to the computer revolution, the majority of the developed world holds money in the form of electronic credits with a regulated bank. These electronic bank notes are easily tracked and taxed.

The current problem for central bankers is that a vast amount of debt was extended for dubious purposes, and inflation must be engineered to make financial institutions whole. First central banks took rates to 0% (ZIRP), then they began buying all types of assets (QE), and now they are going nuclear with negative interest rates (NIRP).

The problem with NIRP is that if the bank charges you to hold your money, you will convert electronic into physical banknotes. When this process happens en masse, that is a bank run. If physical cash was banned, there would be nowhere to hide. Faced with NIRP, either you leave your money at the bank, spend it, or buy risky assets. Low risk saving is not an option.

The biggest NIRP offenders are several European nations (Switzerland, Sweden, Denmark, and the ECB). In Sweden and Denmark, physical cash is barely used. While many hail the effortless ways in which payments are made, the populace is surrendering their financial freedom. In other nations there is a limit on cash transactions. French residents have a 1,000 Euro limit and non-residents a 10,000 one. In America, the cops just steal your money using bogus civil asset forfeiture laws and make you fight lengthy court battles to get it back. The message is clear: holding physical cash is not only unwanted, but could even be illegal.

Using the preferred boogiemen of towel-clad men with beards holding AK-47’s, world leaders will enact more restrictions on the use of physical banknotes. Capital controls are coming for everyone globally. Converting a portion of your electronic fiat credits into electronic Bitcoin is prudent.

The Have And The Halve Nots

140311_bitcoin_mining_660

This July, the much-anticipated Bitcoin Halving will occur. The block reward will halve from 25 to 12.5 Bitcoin. The community is rife with speculation as to how the price will react to this momentous event. Some believe this a structural reason why the Bitcoin price should skyrocket and others believe it’s a non-event. Let’s examine the various effects of halving and their possible price impact.

Bitcoin Inflation Will Decline

A block is mined every 10 minutes on average. That equates to a 3,600 XBT increase in the money supply daily. That will drop to 1,800 XBT after the halving. Over the past 30 days, the average daily trading volume (ADV) across all exchanges was 2.63 XBT million.

Currently the daily Bitcoin inflation is 0.13% of ADV, and future inflation would be 0.065%. Based on the percentage of daily volume, if the miners sold all the new Bitcoin mined it would have 0 price impact. Some would argue that the trading volumes of the big three Chinese exchanges are hocus pocus. To make a conservative estimate, let’s go with that: assume that only 20% of the trading volumes across OKCoin, Huobi, and BTCC is “real”. That leads to an ADV of 642 thousand XBT. The daily current and future inflation then represents 0.56% and 0.23% respectively. Even then, it is still an inconsequential amount.

Those who base their bullish bias on this thesis need to go back to the drawing board.

Transaction Fees Will Increase

Miners are compensated primarily through the block reward. Absent a doubling in price, miners will see their earnings drop by 50%. In order for them to be equal pre vs. post halving, transaction (tx) fees will need to double. Higher fees means that Bitcoin will be less useful for micropayments. Many in the community would like Bitcoin become cost effective for large and small transactions alike, and larger fees are a big fear.

However, tx fees don’t necessarily have to rise. Based on anecdotal evidence, I believe that the marginal cost to product a Bitcoin for the largest mining pools is between $100 to $200. At a price of $430, their gross margins are 330% to 115% respectively. Based on the USD and XBT P2P interest rates on Bitfinex, I would price a plain vanilla July 2016 Bitcoin / USD futures contract at $430 (the term structure is relatively flat).

Even with a 50% smaller block reward, the majority of large miners are still profitable. Low cost producers will be able to offer the same tx fees and obtain more market share. Unless the miners form a cartel, the likely outcome is that tx fees will be unaffected by the halving. Unfortunately for miners, their margins will get crushed and due to competitive forces they cannot unilaterally raise fees. If transaction volumes continue to increase, miners will recoup these losses with higher throughput on the network.

I see no salient positive or negative impact on the future price.

Halving Volatility

Whatever happens, there is sure to be extreme volatility around the event. Bitcoin is a much different animal this halving. The attention being focused on this event is sure to generate wild swings in the price. In late March, BitMEX will list a September 2016 25x leveraged Bitcoin / USD futures contract. Traders who wish to play the pre vs. post Bitcoin halving spread, should trade the June 2016 (XBTM16) vs. the September 2016 (XBTU16) futures contract.

I suspect that due to the expectation for fireworks, the XBTU16 will trade at a substantial premium to XBTM16. Selling volatility by selling XBTU16 and buying XBTM16 could be a profitable strategy.

Crypto Trader Digest – Dec 28

From DM To EM: AUD & CAD

image (9)

Australia and Canada are two Developed Markets (DM) that stand out in their reliance on commodity extraction to fuel their growth. The rise of China and the commodity super cycle over the past 30 years has proved a blessing for these two Commonwealth realms. Unlike many of HM’s past fiefdoms, these two countries were able to escape the middle income trap and become developed nations.

China imported raw commodities in size to fuel industrialisation, and then exported the finished knick-knacks to the world. Canada benefited from higher oil prices and expanded production into high cost per barrel regions like the Alberta tar sands. Australia provided China with raw industrial commodities like iron ore. The wealthy Chinese who wanted to safeguard their newfound riches started buying property in droves in marquee cities like Vancouver and Sydney, which sparked a housing boom. Rising commodity and housing prices made everyone feel like a winner.

Unfortunately the slowdown in Chinese economic activity and falling commodity prices landed a heavy blow to both countries in 2015. The eager Chinese property buyers are fading quickly. The enforcement of capital controls and a worsening business climate in China, has cooled investors desire for expensive Canadian and Australian property. Their currencies became a proxy bet on China, and as such received the stick. Bitcoin in AUD and CAD terms is up 140% from the beginning of 2015.

Faced with a deteriorating economy, the central banks of Canada and Australia will continue cutting interest rates. The Bank of Canada overnight rate is 0.50% and the Reserve Bank of Australia’s cash rate is 2.00%. These policy rates will be zero in to no time if there is no rebound in the Chinese economy and or commodity prices. With USD rates rising, CAD and AUD have much more pain ahead.

Canada and Australia’s situation is not different from EM countries like Brazil. Citizens who find themselves less wealthy, should look for alternative ways to protect what they have left. The fundamentals behind Bitcoin ownership in DM countries is no different than from EM ones. The incremental demand from Canada and Australia for Bitcoin won’t be on par with China, but every little bit counts.

China Doesn’t Believe In Santa

image (10)

Many thought a Santa rally would take Bitcoin over $480 on Christmas day. China said no and took the hammer to Bitcoin over the next two days, culminating in the XBTCNY rate trading at a discount. Some speculated that the ponzi scheme MMM’s operators were cashing out. There is a rumour that they halted withdrawals until January 5th. That might be true, but a more plausible explanation is that savvy traders chose a perfect time to execute a bear raid whilst the Christian world was singing Jingle Bells.

When Bitcoin trades at a discount in China, it surely points to an invalidation of my trade thesis of a weakening CNY pushing money into Bitcoin. However, I counter that nothing changed in terms of monetary policy over the weekend. The CNY is must depreciate vs. other currencies for the China to increase export competitiveness. And the economic climate in China is not improving, nor are capital controls getting looser.

The temporary dislocation in China is an excellent buying opportunity. If one doesn’t want to take an outright position, a China premium spread trade is a good strategy. Buying Bitcoin spot in CNY, and selling BitMEX weekly hedging contracts, XBU7D, is the appropriate expression of the trade thesis.

Step 1:

Buy Bitcoin / CNY onshore in China. If you are located outside of China, BTCC offers the ability to wire USD and convert into onshore CNY for the purpose of trading Bitcoin.

Step 2:

Sell BitMEX XBU7D futures contracts. These futures contracts are great for spread trades vs. spot because each contract represents $100 of Bitcoin at any price.

Step 3:

As Bitcoin / CNY trades at a larger and larger premium to Bitcoin / USD, the spread will widen and the trade will show a profit.

XBT Spot

Screen Shot 2015-12-28 at 10.31.27 pm

Those hoping for a Christmas miracle were witness to an epic dumpfest this past weekend. From $460, the market crashed with fury over a few hours and almost touched $400. $400 held and the market is now testing $430.

The period from December 25 to January 4th is a trading dead zone. Trading volumes globally will be thin as the world’s Bitcoin trading hubs, save Shanghai and Beijing, are effectively closed for business. Expect extreme market action in short bursts as traders run bear raids and short squeezes to inflict max pain on weak hands.

The relevant support and resistance levels are $400 and $475. A break below or above will usher in a flood of market volatility.

Last year, the Bitcoin price dropped 50% in the two days following the New Year. Expect extreme volatility as traders return with fresh eyes and a clean balance sheet.

Trade Recommendation:

BitMEX 100x Daily Bitcoin / USD Futures, XBT24H: Go long with an upside target price of $440.

BitMEX 50x Weekly Bitcoin / USD Futures, XBT7D: Go long with an upside target price of $460.

Crypto Trader Digest – Dec 21

Festivus For The Rest Of Us

Merry Festivus to all, and Godspeed during the Feats of Strength.

Keep Calm, and Trade Crypto.

Lufax, NPLs, and Bitcoin

Red Capitalism in reality is just a rebranding of debt based infrastructure led growth. China over the past 30 years has engaged in one of human civilisation’s largest and fastest expansion of credit. The results thus far have been astounding. From backwater dumps, tier 1 Chinese cities are dotted with the latest trendy restaurants, luxury shops, and night clubs. For shopping, eating, and boozing, Shanghai is one of my global favorites.

Unfortunately, China is becoming saturated with too much debt and Non-Performing Loans (NPLs) are rising quickly at the state owned banks (SOE banks). SMEs are completely shut out of bank credit because SOE banks like Bank of China, ICBC, ABC, and China Construction Bank must roll the bad debt generated by SOE industrial firms. With global growth stagnating and nominal GDP growth collapsing in China, NPLs are rising quickly.

One of the hottest areas of Chinese FinTech is the P2P lending industry. The hottest startup in China and globally right now is PingAn backed Lufax. Lufax is the premier Chinese P2P lending platform. The bloated loan books of the banks are now being securitised and sold to retail and institutional investors through platforms like Lufax. This model is proving so profitable and popular, Lufax is on track to raise $1 billion in its Series B round at an $18 billion valuation. Chinese investors can also buy distressed loans straight from Taobao. Huarong intends to sell CNY51.5 billion via Taobao.

These loans carry high interest rates and the Chinese public is hungry for assets that generate real returns. As the NPL ratios increase, the PBOC must encourage more investors to travel further out onto the risk curve. The greater the credit risk the greater yield on a fixed income investment. How does a central bank create demand for dodgy credit, they lower the benchmark interest rate to force investors to reach for yield. Investors in China assume (quite rightly up until now) that Beijing will force someone to roll over bad debt so that no defaults actually occur. Outright defaults are masked through a crowding out of private credit and inflation.

As more and more Chinese corporates default on their loans, the banks’ balance sheets will become bloated with NPLs. The PBOC will be tasked with lowering the benchmark interest rate and the Reserve Ratio Requirement (RRR) for banks. Taken together, these measures stoke inflation and weaken the CNY vs. other currencies. Hot money that flooded China to take advantage of higher nominal rates will flee just as quickly as they cannot generate real returns when swapped back to USD or another G10 currency.

Bitcoin is priced in CNY. A weaker CNY will lead to a stronger Bitcoin. The slowdown in global growth’s impact on bad loans in China is positive for the price of Bitcoin. Expect further interest rate cuts in the near future as China battles the onslaught of corporate defaults. The popularity of P2P lending platforms like Lufax and Taobao will grow, and it is a signal of the government’s policy towards stuffing the general population with a portfolio of poorly underwritten debt of underwater industrial firms.

China Now Has So Much Bad Debt, It’s Selling Soured Loans On Alibaba

Ping An’s Lufax Close to Raising Funds at $18 Billion Value

Dollar Doomsday

Janet Yellen finally followed up on the promise to normalise interest rates via a 0.25% rate increase in the Federal Funds Rate. The true effects of this credit tightening event will start being felt as the Fed drains liquidity from the markets. I believe that the global markets do not fully appreciate the pain that will be inflicted upon asset classes when the flow of liquidity reverses directions.

Because most financial assets are traded with borrowed money, when the funding leg of the carry trade becomes more expensive traders must cut positions abruptly. The Fed put the brakes on QE and began tightening monetary conditions in 2015. The below table lists Year To Date returns of some bellwether assets.

Asset YTD Return
S&P 500 Index -2.59%
WTI Oil Front Month Future (CL1) -34.06%
SPDR Gold Trust (GLD US) -10.16%
High Yield Corporate Bond ETF (HYG US) -11.24%
MSCI Brazil ETF (EWZ US) -41.97%
MSCI Emerging Markets Index ETF (EEM US0 -16.90%
Baltic Dry Index (BDIY) -38.13%
Dollar Index Spot (DXY) +9.33%
Bitcoin / USD +44.77%

All these assets are priced in USD. Anyone who claims that the Fed’s flow of money has had no impact on the financial markets should read this table. The world dollar economy is addicted to a constant flow of cheap credit. As the Fed continues tightening (they forecast 4 rate hikes in 2016), dollar asset returns will turn even uglier. Bitcoin is finally exhibiting the qualities of a safe haven asset.

If you believe that at a minimum the Fed will not restart QE any time soon, 2016 returns of USD denominated global assets spare Bitcoin will continue declining. It will take a shock to the markets, especially the S&P 500, to force the Fed to reverse course and flood the world with dollars once again. Bitcoin is poised for a breakout in 2016 against a favorable global macroeconomic trends. BitMEX will be listing a June 2016 futures contract, XBTM16, this week. Investors who agree with my arguments should buy this contract.

Get To Work, PBOC

This past week, the CNY devaluation continued. CNY depreciated 0.49% WoW. However, the all important CFETS RMB Index barely moved. If Beijing is really serious about regaining trade competitiveness, the PBOC will have to accelerate the CNY devaluation.

The slow and steady approach is not yielding the desired result. The CNY continues to strengthen against its major export competitors. Chinese New Year occurs in early February 2016. Banks will be shut February 7th to 13th. If the PBOC is waiting to exert the maximum shock and awe, a massive devaluation over the lunar new year is the perfect opportunity. Trading the BitMEX 25x leveraged March 2016 futures contract provides a perfect way to play a shock devaluation during Chinese New Year.

XBT Spot

After a comatose weekend, Bitcoin reawakened with an early Monday morning dumpfest. The price plummeted into the mid 420’s, and is now retracing the move. The global macroeconomic outlook for Bitcoin has never been more favorable. The recent plunge is welcome news to bulls with the cojones to step up and increase their long positions.

$400 still stands, and the path has been cleared for another attempt at $475 then $500. With Festivus and the New Year approaching in the next two weeks, expect strong moves on thin volumes.

Trade Recommendation:

Daily 100x XBT24H Futures: Buy XBT24H with an upside target price of $450.

Weekly 50x XBT7D Futures: Buy XBT7D with an upside target price of $475.

Risk Disclaimer

BitMEX is not a licensed financial advisor. The information presented in this newsletter is an opinion, and is not purported to be fact. Bitcoin is a volatile instrument and can move quickly in any direction. BitMEX is not responsible for any trading loss incurred by following this advice.

Crypto Trader Digest – Dec 14

The Wicked Witch Of The West

The_Wicked_Witch_of_the_West

Will she or won’t she unleash a global dollar margin call, and accelerate a financial market meltdown? This Wednesday, the world will find out if Janet Yellen is a witch or a kitty cat. If you haven’t heard, the financial system is deathly afraid of a 0.25% increase in the Fed Funds Rate. Due to the enormous amount of excess reserves held by Fed member banks, some analysts fear that the Fed may have lost complete control over short term rates. Those who are interested should read up on: Interest On Excess Reserves (IOER) and Reverse Repo (RRP).

How should Bitcoin traders approach this event? Binary events of this nature present amazing opportunities to generate massive returns. There are three scenarios.

Fed Tightens:

Commodities, EM currencies, carry trades, and equities will blow up. The PBOC will have even more of a reason to weaken the currency. The CNY has been pegged to the USD over the past few years. Raising rates is negative for EM currencies which is positive for Bitcoin.

Probability ~25%

Fed Does Nothing:

The market will focus on their forward guidance. Under what circumstances would the Fed raise rates or resume QE? EM currencies and commodities are asset classes will telegraph the market’s forward expectations. The pace of CNY depreciation is unlikely to change if the Fed stays put. For the short term, if the Fed does nothing, it is neutral to slightly positive for Bitcoin.

Probability ~50%

Fed Eases:

There are a few more trading days before the Wednesday announcement. If equity markets and EM currencies accelerate their downward spiral, Yellen might be scared into easing. In the September meeting, Yellen stated that they take into consideration the global economy (read equity, FX, and commodity markets). In the face of global armageddon, the Fed might resume QE and or introduce negative interest rates. The largest central bank restarting the money printer is long term positive for Bitcoin, but I believe it is short term negative for Bitcoin. There will be a massive relief rally and many of the global macro problems beginning to surface today will be forgotten for a short while.

Probability ~25%

No one knows for sure what will happen on Wednesday. There are so many factors which could push the decision one way or the other. Prudent traders will flatten their books ahead of the announcement. Expect deathly silence across all assets until the Wicked Witch of The West proclaims her judgment.

Guo With The Wind

Guo

Beijing has its own version of the Pop ‘n Lock. Pop the stock market to all time highs, then Lock up many financial participants when the stock market drops. Various CEOs, hedge fund managers, and government officials have been disappeared by the China Securities Regulatory Commission (CSRC) for their alleged role in upsetting the apple cart. This has been dubbed the “kill the chicken to scare the monkey” campaign.

Guo Guangchen, referred to as China’s Warren Buffett, is the CEO of Fosun International Holdings. Fosun is one of the largest private financial services firms in China. Guo was disappeared by the CSRC, and apparently is now assisting in an investigation. No one knows the full truth, as he is still in custody. Guo is both mega wealthy (worth $8 billion), and connected to high ranking government officials. If Guo isn’t safe, no wealthy Chinese person is.

Global Financial Integrity published a report that claims $1.4 trillion has illegally escaped China over the past decade. Now that China’s tycoon’s are scared shitless, they will accelerate the pace of capital flight. Beijing is no fool, the traditional means of capital flight are being shut one by one. Bitcoin stands as a beacon light to those who wish to internationalise their assets, and is completely legal. If even a small percentage of this hot China money discovers Bitcoin, it will re-rate the entire asset class.

China’s Illicit Outflows Estimated at $1.4 Trillion Over Decade

Market Panics As “China’s Warren Buffett” Detained In “Richter Scale 9 Event”

ZAR She Blows

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This weekend I found myself watching the movie “BRICS Back Mountain 2001”: a film directed by Jim O’Neill, from SquidWorks Productions. Investors looking for places to deploy excess capital from the developed markets identified the following growth markets: Brazil, Russia, India, China, and South Africa. The search for virgin markets with the capacity to service debt and produce commodities to be consumed by the developed world is not a new phenomenon.

During the late 19th and early 20th Century, Britain and continental Europe exported capital to South America (Argentina & Brazil), Asia (India & Hong Kong), and Africa (Egypt & South Africa). BRICS was a reality long before a Goldman Sachs partner pontificated on the subject. Unfortunately for the BRICS nations: easy come, easy go. Jacob Zuma, in all his wisdom, decided to fire his finance minister. Investors took the stick to the South African Rand (ZAR) and it now is trading at all time lows. The Rand does not suffer alone.

Meanwhile the Brazilian Real, Indian Rupee, Russian Ruble, and Chinese Yuan are all weakening aggressively. Investors do not want local currency exposure. When they lend money to BRICS nations and corporations, they do so in USD. During the commodity super cycle, these nations enjoyed rising local currencies, rising earnings due to rising commodity prices, and easy access to credit because of Fed largesse.

The Wicked Witch of the West, Janet Yellen, has decided to shut off the free money spigot. The surging USD is wreaking havoc upon BRICS nations’ balance of payments. The strong dollar has crushed commodity prices and raised the cost of funds for BRICS nations. Caught in a negative feedback loop of falling earnings and rising debt servicing costs, investors tapped out and took the stick to BRICS currencies.

The local populations now face rising costs for all imports. Local currency denominated assets provide no protection from the ravages of inflation. Bitcoin represents one avenue whereby locals can both export capital abroad freely and store wealth. The marginal buying pressure will come from BRICS citizens fleeing their local toilet paper currencies. Speculators also see the writing on the wall and will buy along with them.

Divestment from developing markets by western investors has just begun. The initial effects are only beginning to surface. Long term Bitcoin bulls should take comfort in the strengthening fundamentals for citizens of the world to own electronic gold.

PBOC To Go Nuclear On CNY

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Readers should be quite familiar with the USDCNY vs. XBTCNY chart. The PBOC began devaluing the CNY vs. the USD this August, and stepped up the pace last week. However, the China Foreign Exchange Trade System (CFETS) began publishing a trade weighted CNY index to better reflect actual CNY exchange rate. The CFETS rate is now the all important one. The PBOC devaluation should be judged against this new index.

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The CFETS published the weights of the different currencies in the basket. I took the rates and reconstructed the index starting in December 2014. The chart above shows the relative appreciation (>100%) vs. the index value twelve months prior. What stands out is that the CNY has actually appreciated by over 2%. If the PBOC is to obtain parity with the CNY’s value from last year, USDCNY must be devalued by 8.38%. That assumes that the ECB and or BOJ don’t continue printing gobs of money to depreciate the EUR and JPY respectively. The much hailed USDCNY depreciation over the last 6 months hasn’t even regained the CNY’s relative position from last year.

The mandate is clear. The PBOC must accelerate the pace of liberalisation of CNY trading. The PBOC interventions have propped up the CNY. With the buying pressure removed, expect the CNY to fall fast and hard. Bitcoin is priced in CNY, and the price will continue higher. The road to $1,000 will be paved with the face of Mao. Don’t fight the PBOC, BTFD!

The Launch of RMB Index Helps to Guide Public View of RMB Exchange Rate

XBT Spot

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The quest for the holy $500 is alive and well. Asisted by the favorable global macro backdrop, Bitcoin continues to climb higher. Make no mistake, the PBOC is weakening the CNY further. Traders who fail to understand the implications and continue shorting into this move will get rekt.

This week’s trading is divided into two periods BY (Before Yellen) and AY (After Yellen). The global markets and other central banks are inflicting max pain in order to scare the Fed off its rate hike course. Tanking global markets and EM currencies are postive for Bitcoin. Depending on what Yellen decides, Bitcoin will continue on its upward trajectory or face a sharp correction. In my opinion, the Fed will not raise and indicate further easing in 2016 causing a massive relief rally and short squeeze. Bitcoin will get stick in the short term, but the uptrend will continue in the medium-term.

Trade Recommendation:

BitMEX 50x Weekly Futures, XBT7D: Buy XBT7D and close the long on Wednesday December 16th. Go short XBT7D into the Fed decision (if you are brave). Otherwise, go long XBT7D if they raise, go short XBT7D if they hold or ease.