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 8

How Will You Spend Your Helicopter Money?

How will you spend your helicopter money

Finnish lawmakers are ready for the nuclear option. A bill under consideration will hand out $900 to every citizen each month. In their desperate attempt to kick start economic activity, Finland will be the first developed nation to drop money from helicopters.

The theory is that each citizen will go out and spend their newfound wealth on goods which will spur inflation and economic activity. The poorer members of society will use this money on necessities, food and shelter. The economy will not magically produce more of these goods. Prices will rise and these members of society will be no better fed or housed than before. Only now they will clamor for additional free money to make up for the loss of purchasing power.

The wealthier members of society will watch the value of their savings decline. They will be searching for assets that can preserve their wealth. Real estate, gold, art, jewelry these are the conventional means of wealth preservation. Once these assets reach ridiculous prices, unconventional assets become attractive. Bitcoin tops my list as an asset that will gain favor amongst the wealthier members of society.

Lawmakers globally will watch and learn from Finland’s experiment with helicopter money. Citizens around the globe will demand that instead of handing free money to banksters, government’s hand cash directly to those most in need. Start hoarding now because as the helicopter money movement spreads, prices of conventional and unconventional means of wealth preservation will skyrocket.

It Begins: Desperate Finland Set To Unleash Helicopter Money Drop To All Citizens

The China Bitcoin Premium Is On The Rise

The China Bitcoin Premium Is On The Rise

The most important indicator for Bitcoin is flashing green once again. Over the past two weeks, as the CNY weakened, the China Bitcoin premium rose. The premium is now approaching 5% as USDCNY flirts with 6.40. All hell will break lose if the Fed raises rates as expected. EM currencies globally have been getting the stick all year as the dollar surged higher. EM countries will descend further down the mercantilist path as they try to defend what market share they have left of world trade.

China will not sit idly by and watch their competitiveness erode vs. Europe, Japan, and South Korea. Unlike most safe haven assets such as Gold that are priced in dollars, Bitcoin is priced in CNY. The PBOC will gradually allow the market forces to take the CNY lower. Up until now, they have gently guided the CNY lower by intervening in the spot markets on a daily basis to stem the selling pressure.

Apart from China, citizens of other emerging markets whose currencies are rapidly depreciating will be scrambling to purchase assets to preserve what wealth they still retain. Argentina and Brazil are two markets where Bitcoin trading volumes will increase rapidly. Argentina’s central bank is out of USD and is set for yet another default. Brazil is experiencing a political crisis, an impeachment trial of the president is set to begin. Concurrently, Brazil’s economy is collapsing due to falling world trade and commodity prices.

For the reasons mentioned above, A Fed rate hike on December 16th is positive for Bitcoin. I still have doubts whether the Fed will follow through on their promise to normalise rates. The calls for a continuation of the 0% status quo are growing. Yellen might still get cold feet in the face of the growing dissent from the likes of the IMF, World Bank, and Bank of International Settlements. Pay close attention to any public comments from Fed governors. If they indeed back down from a rate hike, they will attempt to telegraph their intentions to the markets in the days ahead.

It’s Raining Coin

It's Raining Coin

Goldman Sachs recently filed a patent for SETL coin. This crypto currency is meant to handle settlements of financial assets. Get ready for a slew of patent filings for various coins from major multinational banks. By now, most banks have an internal team working on various ways blockchain technology can help their business.

The banks certainly will not build tools and innovations on top of the Bitcoin protocol. Open source and decentralisation don’t jive with centralised rent seeking banks. They will each release their own coin aimed at performing similar functions. The battle of bank coins has begun.

Ultimately the regulators will choose the winner. After the GFC and the public outcry against the financial services industry, regulators will be loath to introduce radical changes to the financial system that might fail. As such, the various bank coins will be great PR exercises, but I highly doubt any real changes will be made any time soon.

Capturing The Liquidity Premium


The daily 100x Bitcoin future, XBT24H, is BitMEX’s most liquid product. The next most liquid product is the weekly 50x Bitcoin future, XBT7D. XBT24H exhibits a liquidity premium. The positive USD gamma associated with being long a quanto contract means that XBT24H usually trades at a higher annualised basis than XBT7D. Traders who wish to capture this liquidity premium while remaining price neutral should sell XBT24H and buy XBT7D.

Trade Mechanics:

XBT24H usually trades at the highest premium during the first 6 hours of trading. XBT7D re-lists each Friday at 12:00 GMT. From 12:00 GMT to 18:00 GMT buy XBT7D and sell XBT24H in equal quantities. Each day when XBT24H expires, re-sell the same number of XBT24H contracts plus an additional amount to hedge the profit made. Each day you will earn the premium of XBT24H over spot. XBT7D also trades at a premium, and each day you will lose money as XBT7D decays to the spot price.

The compounded return from selling XBT24H each day will be higher than the loss from XBT7D after 7 days. Using data from November 27th to December 4th, I calculated the net return from selling XBT24H each day over the first six hours, vs. the loss experienced by buying XBT7D on November 27th and holding until the December 4th expiry. The compounded return earned by selling XBT24H was 3.74%. The XBT7D loss was 1.74%, for a net return of 2%. Depending on the amount of leverage used, the return on equity will be much higher. Using 10x leverage on both legs equals a 10% return on equity per week. Annualised that’s 520% without taking any price risk.

Daily Return XBT24H
Fri 0.86%
Sat 0.20%
Sun 1.08%
Mon 1.11%
Tue -0.02%
Wed 0.35%
Thur 0.11%

For those who prefer not the trade directionally, this is a safer risk adjusted strategy that generates positive returns.

XBT Spot

XBT Spot

$400 was breached momentarily this weekend. Bitcoin on the USD exchanges is now range bound between $390 and $400, and on the CNY exchanges Bitcoin trades slightly above $400.

The price will climb alongside the China premium. FOMO buying has not occurred yet. The slow and steady rally is healthy. Against a positive global macro backdrop, Bitcoin will continue climbing to the all important $500.

Trade Recommendations:

BitMEX 100x Daily Futures, XBT24H: Buy XBT24H while spot is $390 to $395, with an $405 upside target.

BitMEX 50x Daily Futures, XBT7D: Buy XBT7D while spot si $390 to $400, with an $410 upside target.

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.