The Breakdown - It Wouldn't Be A Bitcoin Cycle Without a China Ban Rumor

Starting point is 00:00:00 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 Monday, August 11th, and today, for the first time in a while, we're asking if China is banning crypto again. 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. All right, friends, we have an old narrative resurfacing here, but before we do, we got to talk a little bit about the price because while the U.S. was sleeping, Bitcoin was ripping. On Sunday night at 9 p.m. on the East Coast, Bitcoin took off, gaining 2.3% over 2 hours.

Starting point is 00:00:55 The price at midnight was $122,000 in change, so Bitcoin began the week in striking distance of a new all-time high. Now, as I record, Bitcoin is trading at around 190. So it's backed off a little bit, but still pretty interesting. The big jump occurred a few hours into the Sunday night session at the CME, so it looks like institutional investors getting positioned for a big week ahead. This weekend's price movement has also left a large CME gap between 117,500 and 119,000. Over 90% of these gaps have been filled, but it doesn't always happen immediately.

Starting point is 00:01:27 Reporting from the middle of the night could only really point to Trump's executive order, allowing Bitcoin to be added to 401Ks is the proximate catalyst. Narrative follows price, so I'm sure we'll have additional big brain takes to come, but honestly, it's difficult to find a single, clear reason that Bitcoin was taking off on a Sunday night. The one guess that some people had was summed up by crypto analyst Noel Atchison, who tweeted, Bitcoin jumped on the Hong Kong open. Coincidence, perhaps?

Starting point is 00:01:50 Which I think perfectly gets us into the question of the moment, which is, are we getting another crypto ban in China? Last week, the news aggregators went into overdrive, declaring the base Beijing was once again banning crypto. The tweet that echoed across Twitter from investing.com declared in all caps, China has officially banned cryptocurrency trading, mining, and related services, citing financial risks, capital flight concerns, and environmental impacts. Now, China has, in fact, banned crypto in various capacities a handful of times over the past decade. The most recent and by far the most impactful was in 2021. During the middle of the bull run, Beijing banned crypto

Starting point is 00:02:26 trading and mining. Authorities seemed to follow through with enforcement, driving a huge portion Bitcoin mining operations out of China. Equipment was largely relocated to Kazakhstan on the one hand and Texas on the other. This was also the era that cemented Binance's strategy of having no fixed address. Now, for many, it wasn't exactly clear than how much further Beijing could actually go to ban crypto, and as it turns out, the report didn't have a solid source and was pretty misleading. In other words, there doesn't seem to be any further crypto bans in China. What's actually happening is more interesting, with Beijing now seemingly concerned over growing crypto adoption out of Hong Kong.

Starting point is 00:03:01 Over the past year, Hong Kong has been putting together a crypto regulatory regime. The city was once a dominant global crypto hub, and policymakers wanted to compete in that sphere once again. Now, this was all happening with the tacit approval of Beijing. CCP officials reportedly attended crypto conferences in Hong Kong and were quietly supportive of using the city as a test case. Now, however, with regulations coming into effect, officials appear to be nervous. Bloomberg reports that late last month, financial regulators began to crack down on

Starting point is 00:03:28 brokerages and think tanks publishing research. They were specifically concerned, apparently, about research that promoted or discussed stablecoins, and ordered analysts to knock it off. Hong Kong's stablecoin legislation was passed in May, allowing the license application process to begin this month. Regulators have already released a handful of licenses to issue stablecoins starting from next year. The licenses allow stablecoins pegged to any fiat currency, meaning there are really two big implications. First, these tokens could become one of the most readily available versions of the Chinese Yuan outside of China. Secondly, this would make U.S. dollars much more available to enfranchise Chinese nationals

Starting point is 00:04:03 that can access markets in Hong Kong. At a press conference on Tuesday, Hong Kong Monetary Authority officials said, We have been quite concerned about market speculation and exuberance. What they're referring to, apparently, is that shares of several firms involved in stable coins have skyrocketed in recent weeks. Paul Tang, the director of the Hong Kong Money Service Operators Association, said, the HKMA's priority is stability and control at launch, so initial programs are expected to focus on business to business applications limiting their initial adoption. Still, that B2B application has the

Starting point is 00:04:32 potential to loosen Beijing's grip on monetary control. Chen Lin, the director of the Center for Financial Innovation and Development at the University of Hong Kong, said that Chinese state-owned enterprises have, quote, become quite interested in stable coins and related topics. Only one of the four dominant state-owned banks on the mainland has been granted a license from the HKMA so far. Chinese authorities have issued a string of consumer protection warnings, meanwhile, after a rise of scam investments purporting to be stable coin issuers, suggesting that there is a lot of retail excitement around the new regulations. Christopher Wong, a Singapore-based currency strategist at oversee Chinese banking corps, said, Chinese policymakers don't favor too much fanfare in some

Starting point is 00:05:08 topics just to avoid a herd rush to any particular asset class. There's still a worry that not everyone knows adequately about crypto, and policymakers being pragmatic, don't want a herd mentality when investors buy into something that they do not know what the risks are. For now, it looks like the officials on the mainland are only issuing warnings, stopping short of interfering with Hong Kong policy. The People's Bank of China has remained silent on the issue. However, reports suggest that officials are being briefed by experts on stable coins and considering their next move.

Starting point is 00:05:37 One participant in the briefing said that their key takeaway was that, quote, any stable coin project implemented in China must be compatible with the country-specific national conditions. They added that central bank officials were stressing the need to protect against capital outflows. Rebecca Lau, the CEO of blockchain infrastructure company Saga commented, this is not technology that can be centrally controlled. When they invest in this technology, it will be taken to places that they do not like. At the same time, the PBOC is still considering how to best internationalize the Chinese Yuan. All told, this is an oblique set of reports, to put it mildly, coming out of China. It seems the actual story is that Chinese officials understand

Starting point is 00:06:13 that they need to allow stable coin issuers in Hong Kong in order to compete with U.S. rivals, but they also seem concerned about the potential ramifications. Stablecoin expert Austin Campbell tweeted, The real answer is that China is experiencing what I have been warning people about for years. Stable coins will destroy currency controls and greatly impair the ability of regimes to lock their people in and then burn the fiscal house down. But differently, do you want your money trapped in China in local currency? Andrew Lunardi, the head of growth at Immutable, wrote,

Starting point is 00:06:40 over 90% of stable coins are denominated in USD. China will be forced into issuing a stable coin if they have any hope of challenging challenging U.S. dollar hegemony. At this stage, none of this is moving particularly fast, and news aggregators on Twitter are getting way ahead of the story, but there does appear to be a shift underway in Beijing. Policymakers seem to understand that U.S. dollar stable coins are coming and that they need to have a plan for their arrival. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for

Starting point is 00:07:15 over a decade now and offer over 20 different crypto investment products, ranging from single asset to diversified to thematic exposure to crypto and the broader crypto industry. They have long been innovators at the intersection of tradfai and crypto, and one of the benefits for a lot of us is that Grayscale products are available right through your existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visitgrayscale.com. scale.com to explore their full suite of crypto investment products and invest in your share of the future. Next up, we move back over to the U.S., where White House Crypto Council Chair Bo Hines will

Starting point is 00:07:58 step down from his role to return to the private sector. Hines confirmed the reports on Saturday tweeting, serving in President Trump's administration and working alongside our brilliant AI and crypto czar David Sacks has been the honor of a lifetime. Together we have positioned America as the crypto capital of the world. I'm deeply grateful to the industry for its unwavering support. I love this community and all we've built together. As I return to the private sector, I look forward to continuing my support for the crypto ecosystem as it thrives here in the United States. A successor has not been named yet, but journalist Eleanor Tarratt suggests that Heinz deputy director Patrick Witt will likely step into the role. Alongside being a senior official on the Crypto Council, Witt is also the acting

Starting point is 00:08:34 director of the Office of Strategic Capital at the Department of Defense, a Pentagon office that invests in emerging technologies. Now, it's difficult to read too much into this reshuffling, as neither Hines nor Witt have deep backgrounds in policy. Hines was appointed to the role after failed congressional runs in 22 and 24, while Witt played a minor role in the previous Trump administration, serving as the deputy chief of staff for the U.S. Office of Personnel Management. Neither Witt nor Hines have any history of working in the crypto industry. As for where we stand with the Crypto Council, it is something of a crossroads moment. The Council delivered on their major mandate for the first year of the administration last month, publishing the White House

Starting point is 00:09:08 Cryptopolicy report. At the same time, the Bitcoin's strategic reserve appears to be in limbo. We've had no further reporting on what's happening behind the scenes, with Heinz simply stating that the work is ongoing and that, quote, people will be very pleased with the direction we go in. The simplest explanation is that Heinz is moving on after completing the bulk of the work he was hired to do. His major role was to act as an industry go between attending meetings and fielding requests as the administration's crypto policy was assembled. The industry seemed pleased with his work, balancing the demands of the various factions. In fact, there was an outpouring of thanks and the replies, with Brian Morganstern, the head of policy at Riot Platforms tweeting,

Starting point is 00:09:41 great work, Bo, you had a bias towards action and dealt with industry and interagency personalities with respect. You accomplished a great deal in a short time. You should be proud of your service. Next up, a fun little one, the Harvard Endowment, has added a gigantic Bitcoin position. The fund disclosed the purchase of $116 million in BlackRock's Bitcoin ETF on Friday. The Ibit position is now the fund's fifth largest individual allocation. For some reference, they own more Bitcoin then, for example, they do Google stock. Their largest individual position at the moment is 310 million worth of Microsoft shares. This investment means the $53 billion endowment now has a 0.2% allocation to Bitcoin.

Starting point is 00:10:16 Not much in percentage terms, but still a hugely influential position. Brian Kubellis, the chief strategy officer at OnRamp Bitcoin, commented that the 0.2% allocation is roughly Bitcoin's share of the global asset landscape, adding, they're basically neutral, off zero no longer short Bitcoin. What happens when every endowment gets neutral, then overweight? In addition to their Bitcoin purchase, the fund also added a new position in gold, purchasing $117 million worth of the gold ETF. The Harvard Crimson published a long write-up about the strategy change, but was unable to get comment from the fund's manager. Instead, they published

Starting point is 00:10:49 a comment from Rutgers Business School Professor John M. Longo, which stated, since the money supply has expanded dramatically around the world, especially since the pandemic, some investors are looking at gold in cryptocurrencies as a store of value. Now, primarily this is about a sea change for professional asset management. The large university and endowment, are part of setting the tone for which asset classes are investable. The other Ivy League endowment to purchase Bitcoin is Brown, who doubled their existing stake to $13 million last quarter, bringing them to a 0.2% allocation as well. Now, Harvard's fund is eight times the size of Browns and has far greater stature as the largest university endowment in the U.S. This purchase then

Starting point is 00:11:23 signals to the rest of the endowment sector that not only is Bitcoin a reasonable investment to make, but it's appropriate to buy in size. Many referred to articles from 2018, reporting on comments from Harvard economist Ken Rogoff. Back then, when Bitcoin was trading at around 11,000, Rogoff said, I don't think it's going to zero because I think there's going to be rogue nations that will still accept it, but I would see $100 as being more likely than $100,000 10 years from now. Harvard Business School graduate and CEO of Botanics, William Schro wrote, I was the only one who wanted to buy more Bitcoin three years ago in my class when we discussed micro-stratage's treasury strategy. Now Harvard itself bought $117 million. Everyone buys Bitcoin

Starting point is 00:11:59 at the price they deserve. This was referring to a 2022 class for CFO training, where students were asked if they should short micro-strategy at the bottom of the bear market. And if you're wondering about Rogoff, the professor published a book on the history of the dollar and why its position is far from guaranteed earlier this year. He still hasn't purchased Bitcoin and currently believes, quote, it's not infinitely valuable because it can't be real money, but it's also not worthless, because Bitcoin and more precisely Bitcoin derivatives are very useful in the underground economy. So while Rogoff will take a little bit more convincing, Harvard's purchase is likely to drive a lot

Starting point is 00:12:29 of institutions to rethink their priors. Pax B tweeted, In Normiland, Ivy League universities are the pinnacle of intellectual authority. Now that Harvard at Brown are actively buying Bitcoin, more Normies will ask the question, why? Every day more people will try to understand. More Bitcoiners shall be born. Now, speaking of institutions, obviously institutional adoption has been one of the largest narratives this cycle, and some expect that narrative will continue to dominate into the end of the year. Arthur Azizov, the founder of B2 Ventures, a private alliance of crypto services in fintechs argued that the banks are coming. He suggests it will only be a matter of months before we see

Starting point is 00:13:02 the first banks issuing stable coins and fully embracing crypto services. He added, Banks have a substantial user base. They already have their own clients. Those clients are loyal to the banks, and for them to implement crypto into their operations will be relatively easy. Aside from the banks offering crypto to their customers, it looks like institutional investors still have a lot of Bitcoin buying to do. The latest edition of the Bank of America, Global Fund Managers survey found that 75% of funds still have zero Bitcoin exposure. This survey captures family offices, mutual funds, and hedge funds, so a lot of these entities don't have a mandate to buy Bitcoin. But for those that do, the allocation is still pretty conservative.

Starting point is 00:13:37 6% of respondents were out a 2% allocation, another 2% were out of 4% allocation, and only 1% had allocated 8% or more of their fund. Callum Thomas, the head of research at Top Down charts, wrote, that 75% of fund managers have no Bitcoin and crypto allocation is not surprising, but 41% not having any gold allocation raises the eyebrows. DLDR, the structural allocation to hard assets is still severely underweight, given that gold and Bitcoin are both outperforming the NASDAQ so far this year. Interesting stuff in this ever-expanding landscape, but for now, that is going to do it for today's breakdown.

Starting point is 00:14:07 Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - It Wouldn't Be A Bitcoin Cycle Without a China Ban Rumor

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