The Breakdown - The De-Chinafication of Bitcoin

Starting point is 00:00:04 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. The breakdown is sponsored by nexus.io and produced and distributed by CoinDes. What's going on, guys? It is Monday, June 21st, and I grew up by the ocean, and there was an old saying, red sky in morning, sailors take warning, red sky at night, sailors 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 decinification of Bitcoin.

Starting point is 00:00:51 But first, let's do the brief. First on the brief today, Micro Strategy buys another $489 million of Bitcoin. This wasn't a surprise, obviously, but it's still always a little wild to see. Micro Strategy 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 Micro Strategy is on this bet. In the meantime, it's going to be the sort of thing where Sailor 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

Starting point is 00:01:35 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 was cursed to give true prophecies that weren't believed, and wrote, quote, 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. Quote, if you don't know how much leverage is in crypto, you don't know anything about crypto,

Starting point is 00:02:13 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 is the more fundamental macro factor shaping all markets right now, which is confusion around Fed policy. All one needs to do is read Bloomberg's headline piece this morning to see what I mean. quote, Powell heads to Capitol Hill as market churns on Dotshock.

Starting point is 00:02:55 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 than our inflation communication, instead of just blankly dismissing everything as transitory. Expect more of this debate to continue, and as it does, markets to be unwilling to commit much in any one direction or another.

Starting point is 00:03:29 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, quote, China's third largest bank, the Agricultural Bank of China, issued a statement on June 21st,

Starting point is 00:03:55 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. So 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

Starting point is 00:04:35 virtual currency transaction hype. Here's a translated section of an article about the Central Bank's statement from a Chinese publication. Quote, institutions must comprehensively investigate and identify virtual currency exchanges and over-the-counter dealers' 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,

Starting point is 00:05:08 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,

Starting point is 00:05:37 if and how this is different than previous similar announcements or policies. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. Borrow against your digital assets at just 6.9% APR. Earn passive income with yields of up to 12%, and swap between more than 100 market pairs with the instant nexo exchange. Try the NXO wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. That's Nexo.io to get started today. 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.

Starting point is 00:06:30 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 shutdown 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 is 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

Starting point is 00:07:02 Sichuan overnight. Quick reactions. The mining ban appears just as comprehensive as believed. Even hydropowered provinces aren't being spared. Hash rate transition is real and the nature of Bitcoin hash rate will entirely change in the next six to 12 months. I'm formulating a new hypothesis, bans 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 lack support. Either way, MSM narratives will likely ignore climate and decentralization benefit of hash rate migration and focus on perceived risk to Bitcoin or loss of fundamentals, while ignoring the astonishing reality of Bitcoin migrating 50% of its

Starting point is 00:07:45 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.

Starting point is 00:08:09 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.

Starting point is 00:08:32 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 Blocks 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 banks said if a customer

Starting point is 00:09:10 was found with 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 Band-Aid. Kieran Murray tweets, quote, After today, it's very difficult to see any news out of China that could be damaging for

Starting point is 00:09:50 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 Band-Aid rip, but it's almost off. Pomp puts it more crisply. Historians will write that China had a majority of hash rate within their geographic borders, yet they made decisions that push that hash rate 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 weren't bad enough, China's plan for a national state digital currency is similar to North Korea's internal internet. As we've discussed over and over again, open systems beat closed systems. The Chinese approach of banning an

Starting point is 00:10:28 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, quote, China's Bitcoin ban is short-term negative, long-term positive. One thing that I think we can firmly say is that Peter Thiel's theory from April that Bitcoin was basically a Chinese weapon at this point was totally incorrect. Nira Zagrawal from Coin Center wrote, quote, I have some bad news for the people who spent the last few years going around D.C. telling policymakers that

Starting point is 00:11:06 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-chinification of Bitcoin. When El Salvador made its Bitcoin bet, I called it an interesting piece of evidence around the type of leader Naib Buckeli ultimately wants

Starting point is 00:11:49 to decide to be. Bitcoin is, of course, not controllable by authoritarian. 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 two, how ultimately the wider market views this dec Chinification. In the short term, there is a trade-the-fud thing happening because of structural weakness in the markets.

Starting point is 00:12:22 But 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 Yunn from CNBC reporting that 6,600 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.

The Breakdown - The De-Chinafication of Bitcoin

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.