The De-Chinafication of Bitcoin

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On this episode of “The Breakdown,” NLW takes a brief look at the most recent crypto news before taking a deeper dive into the latest step in the de-Chinafication of bitcoin.

• MicroStrategy going “all-in” on bitcoin
• Michael Burry’s warnings on Twitter of the “Mother of All Crashes”
• The “dot plot shock” and post-FOMC meeting confusion
• Accelerating China mining ban

While in this in-between state, post-COVID and pre-monetary policy tapering, institutional investors find themselves on diverging and opposing paths. Michael Saylor’s MicroStrategy has gone “all in,” while at the same time investor Michael Burry took to Twitter with warnings of an upcoming “Mother of All Crashes.” Confusion following the Federal Reserve’s FOMC meeting only adds to the contention between investors with contrasting visions for the near future of crypto.

The Central Bank of China has convened a meeting with the major banks to reiterate and tighten previous policies on the prevention of virtual currency transactions in bank accounts. Is this restriction on crypto transactions yet another indication that China is taking a more aggressive stance against bitcoin?

More to this point, Sichuan became the most recent province to crack down on crypto mining. Sichuan, primarily mining with hydropower, seems to diminish previous ban reasoning citing environmental concerns. How far will China go to remove itself from bitcoin, and what does that mean for its citizens and the crypto space as a whole?

See also: China Says Banks Must Block Crypto Transactions; Market Falls

Image credit: remotevfx/iStock/Getty Images Plus

Transcript

What’s going on guys? It is Monday, June 21. I grew up by the ocean and there was an old saying, “red sky and morning sailors take warning, red sky at night, sailor’s delight.” Well, man, did we wake up to a sea of red this morning. Bitcoin trading under $33,000, eth under $2000, the culprit: more news out of China. Today we’re going to discuss the latest step in the larger process of the de-Chinafication of Bitcoin.

But first, let’s do the brief. First on the brief today, MicroStrategy buys another $489 million of bitcoin. This wasn’t a surprise, obviously, but it’s still always a little wild to see. MicroStrategy bought another 13,000 or so bitcoins with an average price of $37,617. The total purchase price now across all 105,085 bitcoin they hold was $26,080. I think there needs to be a new word for all-in to describe just how all-in MicroStrategy is on this bet. In the meantime, it’s going to be the sort of thing where Saylor either looks like a genius or a madman depending on where we are in the cycle. 

Speaking of geniuses or madmen, Michael Burry, who became famous in “The Big Short” for his bet against the U.S. subprime market, has been on an anti-crypto tirade. He changed his Twitter handle to Cassandra, a reference to the Trojan priestess of Apollo, who is cursed to give true prophecies that weren’t believed, and wrote: “All hype/speculation is doing is drawing in retail before the mother of all crashes. When crypto falls from trillions, or meme stocks fall from tens of billions, Main Street losses will approach the size of countries. History ain’t changed.” Burry argues that the problem with crypto is the same as the problem with every financial crisis. That is to say, leverage: “If you don’t know how much leverage is in crypto, you don’t know anything about crypto, no matter how much else you think you know.” 

On the one hand, this is theoretically the type of guy one would want to listen to around this stuff, right? Certainly the shift in sentiment against leverage seems like a trend that’s picking up steam. On the other hand, a whole lot of other self-proclaimed Cassandras have come and gone while Bitcoin just keeps marching on. 

Third, and finally on today’s brief, the Dot Plot Shock. As you’ll hear, I’ll argue later in this show that nothing about China changes what I think are the more fundamental macro factors shaping all markets right now, which is confusion around Fed policy. All one needs to do is read the Bloomberg headline piece this morning to see what I mean. Quote, “Powell Heads to Capitol Hill as Market Churns on Dot Shock.” Basically, the whole piece is about how the markets were surprised by the FOMC meeting last week and are trying to figure out how a concern around inflation is going to jive with the Fed’s stated intention to continue to support labor markets. 

Brett Ryan, a senior economist at Deutsche Bank Security said: “The reaction to the inflation data was what surprised us. This was Powell acknowledging that we want to be a little bit more balanced in our inflation communication instead of just blindly dismissing everything as transitory.” I expect more of this debate to continue and as it does markets to be unwilling to commit much in any one direction or another. 

With that, let’s move to our main discussion. I joked on Twitter this morning that China has got to win the award for trashing the market the most times with the same piece of news. So, what actually happened? The Agricultural Bank of China, China’s third largest, posted a message on its website reinforcing the previous policy of banks not doing business with crypto companies. This was quickly picked up by people like Colin Wu, who tweeted: “China’s third largest bank, the Agricultural Bank of China, issued a statement on June 21, stating that it prohibits the use of its services for virtual currency transactions such as bitcoin. The statement emphasized that once relevant behaviors are discovered, account transactions will be immediately suspended, customer relationships will be terminated, and relevant departments will be reported.”

Now, the agricultural bank quickly deleted that post. But as it turns out, it was a timing thing, not the mystery and intrigue that people thought at first. We found out a few hours later that the Central Bank of China had convened a meeting with the major banks in China plus Alipay around these issues. That includes the Industrial and Commercial Bank of China, the Agricultural Bank of China, the China Construction Bank, the Postal Savings Bank of China and Alipay on the issue of virtual currency transaction hype. 

Here’s a translated section of an article about the central bank statement from a Chinese publication: “Institutions must comprehensively investigate and identify virtual currency exchanges and over-the-counter dealer’s capital accounts and cut off the payment link for transaction funds in a timely manner. They must analyze the capital transaction characteristics of virtual currency trading hype activities, increase technical input, improve abnormal transaction monitoring models and effectively improve monitoring and identification capabilities. Improve internal working mechanisms, clarify the division of labor compact responsibilities and ensure that relevant monitoring and handling measures are in place. Participating organizations stated that they will attach great importance to this work and in accordance with the relevant requirements of the People’s Bank of China will not carry out or participate in virtual currency related business activities, further increase the investigation and disposal efforts and adopt strict measures to resolutely cut off virtual currency trading hype activities.”

Since this all happened early this morning East Coast time, the debate on Twitter has been raging about first, if and how this is different than previous similar announcements or policies.

As you can tell from my joke above, there’s been a lot of this sort of policy announcement in the past. There was 2014 guidance, 2017 guidance and then guidance a couple months ago which was really just a reiteration of the 2017 policy. Then again, in those last couple months, China has clearly taken a more aggressive stance against Bitcoin and crypto in general. I’m referring, of course, to the mining ban. Since the Vice Premier spoke about a mining ban, mining has been targeted for shut down in four provinces, while three of them are heavily coal powered for mining, the most recent, Sichuan, has been primarily mining with their abundant hydroelectric power. The fact that China’s going after hydro mining as well suggests to many that the ban is on the extensive and serious side. Nick Carter tweeted about this over the weekend, saying “Some mining farms went down in Sichuan overnight, quick reactions: the mining ban appears just as comprehensive as believed, even hydro power provinces aren’t being spared. Hashrate transition is real and the nature of Bitcoin hashrate will entirely change in the next six to 12 months.”

I’m formulating a new hypothesis. Bands more connected to anti corruption campaigns, i.e. local officials monetizing grid energy on the black market. The “China Suddenly Cares about Climate” hypothesis doesn’t appear true and the grid integration hypothesis I’ve laid out lacks support. Either way, MSM narratives will likely ignore the climate and decentralization benefit of hashrate migration and focus on perceived risk to Bitcoin or loss of fundamentals, while ignoring the astonishing reality of Bitcoin migrating 50% of its industrial base without difficulty. 

Anyway, I think the key point here is that the context for these announcements is what seems like a very real Bitcoin mining ban. This has made some interpret these announcements in a different light than they might otherwise have. Colin Wu tweets: “This time, the Chinese bank statements are different from the previous ones. One, central bank requested; two, investigated past behavior; three, repeated the government’s anti-mining; four, other banks may follow up.” When someone questioned this on Twitter, he reiterated: “This is different from 2014 in at least three points. First, it clearly shows the requirements of central bank. Second, it requires an investigation of past behavior. And third, it reports to the Chinese when it is found. Anyone who understands Chinese can see the difference.”

Which gets to the second question that’s being debated a lot on Twitter, which is how we should feel about this. Should we be pessimistic, optimistic or something in between? There are a couple ways to look at it. The first is to say, look, this mining ban was more severe than many thought. We don’t know if this is the full extent of the crackdown, or if there is more to come. The Block’s Wolfie Zhao also notes that while previous notices had said that if accounts dealing with OTC cryptos were discovered the banks might shut down those accounts, this time the shutdown is more mandated. Quote, ‘Although various Chinese banks have sent out similar notices before since 2013, the exact wordings in the Monday statement are different in a nuanced way. In all previous notices, Chinese bank said if a customer was found using their banks to make crypto transactions, the banks would retain the rights to close down their accounts, implying they may not necessarily do so.” 

On the other side are those who said that this actually isn’t as severe as it seems. A former People’s Bank of China official wrote: “This announcement is much milder than expected, just closing the account which is consistent with the previous three associations’ caliber. It also shows the upcoming new deal will not be much stricter than in 2013 and should be interpreted as profitable.” There is finally the other point that maybe this is finally just China fully ripping off this bandaid, Ciaran Murray tweets: “After today, it’s very difficult to see any news out of China that could be damaging for crypto, they’ve gone as far as they can short of an outright ban, which means in practice, there’s basically an outright ban. TLDR: it’s been an eight-year long bandaid rip but it’s almost off.” 

Pomp puts it more crisply: “Historians will write that China had a majority of hashrate within their geographic borders, yet they made decisions that pushed that hashrate into more democratic and capitalistic societies. Just as North Korea chose to embrace the internet only for the elites, China is making a similar mistake here. As if that wasn’t bad enough, China’s plan for a nation state digital currency is similar to North Korea’s internal “internet.”  As we have discussed over and over again, open systems beat closed systems. The Chinese approach of banning an open monetary network in pursuit of a tightly controlled monetary system is unlikely to be seen as an advantageous strategic move for their citizens. But just like North Korea, this decision will be helpful in continuing to consolidate power and ensure the longevity of the dictatorship.”

Scaramucci actually summed up what I saw a lot of people on Twitter saying, which was: “China’s Bitcoin ban is short-term negative, long-term positive. One thing that I think we can firmly say is that Peter Theil’s theory from April that Bitcoin was basically a Chinese weapon at this point, was totally incorrect.”

Neeraj Agrawal from Coin Center wrote: “I have some bad news for the people who spent the last few years going around DC telling policymakers that China controls Bitcoin.”

As for me, nothing about this changes my perception of any of the fundamentals about where we are, in an in-between period with a significant lack of clarity, set by the macro reality of being post COVID, or at least vaccine-era COVID, and pre-monetary policy tapering. In that in-between there has been, and is, a barrage of FUD, of which this is part. There’s also a resetting and retesting of the institutional Bitcoin narrative, a new testing of the sovereign Bitcoin adoption and economic empowerment narrative, and within all of that, an important sub theme, the de-Chinafication of Bitcoin. 

When El Salvador made its Bitcoin bet, I called it an interesting piece of evidence around the type of leader Nayib Bukele ultimately wants to decide to be. Bitcoin is, of course, not controllable by authoritarians and viewed on that access, it’s no wonder that China has finally decided to fully rid itself of connection to Bitcoin. This is especially true as it begins to implement its perfect surveillance money. To me, the two real questions to watch are one, how much harsher the CCP gets with people interacting with Bitcoin or crypto at all, and to how ultimately the wider market views this de-Chinafication. In the short term, there is a trade the Fudd thing happening because of structural weakness in the markets. When that resolves to a new China-free normal for Bitcoin, will Bitcoin be viewed as worse off, or better off? We don’t know the answer yet. But when you see things like Eunice Yoon from CNBC reporting that 6600 pounds of bitcoin miners were being airlifted from China to Maryland, it’s hard to see how it ends up a lot worse. Anyways guys as that happens, I’ll of course be watching and I appreciate you hanging out alongside. Until tomorrow. Be safe and take care of each other, peace!