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Comeback. (Any views expressed in the below are… | by Arthur Hayes | Oct, 2022

  • Inverse Futures Contracts — ICBIT, which hailed from a Russian yacht in the Caribbean.
  • Socialised Loss Derivatives Margining System — 796, Huobi, OKCoin, and BTC China, hailing from GuangZhou, Beijing, Beijing, and Shanghai, respectively (all Greater China).
  • Margin Trading — Bitfinex, which hails from Hong Kong — (Greater China).
  • Stablecoins (USDT) — Bitfinex, which hails from Hong Kong (Greater China).
  • Perpetual Swap — BitMEX, which started in Hong Kong (Greater China).
  • Options — Deribit, which hails from the Netherlands.
  • Current Largest Exchange Volume — Binance, which got its start in Greater China.

Up until the 16th century, China was the world’s largest economy. A variety of factors — which I won’t get into because they aren’t important to this essay — contributed to its fall in economic relevance and technological innovation vs. Western Europe. But regardless of China’s economic status, Hong Kong (a deepwater port at the mouth of the Pearl River Delta) has always been China’s window to the world. Whether it was shipping, capital, or narcotics supplied by the biggest drug dealer in human history (the British Crown,) Hong Kong has historically been where China and the West met.

As crypto investors, we care about Hong Kong’s ability to facilitate Chinese capital’s needs. Whether it is in retail sales or capital flows, it is the ordinary wealthy Chinese people that power the Hong Kong economy. I’ll share a few charts in just a bit that demonstrate the power of the Chinese consumer and investor. And the reason we care about the Chinese consumer — rather than just Chinese investors — is because I believe that Chinese investors and consumers are one and the same.

Shortly before COVID, protests raged throughout the city. I remember walking down the escalator to Wyndham Street to have dinner one night, only to be greeted on one side by the police in riot gear, and on the other side by students in gas masks banging drums. I promptly changed my dinner plans to an establishment further up the mountain.

  1. The US Treasury Department publishes a monthly dataset that details the holdings of foreign countries. This field is the amount China’s holdings has dropped by year-to-date.
  2. The Chinese government publishes their Exports minus Imports in USD terms every month. This field is the amount of dollars China has earned abroad year-to-date.
  3. If China was following the traditional recycling playbook to the letter, it would buy US Treasury bonds in the same amount as its earnings from trading internationally. However, this field details the amount of Treasuries that China should have bought under the recycling playbook, but didn’t.

China has a substantial amount of dollars sloshing around internationally. With Treasuries off the table, the question becomes, what do they do with all of this capital?

Reduce the Dollar Long

Bitcoin is outside of the control of any nation, making it a much better financial asset to recycle surplus dollars into than US Treasuries. This of course assumes the primary concern of the buyer is to avoid being subject to arbitrary confiscation of their capital. (If that isn’t the buyer’s chief concern, Treasuries are actually the superior choice — Bitcoin doesn’t offer a yield and is extremely volatile compared to US Treasuries.)

  1. Sell CNY
  2. Buy USD
  3. Sell USD
  4. Buy BTC
  1. Buy CNY
  2. Sell USD

Revitalise Hong Kong

For better or for worse, China is where it is today because it embraces technology, and the Chinese government knows it. The amount of control Beijing has internally is only possible because they nurture, develop, and implement the newest technologies.

Hong Kong is saying all the right things. Now we need to see them in action. What will the final shape be of Hong Kong’s attempt to re-crown itself the premier crypto capital hub? I don’t know– but I’m hopeful.

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