The Breakdown - Is the Chinese Stimulus Walkback Bullish for Bitcoin?

Episode Date: October 11, 2024

Investors have been paying close attention to China's stimulus plans for the past month, but got some cold water thrown on them this week. NLW looks at the implications for crypto and markets more broadly. Unlocking Bitcoin DeFi with ExSat The exSat Network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoins Ideology. The network has partnered with the largest mining pools in the world, major custodians and exchanges, Cefu, Cubolt, Matrixport, Copper, OKX and aims to have over $200M TVL at mainnet launch on the 23rd of October.  Follow exSat’s Twitter to stay up to date @exsatnetwork or visit the testnet exsat.network Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, October 10th, and today we are talking about a Chinese stimulus walkback. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. On Tuesday, top economic planners in China dashed hopes of a large and continued stimulus. At a public briefing, the National Development and Reform Commission largely reiterated plans to boost investment and support the poorest households.

One of the officials said, We are fully confident in achieving the annual economic and social development targets. Substantial new policy was limited to announcing the issuance of ultra-long-term government debt and a general willingness to run fiscal deficits in support of growth targets. Gary Ing, senior economist, and Tixis said, nothing much is new compared to the previous announcements, and the latest commitment to fiscal stimulus looks weaker than market expectations. The front-loading of fiscal spending will only help stabilize growth and will not be enough to engineer a sharper rebound. Now, if you've been paying

attention to the breakdown, you will know that global investors have been watching these moves in China very closely. A large package of stimulus measures had been announced two weeks ago just prior to the beginning of a golden week holiday. Among them was a new vehicle to provide 70 billion in central bank liquidity directly to trading firms. Chinese stocks ripped on that news with the benchmark CSI 300 index surging more than 30%. Tuesday's announcement, or rather the lack of announcement, put a halt to the rally. The CSI 300 plunged more than 5% yesterday following the briefing, and Hong Kong stocks had their worst day since 2008, losing 10%. Alicia Garcia-Herero, Asia-Pacific chief economist at Natixis said, I don't know what the chairman of the NDRC was thinking

with this. Frankly, the more they wait to clarify, the worse it can be because people will realize there's no fiscal side to this stimulus, that it's all monetary, propping up stocks, and so on. and that's quite dangerous. Rotation to China had become the hot trade at the end of September. Foreign investors were betting that policymakers would do whatever it takes to drag the economy out of its slump. As recently as Monday, Goldman Sachs upgraded Chinese stocks and forecast a further 18% upside. The market had been closed for the past week, so this briefing was viewed as setting the tone for the rest of the quarter. The already announced policies were generally

viewed as a good start, but ultimately not enough to address structural problems in China. More than anything, the briefing suggested that authorities are still conservative, and concerned about the risks of doing too much. The bet on Chinese stocks was based on a belief that officials had recognized the need to bring out the stimulus bazooka, and this briefing fell well short of reinforcing that idea. On Thursday in Beijing, the PBOC announced it would start accepting applications from trading firms to tap into central bank liquidity. The facility still stands at 70 billion as previously announced. But a headline is a headline, and the news seems to have put a floor on the Chinese stocks for now. Some analysts suspect that incremental measures are actually by design.

Independent economics journalist Terrick Brooker wrote, Amidst the headlines on Chinese stimulus, I think something needs to be emphasized. Beijing does not want a stock market parabola. They want to stabilize the market, draw on local investors, and drive a positive wealth effect. You can't do that with a parabola. It booms, it busts. Whatever the logic behind the policy, it's pretty clear that Tuesday's drawdown will tamp down on enthusiasm to invest in China.

Banker Frizeer Ali tweeted, so many people were bragging on the no-brainer of going full portfolio into Chinese stocks over the week. Then it all tanked last night. China is a paper economy at this point, retiring workforce for an investment down 30% year-on-year, housing bubble collapse, printed trillions, massive youth unemployment, and household spending non-existent pushing them into deflation. So why are we talking about this on the breakdown other than it's a big-picture power shift kind of issue? Well, one of the big reasons trouble in the Chinese stock market matters for our industry is that it competes for crypto demand.

We've discussed this week, for example, that a lack of momentum for Nvidia and other AI leaders has caused US stock traders to take a second look at micro-strategy. Chinese stockers, play a similar role, competing for liquidity with the crypto market. During the rally, the effect was so prominent that it caused tether to trade at a slight discount in China. Earlier this week, Livia O'Wang, the CEO of Hong Kong-based exchange hashkey said, if the traders are rushing to exchange back into fiat currency, it can be inferred that they are panic buying Chinese stocks. QCP Capital believes the drawdown will force a rotation. In a research note on Tuesday, they wrote, as the Chinese rally wanes, we anticipate capital reallocation back into crypto, reflecting the

industry's growing maturity as an alternative risk on asset. Of course, this is all highly speculative, but it does follow a certain logic. There's clearly an appetite for excessive speculation. With tech stocks trading sideways and the Chinese rally cut off early, Bitcoin could benefit from a hot money rotation. This episode of The Breakdown is brought to you by XAT Network. As regular listeners know, one of the things that I think is really exciting right now is all of the new builder energy around Bitcoin, and XSat Network is a great example of that. Ex-Sat Network utilizes a combined consensus mechanism of POW and POS, enabling miners to earn revenue and stakers to earn Bitcoin yield.

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and unlock Bitcoin Defi with X-Sat. Staying globally themed but moving a little bit closer to crypto. An international crackdown has resulted in criminal charges against four market-making firms. The firms named in the indictment are ZM-Quant, Gottbit, CLS Global, and My Trade, employees and executives at the firms have been arrested across Texas, the UK, and Portugal this week. In addition, a group of five crypto asset promoters have been criminally charged with market manipulation and wire fraud. The major focus of the investigation was a pair of meme coins from late in the last cycle, Saitama and Robot Inu. Saitama reached billions of dollars in market

cap in 2021, although then again I could have made a coin about my mom and it probably would have as well in 2021, but neither coin was particularly prominent. The influencers are all named, but none are particularly recognizable unless you're deep in the D-List meme coin space. The press release from the DOJ referenced numerous related suspects spread across Russia and Vietnam. Acting U.S. attorney Joshua Levy said, This investigation, the first of its kind, identified numerous fraudsters in the cryptocurrency industry. Wash trading has long been outlawed in the financial markets and cryptocurrency is no exception. This conduct has a long history for some of the defendants.

In 2019, the founder of Gotbit conducted an interview with CoinDesk, stating that he was wash trading for at least 30 token projects. When asked why the firm was not registered in any jurisdiction, he responded, the business is not entirely ethical. His services were available for as little as $15,000. During a press release, the SEC mentioned they had referred Gottbit for criminal prosecution over two years ago. Where the story gets really wild, though, is the method of investigation used by the FBI. The agency created a meme coin and company to engage the services of these market makers. The coin was called Next Fund AI and was promoted as an AI investment fund that would pay out 80% of its returns to token holders. It was

launched on Ethereum in late May of this year, and displayed the classic chart pattern of a rug pull, vertical for the first 10 minutes before crashing to zero. To give a sense of scale, the token did around $400,000 in volume at launch and has 372 token holders. The indictment revealed the pricing structure for ZMQuant to paint the chart. They quoted the FBI $800 per month to create volume on a centralized exchange. The same service was $2,500 per month on decentralized exchanges. Law enforcement alleged these marketmakers' bots were still conducting millions in wash trading as recently as last week before they were shut down. Now, crypto Twitter obviously had a keen interest on the FBI revealing what they have been getting up to on chain. Crypto attorney Eric Dylis wrote,

the FBI deployed a vaporware AI token promising 80% ROI in USDT and rugged it on September 18th. What is happening? Lawyer Gabriel Shapiro leaned into conspiracy theory, tweeting, almost all meme coins are made by the FBI NSA CIA agents to entrap CIA FBI NSA agents posing as DGens. Melaides are all government agents and trapping each other constantly. Circular economy of guaranteed spy versus spy employment. Now, I think as you might be able to tell that that was probably fairly tongue-in-cheek. And jokes aside, there's some pretty interesting ramifications to this FBI operation. Coinbase director Connor Grogan tweeted, not sure if the FBI realized this, but they docks their wallets. Shortly after deployment, the wallet that ceded the FBI wallet deployed capital to

multiple other wallets, making dozens of trades. FPI wallets own at least 75% of the token supply from what I can tell. The linked wallets that Connor picked up have recently deposited to Binance, HTX, and a few lesser-known exchanges. Some of the wallets in the cluster also have a ton of meme coin activity dating back to 2021. Without getting too much into it, this looks more like developer wallets linked to the market makers, rather than the FBI conducting a three-year operation on on-chain degeneracy. Perhaps the biggest part of the conversation was about what comes next. Jupiter developer Slorg tweeted, Saita Minu was a pump and dump that ran up to a $7 billion dollar market cap back in 2021. Given that the FBI charged them today, everyone launching pump and dumps

now has until 2027 to enjoy their freedom. Writer Tolks tweeted, Imagine how many meme coins were made by the FBI to trap KOLs for undisclosed shilling. Some of you might be absolutely cooked. Indeed, Polymarket is offering a market on whether one prominent influencer will face criminal charges by the end of the year. The odds ticked up substantially yesterday, but still sit only at 10%. A couple more quick ones before we get out of here. Van Eck is expanding into venture investing with their first fee C. fund. The 70-year-old asset management firm has spun off a new entity called Vaneck Ventures. The first fund will be $30 million in size, with around two-thirds of the capital coming from

outside investors. The fund will focus on pre-seed and seed investments across digital assets, fintech and AI. Wyatt Lonergan and Juan Lopez, two former leaders at Circle Ventures will be general partners. Since the parting circle during the summer, Lonagran said, we've been working in stealth as we set up the Vannock Ventures Fund, firm up our thesis, and make our first few investments. Vanek confirmed that four investments have been made already. One of the main focuses will be on stablecoin infrastructure. Lonagren said, The infrastructure is battle-tested and ready.

As an example, stablecoins will settle $24 trillion in volume this year. Therefore, we want to invest in the middleware and applications that enable that volume and capture the most value in the long term. Now, Vanek has been through a big evolution over recent years. The firm was among the first to file for a Bitcoin ETF in 2017 and spun up private liquid token funds in 2022. CEO Jan Vanek said, from pioneering an approach to gold investing in 1968 to recognizing

the disruptive potential of Bitcoin in 2017, embracing a long-term view on transformative opportunities has always been part of our investment philosophy. This fund extends that vision into the early-stage venture space. We look forward to supporting founders of what we believe are some of the most disruptive companies in fintech, those building the future of finance. Lastly, in our satisfying news of the day, Gary Gensler's public appearances seemed to be getting more and more hostile. Yesterday, the SEC chair attended a fireside chat at NYU Law School. The host was SEC Democratic Commissioner Robert Jackson Jr. I'll spare you the usual Gensler talking points, but he was on script as usual.

The more interesting discussion came up when Jackson asked, Is that the way we should oversee cryptocurrency by trying to apply a 1940 Supreme Court decision to this technology? Gensler responded, Look, it's the law of the land and I took an office of oath to do it, but it also protects investors. At the core of the securities laws, there's a basic concept. You all get to decide what you want to invest in.

He went on to make his usual points that disclosure is important in all manner of fields from crypto to AI to green energy. What stood out, as usual, was a complete failure to engage. with the question of what the SEC should be doing in crypto. However, this seems clearly to be a question that's being raised not only in Republican circles, but Democrat circles as well now. Another telling moment stemmed from a question from the audience. The attendee asked Gensler what the value of cryptocurrency would be if it was totally brought within the regulatory perimeter. Gensler waffled through his usual comments about being merit neutral and wanting to allow the market to decide on

value. Then he hit on a really interesting piece of commentary, stating, I did teach this stuff up at MIT and so forth, so I'm just going to say this. These debates literally go back to Plato and Aristotle. This is 3,000 years of history, hundreds of great nations, thousands of nation states, we tend to have one currency per geographic economic state. We even tend not to have bimetalism. Gensler even referenced Gresham's law, the idea that bad money drives out the good. He commented that nations tend to want a single currency, adding, you want one currency unit because it's a store of value, a medium of exchange, a unit of account. It all has tremendous economics of networks. So it's unlikely this stuff

is going to be a currency. It's going to have to show its value through disclosure, through use. The exchange demonstrated to many that Gensler is well aware of all the narratives around Bitcoin and other cryptocurrencies, but chooses to take an extremely narrow view. Rick Tapia, the General Counsel at Digital Ascension Group tweeted, Gensler is once again taking a disappointing anti-crypto stance, now claiming that cryptocurrencies are unlikely to become mainstream payment methods while they are actively being used mainstream. I think to many this felt like a saying the quiet part out loud point,

where Gensler clearly views himself, not as just doing the work of the SEC's mandate, to promote capital formation and to protect investors, but instead to protect the dollar. Anyways, it was an interesting moment, and you got to think that Gensler is going to turn down his schedule at some point here if these things keep getting more and more contentious. Anyways, guys, that is going to do it for today's breakdown. Appreciate you listening as always, and until next time, be safe and take care of each other. Peace.