Bitcoin's Potential Role In The Current Global Instability

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To investors,

The global instability we have been discussing for the last few weeks appears to be getting worse. President Trump recently threatened another 10% tariff on over $300 billion of Chinese goods, which has led the Chinese government to continue weakening the yuan even further in response. The Chinese currency broke a key resistance of 7 yuan per US dollar late last night, which is the weakest level since 2008, and the government asked all state-owned corporations to suspend imports of agricultural products from the United States. (note: Trump continues to criticize China for allegedly failing to keep promises to buy more US crops)

For the purposes of our conversation, the failure of the yuan has multiple implications, including the increased likelihood of the Hong Kong dollar’s failure, a potential for Bitcoin to benefit from significant capital flight, and a “great awakening” among citizens around the world.

The drop in value of the yuan by the Chinese government was not a complete surprise, but the currency is being devalued faster than most anticipated.

Let’s looks at the implications of this one by one. First, investors like Kyle Bass have long been making the argument that the Chinese yuan and the Hong Kong dollar held systematic risks that were misunderstood or ignored by most people. With the collapse of the yuan, Bass was quick to point out that the HK dollar should quickly follow. To better understand his argument on these issues, I highly suggest you listen to this podcast he and I recorded in July on many of these topics.

Next, the correlation between global capital flows and Bitcoin price movements is nothing new. In his May 31st update to investors, Adamant Capital’s Tuur Demeester wrote: 

“On May 5th, the Chinese Yuan started weakening against the US dollar, and 13 days later traded 2.5% lower — a huge move in forex terms. Remarkably, that was also the week that bitcoin broke above the resistance of $6,500. In short, there’s a significant chance that in fact it was Chinese investors who pushed bitcoin in bull market territory this year.   

Is there historical evidence to back up this claim? In our opinion yes. Capital controls, inflation and capital flight have always proved to be significant medium-term drivers of the bitcoin price, as early as the 2013 Cyprus banking crisis. In early 2016, global macro trader Mark Hart mentioned Chinese capital flight as one of the main reasons he was long bitcoin. And indeed, when from winter 2015 to winter 2016 the yuan weakened by 10%, there was ample evidence of significant price premiums on Chinese bitcoin exchanges to validate that bitcoin was used by Chinese investors as a portfolio hedge or as a vehicle to move money out of the country. In fact, the record outflows of private capital out of China in late 2015 almost perfectly coincided with the third largest move in the Relative Unrealized P&L for bitcoin.”

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If this trade war continues, it wouldn’t be surprising to see capital flight accelerate from China and Hong Kong in the short to medium term. There are more than $27 trillion in Chinese deposits alone, yet the total crypto market cap barely eclipses $300 billion. If only 1% of Chinese deposits moved into Bitcoin to facilitate capital flight, the crypto market cap would almost double in size — incredible to think the size difference between these two markets.

Not everyone thinks that the weak yuan, and the subsequent potential capital outflows, are a permanent thing though. Selina Wang, a Bloomberg reporter based in China, recently wrote:

“On the China Market Open show today, we interviewed a number of guests about Trump's abrupt threat to slap 10% tariffs on another $300 billion worth of goods and the reverberations across the markets. The yuan blew past 7 per dollar for the first time since 2008, amid speculation that Beijing is allowing currency depreciation to counter Trump's latest threat.

Tongli Han, chief investment officer at Deepblue Global Investment, told me on Bloomberg TV that he expects the yuan to strengthen in the long run, as China tries to avoid capital outflows. He's also betting that the U.S. stock market will crash and a recession is coming next year after the elections.”

Whether the weak yuan is temporary or not, we have seen Bitcoin benefit in numerous countries where the sovereign currency is devaluing / failing. Take Venezuela for example — the bolivar has seen as much as 10,000,000% inflation recently and bitcoin volumes continue to hit new all-time highs on an almost weekly basis.

Other countries that have experienced similar increases in Bitcoin volumes that appear to correlate with sovereign currency issues include Iran, Argentina, and Zimbabwe. Obviously, none of these countries are remotely as developed as China and/or Hong Kong.

We also saw Bitcoin benefit during recent moments of global instability. In May of this year, Bitcoin rose ~55% while threats of tariffs and trade war nonsense raged on. The digital currency also turned inversely correlated to the S&P (-0.9%) and gold (-0.8%) during the same month.

With that said, we are watching one of the most interesting experiments in history play out. Individuals have been incentivized to move their wealth into other assets, whether real assets or foreign currencies, whenever they have historically experienced issues with their default sovereign currency. Recently, the Bitcoin volumes in the few countries mentioned would suggest that those individuals are electing to trust a cryptographically secure, non-sovereign currency with the role of storing their wealth, rather than moving to other real assets or foreign currencies.

To be clear, I am not making the claim that everyone is doing this, or that it is even a large percentage of an affected population. In fact, I think a small percentage of people are doing this, but the important part is that some people, regardless of the size percentage wise, are choosing to do this for the first time in history.

This is worth paying attention to for two reasons:

  1. As I mentioned, if only 1% of Chinese deposits moved into Bitcoin or other cryptocurrencies, the entire market cap would almost double in size. China (and Hong Kong) is a drastically larger economy and currency than the areas that we have been previously watching suffer from inflation or devaluation.

  2. Individuals have never really had the option of storing their wealth in a non-sovereign currency. That all changed in 2009 with the creation of Bitcoin. But Bitcoin has only existed in a bull market, so there has been a lack of macro drivers to push people to seek out alternative stores of value for their wealth. The ongoing trade war, and the related currency manipulations, are an interesting potential catalyst for capital inflows to a digital currency that is not run by any one country and can not be manipulated by a single country either.

Ultimately, no one knows what is going to happen in the future. As investors, we are tasked with sifting through mountains of information, identifying potential scenarios, assigning probabilities to each scenario, and then making educated bets on which risk-reward opportunities appear to be most attractive.

The most interesting scenario in my personal opinion is that larger percentages of the human population begin electing to store their wealth in software-based currencies. Quite literally, they decide to trust the governance of an algorithm over the governance of humans. As I have previously talked about in other letters, humans already trust algorithms to move around physically (Google Maps), determine the music they listen to (Spotify/Apple Music), filter the information they receive (Facebook/Twitter), and answer any questions they may have (Google/Siri).

It makes sense to me that algorithms will also be trusted to govern our currencies as well. The big question now is whether the current trade wars are a big enough threat to the way of life for individuals to begin making a conscious decision to move their wealth.

These are interesting times. The complexities are abundant, but one thing is clear — the world is changing rapidly and I can’t believe we are alive to watch this all play out.

-Pomp


The “Off The Chain” podcast has been downloaded in every country in the world, with more than 1,500,000 combined downloads. You can listen to the latest episode with Kyle Bass, Founder & CIO at Hayman Capital Management here: Click here for Off The Chain podcast


THE RUNDOWN:

Walmart Seeks to Patent a Way for Using Digital Cryptocurrency: Walmart Inc. appears be pondering whether to test waters in the world of cryptocurrencies, following the steps of Facebook Inc. The retailing giant applied to patent a way to use a digital coin tied to a traditional fiat currency, which could allow for cheaper and faster transactions as well as loyalty features, according to a filing published Aug. 1 by the U.S. Patent and Trademark Office. Read more.

Bitcoin.com to Launch an Exchange: Bitcoin.com has announced it will launch a crypto exchange called Exchange.Bitcoin.com. This is the latest addition to a suite of products Bitcoin.com provides beyond their news service. The company has also developed a crypto casino, a wallet, and a P2P bitcoin cash exchange, aimed at furthering the utility of the forked alternative to bitcoin. “While our company thinks the bitcoin cash network will be adopted by the masses worldwide, we also think it’s important to promote free markets and choice,” the company said in a statement. Read more.

Roger Ver Steps Into Chairman Role as Bitcoin.com Adds New CEO: Stefan Rust has replaced Roger Ver as CEO of Bitcoin.com. Longtime CEO and Bitcoin Cash leader Ver is now the Executive Chairman of Bitcoin.com, according to a release. Ver was CEO since 2016. Rust joined Bitcoin.com six months prior to his appointment as Global Head of Corporate and Business Development. Before joining the website, Rust founded Exicon, a marketing automation platform. Ver and Rust intend to co-lead Bitcoin.com. Typically, an executive chairman operate in an oversight role for financials and company direction. Information on the former CEO’s new role in the company has not been disclosed, however. Read more.

The CFTC Fintech Chief Who Oversaw Early Blockchain Trials Is Leaving: The director of the U.S. Commodity Futures Trading Commission’s experimental fintech initiative will step down. LabCFTC’s director and chief innovation officer, Daniel Gorfine, will leave his post to pursue a job in the private sector. In his two years with the agency, Gorfine spearheaded the LabCFTC project, released educational materials on virtual currencies and launched an accelerator program to trial internal blockchain applications. The educational primers published by LabCFTC discussed the history, characteristics, case studies and potential use-cases of blockchain and smart-contract technology, rather than set official policy. Read more.

Nexo Launches a Debit Card That Lets You Not Spend Your Crypto: Arrington XRP Capital-backed financial startup Nexo has unveiled a crypto card with a line of credit backed by the user’s crypto holdings. Nexo partnered with an unnamed intermediary to issue the card, which offers a way for users to “spend the value of their crypto without actually spending it,” said firm partner Antoni Trenchev. Unlike other crypto credit cards like TenX and Crypterium that convert cryptocurrencies to fiat for every transaction, Nexo collateralizes users’ crypto and supplies them with a fiat loan. Since its founding, the startup has extended more than $700 million in crypto-collateralized loans to over 200,000 clients. Now, the loans can be used to make purchases at merchants that accept MasterCard, through a co-branding. Read more.


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LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE


Anthony Scaramucci is the founder of SkyBridge and the former White House Director of Communications. He is one of the most well-known people in finance, but no one was aware of his current thoughts on Bitcoin and cryptocurrencies. I found him to be intelligent, thoughtful, kind, well-versed in history, and open to new ideas. This is a must listen episode so make sure you take time to digest this one!

In this conversation, Anthony and I discuss:

  • The macro economy

  • The history of money

  • The current structural issues in America

  • What he took away from his time in the White House

  • Why he thinks Bitcoin could be interesting

I really enjoyed this conversation with Anthony. Hopefully you enjoy it too.

LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE


Here are my tweets from yesterday:


Interested in crypto research? Look no further. The premier research firm in the space, Delphi Digital, has two subscription offerings for individuals and institutions alike. Take a look at their Bitcoin and Ethereum reports to get a taste of their analysis. [Click here]


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Nothing in this email is intended to serve as financial advice. Do your own research.