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 2

You Like It Hard Or Soft, Baby?


Core, Classic, Hard Fork, Soft Fork, SegWit, …the number of terms and proposals released regarding the block size debate has become daunting. We traders are simple creatures. Whether hard or soft, the word fork doesn’t sound auspicious.

As the debate drags on with no implemented solution, the upper ceiling on Bitcoin’s short term price hardens. Since the Bitcoin Hearnia, the price has been unable to hold $400. The $350 to $400 range holds true, and absent a macro economic catalyst the risk of a break below $350 and a retest of $300 grows.

While I believe in the soundness of my Yuan devaluation call, I would not take long term outright long positions. The flurry of technical announcements have usually been price negative as the community further divides.

The addition of leverage is both a blessing and a curse. Using BitMEX futures contracts to construct spread or arbitrage trades and adding a healthy dose of leverage is the preferred strategy in these choppy times.

2016 will witness bans on physical cash, negative interest rates, and competitive devaluation. These trends are all net positive for Bitcoin. Use the dips in the market to go long volatility and interest rates. Buying BitMEX quarterly (XBTH16) or bi-quarterly (XBTM16) futures contracts vs. shorting the weekly (XBT7D) contract is an appealing spread trade. The negative carry of the long dated futures contracts can be covered by selling XBT7D and short rolling week to week. The strategy is price neutral and benefits if volatility and or interest rates rise. Volatility and interest rates will rise during a sustained upward Bitcoin rally, especially if there is a shocking macro economic development precipitating the price movement.

We recently concluded our series of arbitrage webinars. Over the course of four lessons, I explained the basics of arbitrage and basis trading on BitMEX. Please visit the BitMEX YouTube Channel to view the lessons.

Gepetto’s Children


Central bankers are well-paid liars. Last week the BOJ inflicted max pain on JPY longs when they announced negative interest rates. In the weeks leading up to the policy change, Kuroda-san stated that the BOJ would not go negative in the near future. After sippin’ bubbly in Davos, he had a change of heart and decided to cross the Rubicon.

This action confirms the futility of QE. Japan has suckled on the money-printing teet for over two decades. The results: an economy stuck at 0% growth. Even with the gobs of money floating in Japan, the Nikkei has still failed to retake its 1989 high. Faced with failure, they entered the last stage before helicopter money: NIRP. Two of the four most important central banks now employ NIRP (ECB and BOJ). The Fed hasn’t joined the party yet, but that is probably only one presidential election away. Trump or Sanders may not like the fed, but Grandma Yellen still has two years left. If the S&P 500 touches 666 again, you can bet the Fed will roll out all the stops to keep the dream alive.

The PBOC joined the party late, but they are ginning up Mao’s printers. As the calls for a Yuan devaluation crescendo, the PBOC holds steadfast that the Yuan will not devalue. They even trolled George Soros in the People’s Daily for even hinting that he might short the Yuan. China does not have the time or political will to internally devalue by firing millions of migrant laborers, and allowing SOE firms to fail. The Yuan must and will devalue.

Now that two of China’s biggest export competitors are trashing their currencies in hopes to export deflation and goods abroad, China must respond forcefully. The PBOC has been busy abusing Yuan shorters and closing the gates on the obvious ways that capital flees the country. The legal yearly limit for FX is $50,000 per comrade. China has $3.3 trillion in reserves. It would take only 5% of China’s 1.3 billion population to convert their legal amount of Yuan into a foreign currency for the reserves to be depleted this year. There is no way but down.

The PBOC attempted the slow and steady approach. However, unpatriotic comrades began front running them, as evidenced by the widening gap between CNH and CNY. The PBOC then went nuclear on CNH shorts by cornering the spot market and kicking foreign banks out of the onshore market. All the while proclaiming, all is good and no further devaluation will occur. Liar liar pants on fire!

The PBOC will orchestrate a China style devaluation, big, bold, and in your face. It will happen when people least expect it, or are least prepared to react. The Chinese New Year holiday presents an excellent opportunity to shock the markets. Going long XBTCNY vs. short XBTUSD with futures, spot, or a combination of both is an asymmetric bet. Worst case, the PBOC keeps the Yuan stable and continues to bleed FX reserves. Best case, the PBOC devalues big and Bitcoin goes nuts.

If you place trust in Gepetto’s Children, I have an apartment in Ordos to sell you.

China Warns Soros Against Starting A Currency War: “You Cannot Possibly Succeed, Ha, Ha”

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?; 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 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


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


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


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


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

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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 – Oct 19

BitMEX Smashes Volume Records


The launch of the 100x daily Bitcoin / USD futures contract, XBT24H, corresponded with a surge in intraday price volatility this weekend. The result was a massive surge in trading volumes on BitMEX. This weekend, we hit a high of 29,000 Bitcoin traded over a 24 hour period. We want to thank all of our traders for helping to make BitMEX one of the most liquid exchanges to trade Bitcoin / USD. If you have not tried out XBT24H, you can take it for a spin on the BitMEX Testnet before trading with real Bitcoin.

We are working diligently to improve the trading experience. We received many great suggestions for new features and UI design change requests. Look out for further announcements about upgrades to the platform.

The Case For CNY Devaluation

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Whether or not the recent pump to 1835 CNY and subsequent dump to 1700 CNY is attributable to the MMM ponzi scheme, the premium of XBTCNY to XBTUSD continues to slowly rise. The PBOC resumed the CNY devaluation last Friday, and continued today. Each day at 9:15am Beijing time (GMT + 8), the PBOC releases the CNY Interbank Rate. The Interbank Rate is the rate at which banks can buy and sell CNY against the PBOC. The USDCNY and USDCNH (offshore CNY) follow the trend of the official interbank rate.

The PBOC has allowed the CNY to strengthen vs. the USD and more importantly their trade rivals Germany (EUR), Japan (JPY), and South Korea (KRW) for years. Now with global growth slowing, and the aggressive money printing from Japan and Europe, China’s hand has been forced. Xi Jinping’s biggest economic goal is to shift China away from an investment led economy to a services and consumption lead one. Many politically important groups will be impoverished by the shift in economic focus. A way to cushion the blow to the manufacturing sector is to weaken the CNY.

While the CNY was strengthening, the most popular carry trade was to borrow USD, FX into CNY, then buy bonds yielding significantly more than the cost of USD funds. Because the PBOC had a one way policy of CNY appreciation, carry traders did not forward hedge USDCNY. If they had hedged, the USDCNY forward premium would wipe out most of the profit. These carry traders profited off the PBOC who sold CNY and bought USD. The PBOC’s USD assets, mainly US treasuries, have much lower yields than comparable CNY debt. The easiest way to import USD into China was to fake invoices; this allowed individuals and corporate to FX more USD into CNY than allowed by the PBOC.

The one way CNY appreciation is now over. The carry traders are rushing for the exits, and the PBOC has put up the road blocks. Banks are now enforcing the yearly $50,000 FX limit; overseas UnionPay withdrawals are limited to 100,000 CNY per year; money changers, who previously would help move CNY in and out of China, have been shut. With capital trapped onshore, the PBOC can now devalue the CNY without suffering a loss in China’s capital account.

With the easy and cheap means of moving CNY out of China closed, Bitcoin presents a legal and viable option. The premium of XBTCNY and XBTUSD has begun rising ever since the PBOC devalued the CNY by 4% in August. If this hot money leaks into Bitcoin, the premium and price will shoot higher.

The top chart shows the XBTCNY premium vs. the PBOC Interbank Rate. The premium rose as USDCNY moved higher (read: CNY devalued). The bottom chart shows the premium vs. Bitstamp XBTUSD. As the premium rose, XBTUSD rose as well. These are the most important charts in Bitcoin. China drove the 2013 Bitcoin bubble. The PBOC isn’t done yet. The CNY will weaken, and as it does Bitcoin will slowly leak higher.

This process will happen either slowly or all at once. To take a longer term bullish view on the devaluation, consider buying the BitMEX March 2016 25x leveraged Bitcoin / USD futures contract, XBTH16.

XBT Term Structure

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Volatility spiked over the weekend during the China pump and dump. As a result, the term structure parallel shifted upwards. All contracts became more expensive, with shorter dated contracts experiencing the greatest shift upwards. There is a liquidity premium for shorter dated contracts, and that is why they tend exhibit more basis volatility.

The term structure has now become inverted. XBTH16 looks quite cheap in comparison to its peers. XBTH16’s basis only increased 9%. Given the time value this contract still retains, it should increase the most if the price volatility continues. If the curve flattens, XBTH16 should trade at 60%, an increase of 10% annualised. If the curve steepens, XBTH16 could trade at 70%, an increase of 20% annualised.

Trade Recommendation:

Buy XBTH16 (March 2016) vs. sell XBTZ15 (December 2015) to bet on the annualised basis of XBTH16 rising.

XBT Spot

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The stair step rally continued into last Friday’s settlement. Then Saturday early morning China time, a pump began. XBTCNY reached a high of 1835. At the pump’s peak, the premium in China was 10%.

The price languished above 1800 CNY, then dumped late Sunday night to a low of 1706 CNY. The rally that started a few weeks back is not over. $260 held on Bitstamp, and China has remained above 1700 CNY. After the weekend fireworks, expect a period of consolidation between $260 to $265. A break below $260 on decent volume will put pause in the rally. If the price can hold above $270 for 24 hours, a run to $300 is likely.

Trade Recommendation:

Buy October 2015 25x leveraged Bitcoin / USD futures contracts (XBTV15) while spot is $260 to $265. The upside target price is $270 and then $300.

The Most Important Chart In Bitcoin

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The PBOC is back at it again. Today they devalued the Yuan by the most in 2 months. Their first shock and awe campaign sliced 4% off the Yuan’s value vs. the USD. Then the PBOC sold US Treasuries to support the CNY in the open market.

Since August, the PBOC has been hard at work stemming the enormous flow of capital fleeing China. The $50,000 per year FX limit is beginning to be enforced by banks. There is now a yearly 100,000 CNY limit on overseas UnionPay withdrawals. And I have heard anecdotal stories about the closure black market CNY / HKD money changers in China and Hong Kong.

Today’s action might be the resumption of the devaluation trend the PBOC embarked upon this summer. With the closure of the easy, cheap, and convenient ways to squirrel cash out of China, Bitcoin becomes more attractive. If Bitcoin emerges as a legal means to export capital out of China, the premium for it onshore in China will rise.

In my post China Bitcoin Premium Points To Moon, I presented a one month chart of the Bitcoin premium (OKCoin XBTCNY vs. Bitstamp XBTUSD) starting August 30th. The above chart is an extension of that time series. The premium dipped to 1%, but during the recent rally has resumed its climb above 2%. If this premium continues to rise above 5%, then we know China truly appreciates Bitcoin’s potential as a means of wealth preservation.

If the PBOC renews its devaluation of the Yuan, watch this chart closely. A lot of money through a small door will spell riches for those positioned correctly.

Hello Bitcoin: China Begins Actually Enforcing Capital Controls


Faced with a depreciating currency and an acceleration of elites running for the exit, China is actually beginning to enforce capital controls. The official individual FX limit is $50,000 per year. But for those with the right connections, RMB flowed out of China like water. The amount of illegal capital repatriation from China has been estimated in the trillions of USD. Now that is all changed. Xi Jinping is hell bent on transitioning the Chinese economy into one lead by domestic consumption rather than by investment. GDP growth has slowed, and at the same time the strengthening USD has forced the PBOC to allow the RMB to weaken.

Property markets in favoured jurisdictions have seen furious buying by cash rich Chinese. The Chinese hoard levitated property prices in Vancouver, Sydney, New York City, and parts of California. The explosive growth is about to come to an abrupt halt, if the PBOC has it way. They have instructed banks to begin enforcing the $50,000 limit and to look through the ultimate beneficiary account to determine if bundling of funds is occurring. [AFR]

The crackdown from Beijing has seen Chinese banks setting up watch lists for unusual transactions, according to one bank manager, who asked not to be named as he was not authorised to speak about the policy.

He said the operation was aimed at cracking down on a practice whereby family and friends of those wanting to purchase a property overseas all transfer US$50,000 into an overseas account. That’s the limit each Chinese individual is allowed to move out of the country each year.

The purchaser then pays back his friends and family in China and uses the money from the overseas account to put down a deposit on the property.

However, banks are now tracking the source of funds for overseas bank accounts that have received more than US$200,000 within 90 days, according to the bank manager, who works in Shanghai for one of the major state-owned banks.

“We have always had this policy but now it has been restated and is being enforced more strictly,” he said.

“In the past we could find a way around these rules but now all those ways have been blocked.”

“I’m sure this would be having an impact on overseas property purchases,” he said.

Sydney and Melbourne are starting to feel the pinch [AFR].

Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing’s move to tighten capital controls.

One Chinese agent said the latest efforts by the central government to avoid large capital outflows were having a “significant impact” on his business.

“It has affected 70 to 80 per cent of current transactions and some have already been suspended,” said the agent who asked not to be named.

The tighter foreign exchange rules are also set to impact the federal government’s relaunched Significant Investor Visa (SIV), which provides fast-tracked residency for those investing at least $5 million into Australia.

“I think it will be big, big trouble for the SIV program because the amount of money is just too large,” said one Shanghai-based adviser, who sells Australian property and advises wealthy clients on their migration plans.

Only seven SIV applications have been submitted since the new rules were introduced on July 1, which require investors to put their money into riskier assets such as venture capital and emerging companies.

The fall 2013 Bitcoin bubble was fuelled by speculation that Chinese investors would be able to send their capital abroad by using Bitcoin. The problem was the grey channels were by and large much cheaper and easier than using Bitcoin. Therefore the massive inflows never materialised. The situation is grossly different now. The PBOC is actively enforcing the controls and the avenues open to the Chinese are rapidly disappearing.

The big question for anyone attempting sell RMB / buy Bitcoin then sell Bitcoin / buy USD (or another G10 currency) is liquidity. I took data from about trading volumes for BTCCNY and BTCUSD. For the Chinese exchanges I divided their reported volume by 2 because they double count trades. Over the past 30 days the average daily trading volume was 82,400 BTC. To minimise price impact, assume that you trade 30% in line with volume. At a BTCCNY rate of 1,500 CNY, that comes to a total of 51,180,000 CNY of Bitcoin that can be traded per day with minimal price impact. I did the same calculations for the top BTCUSD exchanges, and the amount is 39,366,600 CNY. Because you need convert RMB -> BTC -> USD, I assume that 39,366,600 CNY worth of BTC can be traded each day with minimal price impact.

Chinese people love property. It is one of the preferred vehicles in which park their cash abroad. The other benefit is they can ship their families off to obtain passports in better jurisdictions. The below table shows how many equivalent houses Chinese buyers could purchase each day using Bitcoin.

City Median House Price Equivalent Houses
Sydney 1,000,000 AUD 8.7
Arcadia California 1,084,500 USD 5.7
New York City 572,800 USD 10.79
Vancouver 900,592 CAD 9.1

According to the National Realtors Organisation, for the 12 months ending March 2014 Chinese people bought $22 billion in property in America. Per day that equates to roughly 368 million CNY, or over 9 days worth of Bitcoin trading. This happens each day, and this is just for America. Chinese will not all rush to use Bitcoin as a method of wealth transfer, but with no other options they will get creative. The largest Bitcoin exchanges globally are in China. In China, you can wire CNY to the exchange, buy Bitcoin, and remit Bitcoin outwards in under 30 minutes for 0 fee. The foundation is there, and now there is a real pain point. As the capital account of China deteriorates due to slowing global growth, a stronger USD, and competitive devaluation by their trading partners, the only way out may be Bitcoin.


2014 Profile of International Buying Activity

Median house price in Sydney tops $1 million for first time

Arcadia Home Prices & Values

New York Home Prices & Values

Canada National Average Price Map

Renminbi vs. Bitcoin Correlation

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The PBOC shocked the world this summer with a 4% devaluation of the CNY. What was the effect on Bitcoin if any, due to their actions?

The above chart is a time series from early June until early September of USDCNY and BTCCNY ( The USDCNY rate was stable up until the beginning of August when the devaluation began. After the devaluation began, it appears that the two exchange rates were negatively correlated. Traditional economic thinking would suggest that a weaker currency would lead to a higher BTCCNY  rate.

I then calculated the correlation from Aug 30th to September 8th between the two rates. It came to -0.779. A correlation of 1.00 means the two rates move in the same direction and magnitude, and a correlation of -1.00 would means the two rates move in the opposite direction but same magnitude. The observed -0.779 correlation is a relatively strong negative correlation, meaning as CNY weakened and USDCNY moved higher, and the BTCCNY rate moved lower.
There were many external events such as the block size debate that occurred at the same time as the CNY was devalued. This may explain the divergence, but given China is the world’s largest Bitcoin trading market, I would expect the weakening of CNY to have a meaningful price positive impact on Bitcoin. It remains to be seen if as the effects of currency devaluation  will slowly change investors holding preferences for their domestic currency vs. other international risk assets. If you believe that the PBOC has just begun in its race to the bottom, buy BitMEX March 2016 (XBTH16) Bitcoin/USD futures contracts. As investors begin to sell CNY and buy wealth preserving risk assets, Bitcoin will benefit.

China Devalues Yuan, Bitcoin To Da Moon

In the August 10th Crypto Trader Digest, I predicted the PBOC would devalue the Yuan to regain export competitiveness. Less than 24 hours after hitting the press, the PBOC shocked the market with a 1.9% devaluation. Global macro will be tilted on its head now that the world’s largest export regime is actively engaging in currency debasement.

The RMB is one of the largest globally traded currencies and it’s importance in global capital flows cannot be underestimated. Bitcoin, which is a financial and speculative asset, will be affected as well. Chinese households are now faced with a very painful question, how to protect and grow their saved capital.

Stock market and real estate investments have soured. Households are unable to invest abroad due to capital controls (the elite always could, but I am talking about regular folks). Due to a depreciating Yuan, imported goods will become more and more expensive. They must find a way to convert their paper wealth into real assets that cannot be devalued by the central government. Alternative means of investing will become more and more prevalent. P2P loans, wealth management products, and crypto currency will be three alternative areas where Chinese households will rush to convert Yuan into some form of wealth preserving asset.

The PBOC stated this was a one off devaluation. If anyone believes that, I have a ghost city in China to see you. China is mercantilism on steroids. Kuroda-san’s BOJ printing press will now go into overdrive. Mario Draghi will have no choice but use the cover of Grexit to unlease Euro QE. Each successive devaluation by its exporting peers will be met with force from the PBOC. Chinese speculators recognise this, and they will begin selling and borrowing CNY to buy any risk assets they can get their hands on.

It is time to back up the truck and buy buy buy Bitcoin. The $40 fall from $300 is a blessing. Coins can now be bought at much cheaper levels. To obtain long exposure, buy BitMEX December 2015 futures, XBTZ15.