Need to Hide 200 Million Yuan? Use Bitcoin Instead


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.


200 Swipes: A New Way Chinese Avoid Capital Controls


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.


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 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 18

Bitcoin Hearnia


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

year of monkey

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?; 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 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


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


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


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

image (5)

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.

image (6)

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

Screen Shot 2015-12-14 at 7.05.55 pm

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.

Crypto Trader Digest – Nov 30

Welcome To BlockMEX



Arthur: Hi Garry (VC), I want to tell you about a pivot we just made. BitMEX is now BlockMEX, we allow trading of Blockchain Derivatives.

VC: Oh that’s great. You know we are not that interested in Bitcoin, but very positive about the Blockchain. Please tell me more.

Arthur: Clients use Blockshares to trade on BlockMEX. And we allow the trading of financial derivatives using the Blockchain.

VC: Wow that’s awesome. So you no longer use Bitcoin? You were previously called BitMEX right?

Arthur: We never were a Bitcoin company. The “Bit” merely stood for digital information, you know like Bits and Bytes.

VC: Gotcha. So what kind of Blockchain do you use for your derivatives, do you touch Bitcoin in any way?

Arthur: Touch Bitcoin, oh heavens no. We created our own Blockchain that uses Blockshares. It is proprietary to BlockMEX.

VC: Wow, you created your own Blockchain? I’m really impressed. So if anyone can trade anything using the BlockMEX Blockchain, how do regulations work?

Arthur: Regulations are irrelevant with the Blockchain. It’s all decentralised, so no legacy regulations apply to BlockMEX.

VC: Man, the Blockchain is so amazing. So what about trading volumes?

Arthur: We have not done a single trade on BlockMEX yet. That’s okay, we’re just pre-revenue. Our technology is meant for large financial institutions. We are going to revolutionise how they trade derivatives.

VC: I totally agree that legacy finance needs services like yours. What about your team? Finding good Blockchain engineers is getting harder and harder.

Arthur: Our team is top notch. We have expert MySQL and PHP developers straight from Tokyo. They have been involved with the Blockchain since 2010.

VC: I really think you guys are onto something. How can our firm, FOMO Capital, get involved?

Arthur: On the back of our strong traction, we are raising $116 million at a $500 million valuation.

VC: That sounds very reasonable. FOMO Capital typically writes checks for $50 to $100 million. We are interested in leading your round.

Chinese Exchanges: Bitcoin Shadow Banks


How do Chinese Bitcoin exchanges make money when they charge no fees to trade spot? When asked, management of the big three (OKCoin, Huobi, and BTCC) assure us that they do indeed make money. In this post, I will conduct a thought experiment as to how I would monetise a spot business that charges zero fees in China. I have no concrete evidence to back up any of my claims other than deductive logic.

China accounts for the vast majority of all on-exchange Bitcoin trading. Exchanges must therefore have a large balance of customer CNY and Bitcoin. I believe that Chinese exchanges act as shadow banks. They borrow at 0% from clients who wish to trade Bitcoin, and lend out customer funds by purchasing China debt instruments.

When the product is free, you are the product. Chinese Bitcoin exchanges use the captive CNY held to trade Bitcoin to earn interest income. How much does it cost to operate the exchange? I have no hard data, but the big three generally have around 150 staff. Assume an average salary of 10,000 CNY per month. Demand deposits yield between 3% to 5%; this is the least risky form of lending as it can be redeemed at any moment from the bank to satisfy withdrawals. The yearly salary costs alone are CNY 18 million. To earn that amount in interest income at 5% requires CNY 360 million or $56 million of stable customer funds. Given the reported trading volumes, it is reasonable to assume that the big three could each possibly hold this amount of capital.

Unfortunately only investing using demand deposits just barely covers salaries. If the exchange is to turn a profit, they must step out on the risk and maturity curve. Private companies cannot obtain credit from banks. All bank credit is reserved for State Owned Enterprises (SOE). In the last decade, high interest rate Wealth Management Products (WMP) have emerged to provide credit to SMEs. The banks underwrite these WMPs off balance sheet which are secured on a company’s assets. WMP yields range from 10% to 20% and have various maturities. Investors believe there is an implicit guarantee provided by the issuing bank. The belief is the government would not let WMPs fail because of the catastrophic losses retail investors would suffer. Therefore, in the few cases where it appeared a company would default on a WMP product, the banks have stepped up and rolled the debt.

Like any bank, a Chinese exchange must keep a portion of the float liquid so they can’t lend the entire balance out via WMPs. The below table assumes that the Demand Deposit rate is 5% and the WMP rate is 20% per annum. NIM is the Net Interest Margin, which in this case is the full interest rate since customers are paid nothing on CNY they hold with the exchange.

% Liquid % WMP Yearly NIM Costs Profit
50% 50% $7,031,250 $2,812,500 $4,218,750
40% 60% $7,875,000 $2,812,500 $5,062,500
30% 70% $8,718,750 $2,812,500 $5,906,250
20% 80% $9,562,500 $2,812,500 $6,750,000
10% 90% $10,406,250 $2,812,500 $7,593,750

As the table shows, the more credit and maturity risk management is willing to take the more money they make. Given there is no regulation as to how the exchange holds customer funds, management can invest in whatever they like to generate a positive NIM. It is not a far stretch to imagine the CEO’s punting the A share market in their spare to time to generate enhanced returns.

Bitcoin trading has become a side show, and these entrepreneurs have created very profitable banking institutions. Because they have excess cash, they are able to pledge customer CNY to fund whatever assets will generate a positive risk adjusted NIM. The Chinese Bitcoin exchange model will be copied in other emerging markets with broken credit intermediation and high nominal rates of interest. If I was opening a spot Bitcoin exchange in India, this is the model I would choose. Private credit in India is hard to come by, and nominal rates are sky high.

The Magic Number Is 6.40

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The IMF is set to announce the CNY’s inclusion into the SDR basket today. Analysts expect that after the inclusion, the PBOC will intervene less in the FX markets and allow the CNY to depreciate further. 6.4 is the highest level USDCNY reached this summer after the shock devaluation.

If USDCNY rises above 6.4, the dominoes may begin to fall. The expectation of future weakness will become more acute. Ordinary citizens will search for any means to preserve their purchasing power. The Bitcoin meme is gaining ground in the financial media. Zerohedge mentions Bitcoin daily when talking about the Chinese financial markets. Once the mainstream pundits at Bloomberg, FT, and WSJ discover Bitcoin, make sure you have your moon boots ready.

Apart from the Federal Reserve meeting December 16th, nothing else will have more impact on Bitcoin than the USDCNY exchange rate. The above chart shows the Bitcoin premium expansion as CNY has depreciated (as USDCNY rises, CNY is worth less USD). To check the PBOC’s daily USDCNY interbank rate click here. If you are lucky enough to have access to Bloomberg or Reuters, search for the USDCNY daily fix. It is announced each day at 9:15am Beijing Time GMT + 8.

Don’t fight the Fed. In Bitcoin, don’t fight the PBOC.

XBT Spot


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$400, here we come. Global macro is providing so many positive catalysts for Bitcoin it is hard to keep them all straight. Argentina has descended into currency chaos. The CNY depreciation continues. The Fed is expected to lift rates and torpedo asset markets globally.

Yet – $400 won’t be taken as easily as it was one month ago. The retrace from the graces of $500 has been slow and steady. However, the recent price action contains the wiff of FOMO, and the upward pressure is likely to accelerate if the CNY devaluation continues.

Trade Recommendation:

Daily 100x Futures, XBT24H: Buy XBT24H while spot is $375 to $380 with an upside target price of $385.

Weekly 50x Futures, XBT7D: Buy XBT7D while spot is $375 to $385 with an upside target price of $400.

Crypto Trader Digest – Nov 3

It’s China Stupid


As China goes, Bitcoin goes. This Halloween weekend, Bitoiners were either drinking in celebration, or fixated on their charts as China ripped and roared higher. XBTCNY reached a high of 2316 CNY or $364 this past Friday. I will devote the entirety of this week’s newsletter to questions surrounding China’s impact on Bitcoin.

Is China Using Bitcoin To Get USD?

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The PBOC is attempting to halt the hot money fleeing China. Since the 4% devaluation in late August, the authorities began actually enforcing capital controls. Bitcoin is legal in China, and individuals can wire RMB to one of several large Bitcoin exchanges to exchange RMB for Bitcoin. Once they have Bitcoin, they are free to transfer it anywhere in the world to buy goods or services, or convert into another fiat currency.

Further devaluation is forthcoming for the RMB. The Chinese citizens know this, and are searching for ways to protect their wealth. One popular theory is that through Bitcoin, Chinese households will get access to USD. The Bitcoin corridor is very narrow, and even a slight uptick in this sort of activity would cause trading volumes and the price to skyrocket.

The above chart shows the ratio of XBTCNY volume on, Huobi, and BTCC vs. XBTUSD volume on Bitfinex, Bitstamp, Coinbase, itBit, and Each was indexed at 100 on October 1st. Each subsequent day’s index looked at the change in volume vs. October 1st. If Chinese households were using Bitcoin as a USD conduit, then XBTCNY and XBTUSD volumes would have the same magnitude of increase.

The chart clearly shows that there were actual inflows into Bitcoin that didn’t fully leak into USD. This is very price positive. There is actual organic demand from China for wealth preservation or pure upward price speculation using Bitcoin. As the rest of the world piggybacks on the surge in Chinese demand, that ratio will fall further.

USDCNY vs. USDCNH: The Bitcoin Angle

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Currency trading in China is a complicated and fickle beast. There are three currency pairs to know about. The interbank USDCNY rate is set each morning at 9:15am by the PBOC. This is the rate at which member banks can trade USDCNY against the PBOC. USDCNY floats in a PBOC set band around the interbank USDCNY rate. USDCNY can only be traded onshore in China and is subject to capital controls. USDCNH is the offshore version of USDCNY. This pair floats in a band around the USDCNY rate. USDCNH cannot be imported onshore accept in a few circumstances that are irrelevant for this discussion.

USDCNY and USDCNH both have different forward curves, which represent the supply / demand dynamics of onshore and offshore CNY. Only domestic Chinese banks can participate in the deliverable USDCNY forward market, and this market is heavily regulated and monitored by the PBOC. Any bank globally can participate in the deliverable USDCNH forward market; the PBOC have very strong regulatory control over this market. Because of this, the USDCNH is a leading indicator of where the PBOC will set the interbank USDCNY, as banks can effectively use the offshore forward market to speculate. Recently USDCNH has traded at a higher price than USDCNY, which signals the market believes further CNY devaluation will occur.

The chart above shows the USDCNH premium (read: the market thinks CNY will be devalued) vs. the premium of Bitcoin in China. There is no clear correlation between the two metrics. The complicating factor is that the PBOC actively intervenes in the USDCNH forward market to narrow the differential. The PBOC does not want clear market signals of the impending devaluation. I still believe that a major motivating factor for China’s shift to Bitcoin is a real fear of currency devaluation.

How To Play The China Bitcoin Premium

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The China Bitcoin Premium chart as the most important chart in Bitcoin. The premium rose substantially during the recent run up in price. The 5%-10% region is very important. If the premium breaks out of this range, it means the usual avenues of arbitrage are broken. Arbitrageurs provide a price dampening effect in China. If they are unable to effectively move money between China and Hong Kong, then Bitcoin and China will soar farther and faster than in November 2013.

The premium is close to the 10% level. Let’s examine how to properly arbitrage this premium.

  1. Set up a Bitcoin account offshore (Bitstamp and Bitfinex are my top choices), and a Bitcoin account onshore (, Huobi, or BTCC are my top choices).
  2. Set up a mainland Chinese bank account. If you live in Hong Kong, take the bus to Shenzhen and you can open a bank account with just your passport. The Chinese banking system is very easy to enter, but hell to exit.
  3. Wire USD to your offshore exchange, then buy Bitcoin.
  4. Send the Bitcoin to your onshore exchange, sell it to realise CNY, then withdraw the CNY to your onshore bank account.
  5. Now comes the tricky part of converting CNY into USD or HKD. Every person is given a $50,000 equivalent FX limit each year in China. Assume that you have exhausted your limit. You can travel to China and withdraw 20,000 CNY and walk it across the border. If you want to do size, then you need a few friends to come with you each day. Or you can use a shadow bank to move the money from CNY to HKD. Unfortunately Beijing has begun cracking down on these bankers, and your money may or may not appear in Hong Kong.

With $10,000, you could make $800 per day in profit. However moving even $10,000 between China and Hong Kong on a daily basis is quite difficult. Therefore, I expect the premium to continue its upward ascent as the fear of continued CNY devaluation grows. Also remember that as the PBOC lowers the benchmark interest rates, it becomes less attractive to store savings with a bank, and more attractive to speculate on risky assets like Bitcoin.

Conclusion: Long And Strong


Unlike 2013, there are real concrete macro factors affecting the flow of CNY into Bitcoin. Bitcoin has passed through many trials and tribulations over the past two years. Many exchanges have fallen, but Bitcoin and the blockchain are still here. China and the rest of the world tackled the 2008 GFC by engaging in a money printing orgy. The effects of which are only starting to be felt. The volume of world trade is declining and the only method left for nominal growth is money printing. Nominal not real growth is all that matters so that banks can extinguish their pouch of non performing loans. The high priests of central banks will provide this growth at whatever social and or economic cost.

China “rescued” the world in 2008 by going on a massive credit fueled infrastructure spending spree. The PBOC now must fight the spectre of deflation. The tools at its disposal are rate cuts and currency debasement. Bitcoin and other non-standard risk assets will gain favor with a desperate populace trying to escape the jaws of inflation. Short this rally if you must, but cover before you bust.

XBT Spot


$330 dusted, $320 is history, $340 we are almost there. That statement is filled with hubris. As a speculator, I would like to see $300 put to the test and pass before I marched towards $400.

The volumes on non-Chinese exchanges have not increased enough at these levels. This week will be a true test. Will the $300 prices bring out the closet buyers. A good indicator will be premiums paid in America on LocalBitcoins. The volume on Coinbase will also be an important barometer. Coinbase operates the largest American Bitcoin brokerage service, and all that volume is passed onto their exchange. The largest trading market for Bitcoin has spoken, but we still need follow on support from the second fiddle, America.

Shorting this rally has proved fatal. If you want to express your bearishness, earn the carry by shorting the BitMEX daily 100x leveraged Bitcoin / USD futures contract, XBT24H, vs. buying spot.

Trade Recommendation:

If you are bearish, sell XBT24H vs. buy spot for a cash and carry arbitrage trade.

If you are bullish, buy weekly 50x leveraged Bitcoin / USD futures, XBT7D, while spot is $325 to $330.


Crypto Trader Digest – Oct 26

To Print Money Is Glorious


On his southern tour of China in 1992, Deng Xiaoping was credited with uttering “To Get Rich is Glorious”. His program of Socialism with Chinese Characteristics unleashed one of modern times’ greatest transformations in a country’s wealth. Since the early 1990’s, China transitioned from the century of humiliation, to a century of prosperity and growth.

China’s growth over the past two decades is legendary, but underpinning this growth is one of the largest credit expansions in human history. Socialism with Chinese Characteristics is a euphemism for a red printing press. Printing money is as old as centralised government. China being China just did it larger and more in your face than any government in history. Since the 2008 GFC, China’s total debt to GDP has almost doubled to 180%. The gargantuan issuance of debt underpinned the creation of ghost cities and bridges to nowhere.

The great financialisation that began in 1971 when Nixon took America off the gold standard is reaching its expiry date. World growth is slowing evidenced by an across the board slump in industrial commodities. China is a highly levered to the global manufacturing economy, and the state owned banks (SOE) loan books are stuffed with industrial companies’ debt. This debt must be warehoused and rolled over to keep the many zombie SOE’s alive. As a result, the PBOC continues to aggressively ease monetary conditions.

This past weekend the Reserve Ratio Requirement was cut by 0.50%, and the benchmark lending rate by 0.25%. These desperate moves are meant to help banks deal with their toxic loan books. As deposit rates drop, the rush to sell CNY and convert into a higher yielding asset will intensify. The PBOC is clearly telegraphing that the CNY will depreciate in the near term. Mao’s red army is watching and as the they earn less and less at the bank, they will start to embrace risky assets. Bitcoin serves as a central bank put, an electronic means of wealth preservation, and a vehicle to export domestic capital.

$300 is just the beginning. If the China narrative catches hold again, a truly explosive upward price burst will occur. For the more patient traders, consider buying BitMEX’s 25x leveraged March 2016 Bitocin / USD futures contract, XBTH16.

XBT Term Structure

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The FOMO was strong this weekend. The amazing China pump to 1950 CNY ignited the inner bull in traders. The short end of the curve shot upwards. The long end barely budged. XBTZ15’s basis was flat, and XBTH16’s basis was up 8% on the week. Traders are still hesitant to believe the rebirth from the $200 to $300 purgatory. That is why the long end has not been bought as aggressively. Many traders expect a $300 breach, and then a quick tumble just like the other two attempts prior.

If the narrative around China grows, the medium term trend for Bitcoin is higher. If $300 can be broken and held for a week, then the FOMO will begin in earnest. Then the long end of the curve will skyrocket. Those patient enough to buy XBTH16 and sell XBTZ15 or spot, will be amply rewarded.

Trade Recommendation:

Buy XBTH16 vs. sell XBTZ15 or spot if you believe $300 can be broken and held for one week.

Dancing With The Daily

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If Bitcoin is fun, Bitcoin with 100x leverage is a hell of a party. BitMEX’s 100x daily expiring Bitcoin / USD futures contract, XBT24H, has quickly become our most popular product. Because of the heightened volatility and price rise, the premium intraday has been massive.

The above chart shows the premium of XBT24H over spot for October 25th from 00:00 GMT to 23:00 GMT. 12:00 GMT is the settlement time, and that is why there is a dip. Starting yesterday night during the pump to 1950 CNY, the premium of XBT24H reached 1.75% outright. For a contract that expires in 24 hours, that is massive. I call that the FOMO premium. In a trending market, traders following the trend and momentum will overpay for exposure. This is a perfect opportunity for spot vs. futures arbitrage.

The trade is to sell XBT24H and buy spot. This is not a perfect arbitrage. At certain prices, the short XBT24H’s negative USD gamma will cause a loss for the portfolio. The PNL function is quadratic so we can solve a priori for the two break even points. For this particular trade, break even is below $259.37 and above $337.71. Given the spot price was $293, it is extremely unlikely that XBT24H will settle outside of that range. This is a no brainer trade for an arbitrageur.

XBT Spot


Bitcoin traders have been praying to the goddess of volatility for the entire summer. She awoke with a vengeance this weekend. The price action in XBTCNY reminded me of 2013. The highs were high, and the retrace was violent and swift. XBTCNY touched 1950 (appx. $306), and then careened lower by 120 CNY to a low of 1830 this morning.

Bitstamp climbed to $296, and during the downdraft briefly touched below $280. The price action will subside this week, and another attempt will be made for $300 on XBTUSD, and 1950 for XBTCNY. Additional easing from the PBOC will lend the China narrative further firepower. Make no mistake, this is a healthy rally. Short at your own peril.

Trade Recommendation:

Buy the weekly 50x leveraged Bitcoin / USD futures contract, XBT7D, while spot is $280 to $285. The upside target price is $300.