Arthur Hayes Blog: US Regulation Tightens, Hong Kong Welcomes Cryptocurrency – What Does This Mean?

Author: Arthur Hayes; Translated by: GaryMa Wu on Blockchain

Last week, I met with my favorite OG volatility fund manager David Dredge and a few of his colleagues for a cup of coffee. The conversation started with how the Japanese financial market is performing. The general public and companies there have plenty of cash, and inflation is driving them out of low-yield or even zero-yield bank deposits and into the stock and real estate markets.

Then we talked about the state of the cryptocurrency markets, and David asked me, “So, what’s up with the SEC’s investigation into Coinbase and Binance?”

I replied that it was just another example of the legal financial system trying to limit capital leaving the casino. There is a lot of debt to be repaid, and the financial system needs as much liquidity to exit as possible. He nodded in agreement. David likes to refer to the fragile legal financial system as the Sharpe World. (The name comes from the Sharpe Ratio, which most risk managers consider to be a measure of the “risk” level of an investment portfolio — when in fact, it is complete nonsense because it focuses on the probability of possibilities rather than the actual results of investment decisions.)

Then I added that I think what’s happening in the US regarding cryptocurrencies is actually irrelevant because capital is fungible. (I’ll expand on this idea a bit.)

Finally, we talked about the upcoming devaluation of the yuan. The context for this conversation was our skepticism about the continued rise of the residential real estate market in Singapore. Chinese capital doesn’t care how big the property tax is because the yuan is overvalued and the Singapore dollar is undervalued. So even if they have to pay the Singapore government a 60% tax, Chinese capital sees Singapore real estate as a cheap bank account where they can safely store their wealth.

David went on to say that Beijing will eventually devalue the yuan against the yen because Japan is China’s true global export competitor. Since the Bank of Japan (BOJ) continued its money-printing activities (called Yield Curve Control (YCC)), the yen has rapidly depreciated against the US dollar and the yuan, while all other major central banks have raised interest rates and reduced their balance sheets. Since the pandemic, the People’s Bank of China and the Chinese central government have shown relative restraint in printing money, which is why the yuan is so “strong” against the dollar and the yen.

We briefly talked about the fact that China’s exports have started to slow down as the global economy slows. The government will soon need to start creating growth to appease its civilian comrades, which means it’s time for the People’s Bank of China to adjust its monetary policy and weaken the yuan against the yen and the dollar. The depreciation of the yuan will help boost China’s exports and harm the interests of Japanese competitors.

As I walked home, a small idea floated to the surface. The current market situation reminded me of the summer of 2015. The bear market, which began with the Mt. Gox collapse in early 2014, was quite brutal. Volatility and trading volume plummeted; sideways price movements were painful and frustrating. The price of Bitcoin hovered around $200 for a long time. But in August 2015, the People’s Bank of China suddenly sparked renewed interest in Bitcoin in China, and the Bitcoin-to-dollar “shock” devalued. From August to November 2015, the price of Bitcoin doubled, driven by Chinese traders. I believe similar things will happen in 2023.

Since 2021 (when major exchanges in China stopped operating on the mainland), retail capital inflows from China into the cryptocurrency capital market have collapsed. The most influential marginal retail buyers have shifted from China to the United States.

Since 2020, the US government has done some unexpected things in deciding how to distribute stimulus packages. The US government did not give money to the rich who hold financial assets for free, but directly distributed money to everyone – the rich and the poor alike. For the general affluent population (I will describe this group in more detail later in this article, but for now, let’s call them households with annual incomes of $100,000 to $200,000), many of them don’t actually need government assistance because they are not unemployed (because they are white-collar workers who can work from home). They seized this free money and headed straight for the financial markets, enjoying a good time. Meme stocks, cryptocurrencies, NFTs, and other investments are all made by US retail investors. As usual, some of these people have made enough money to buy Lamborghinis and Richard Mille watches, but most have bought at the top of the market and have put themselves in a precarious position due to subsequent rate hikes.

Now, the “TradFi Devil” is causing trouble for some of Satoshi’s faithful, and the market is panicking over the possibility of US retail investors being forced out of the crypto capital markets. I think this concern is misplaced, as if you are prompted to sell because of the influence of US institutions, which may feel compelled to sell or stop providing cryptocurrency services to Americans, then you will be another fool who bought at the market peak and sold at the bottom. Because in Asia, China and Japan are engaged in a silent currency war to boost their export competitiveness, which will drive the world’s second-largest economy to issue credit wildly. This credit issuance, or printing money, will ultimately weaken the renminbi and prompt some wealthy Chinese to transfer capital elsewhere. Given the large number of people who make up China’s wealthy middle class, various hard assets will be pushed higher when they want to “exit”.

I will cover a lot of ground in this article. I will start with a discussion of Sharpe World and why the United States will spare no expense in convincing its citizens that their capital is “safest” in the hands of US financial institutions. Then, I will continue the discussion on how the substitutability of capital means that even if wealthy retail investors in the United States find it difficult or impossible to enter the crypto capital markets, the wealthy in the United States can still easily choose to exit the fiat financial system and buy hard crypto assets. This will ultimately lead me – and hopefully you – to the conclusion that all this panic about what is happening in the “land of the free” is a waste of mental energy. Then, I will introduce the budding currency war between China and Japan and how this will move some Chinese capital into the cryptocurrency realm through the Hong Kong financial market. Finally, I will summarize how I strategically use indiscriminate selling of junk coins as a liquidity entry point into high-confidence “shit projects”.

Sharpe World

David is one of the best and smartest derivatives traders I’ve ever met. Every time we talk, I learn something new about market structure. Most of his banking career has been spent in the Asia-Pacific region. At our last coffee meeting, we exchanged stories about our favorite bars in Jakarta. He lived there in the late 1980s, and I frequently visited in the 2010s.

He has a deep understanding of both Eastern and Western economic institutions. Janet Yellen, the US Treasury Secretary, was one of his university professors. He is a member of multiple central bank advisory committees. Every time we meet, he talks about how he is trying to get the “grown-ups in the room” to understand that their way of looking at risk is completely flawed. As I mentioned earlier, he calls it the Sharpe world.

David asked me, “How do humans manage the risk of death?”

“You don’t do things that you know will definitely kill you–even if the probability of each thing causing death is small–this will prolong your life.”

I think of many simple things people do to extend their lives:

● Don’t smoke

● Don’t drink and drive

● Wear a bicycle helmet

● Buckle up

If you devoutly follow these simple rules, you can completely avoid avoidable deaths and (likely) prolong your life. However, humans do not probabilistically evaluate their own behavior in every action, determine the likelihood of death, and then take risks, betting that they will not be the tail of the distribution. For example, the typical person riding a bicycle does not look at a helmet and say, “That thing is too much of a hassle, if I don’t wear it today, the probability of dying in an accident is a 3-sigma event (<1% chance). I like those odds." But they don't wear a helmet, and that day happens to be a 3-sigma event day, you can't ask God for another life because you faithfully used a log-normal probability decision model with a ±2 sigma, so you took an appropriate risk…you just died.

However, in the “Sharpe world,” financial institutions bet on the probability of death and engage in risky behavior. They do this largely because they know that when they die on average every 5-7 years, central banks and governments will be there to rescue them. The system will always save the residents of the Sharpe world by printing money and devaluing public wealth.

Governments and financial institutions like the Sharpe world because it is full of rules devised by super-smart scholars in “elite universities” that tell them what to do and how to do it. Everyone follows the rules, so when things blow up, no one can say they did anything rude. So when the public has to pay to save another highly regulated financial institution (such as Credit Suisse), they feel it is unfair.

The whole point of this confidence game with currency is to persuade investors to continue buying and holding long-term government bonds – all supported by unproven economic theories disguised as natural laws. As a government, if I can convince my citizens to defer consumption and invest their savings with me long term, then I am a successful, credible state actor. On the other hand, if investors prefer to lend to the government only short term (if at all), then the government is not credible and must resort to unpopular measures (like high taxes) to pay for welfare.

The Sharpe world began imbuing this idea into the minds of top financiers worldwide early on. If you’ve taken any university-level finance courses, then you already know about the efficiency frontier and how certain magical assets called government bonds can both improve returns and lower overall portfolio volatility. Thus, all a portfolio manager has to do is lever up on long-term government bonds, and voila, their returns soar.

US 10-year Treasury Yield

As US and developed market bond yields entered a 40-year bull market, everyone thought they were geniuses. People like Ray Dalio repeatedly became billionaires by going long bonds. Whenever the market would experience turbulence, they’d add more leverage, knowing that authorities would print money to suppress any form of actual price discovery. Dalio called it his Fair Weather Fund.

But now, with inflation and short-term rates rising at the fastest pace in decades, investors seemingly have no reason to hold long-term government bonds. You readers are all part of this story. Your retirement plans are managed by public or private pension funds made up of residents of the Sharpe world. The law requires fund managers to invest most of your savings in long-term government bonds because… well, because the government says so. As inflation rises, these government bonds will be hollowed out, but Sharpe world’s financial institutions dutifully follow the rules and bring their clients’ capital to the slaughterhouse because they need rules! No one in the Sharpe world would ever use their own money to buy long-term government bonds.

David emphasized this repeatedly in his monthly letters. His point is that investors should ditch government bonds for lower volatility and higher returns because in a low-rate environment, these tools no longer have their magic. Instead, investors should hold stocks, gold, cryptocurrencies, and long-term volatility tail hedges.

“Participate and protect,” he said. “My fund provides protection by holding positive convexity derivatives, and as an investor, all you need to do is buy a basket of stocks to participate in the upside.”

This chart shows clearly that holding a basket of US Treasuries (UST) has been a losing proposition both nominally and in real terms over the past decade.

The red line in the chart represents the performance of the standard, most common 60/40 investment portfolio in which 60% is invested in stocks and the remaining 40% is allocated to bonds via investment in the Bloomberg US Total Return Index. The blue line represents a portfolio that maintains the standard 60% stock allocation but allocates the remaining 40% of assets, which would typically be allocated to bonds, 62.5% to stocks and leverages the remaining 37.5% with a LongVol proxy by 2x (i.e., a 75% risk exposure). As you can see, over the past decade, the zero bond allocation blue investment portfolio performed 100% better than the standard 60/40 investment portfolio.

This raises an important question: Why is your fund manager still holding long-term government bonds? The answer is that the structure of the entire statutory financial system forces—or at least strongly implies—that holding government bonds is the fiduciary responsibility of your pension fund manager. If they don’t adhere to this prescription, they may lose their job, which is absolutely the last thing any citizen of the Sharpe world wants to see. Be a mediocre marionette, earn millions of dollars a year, suck your customers dry, and follow the rules.

But to some extent, once you lose enough client money, your clients will demand that you change your strategy. And that’s exactly what central banks around the world are dealing with. Faced with ongoing inflation, bank failures, and strong performances by alternative hard assets such as gold and bitcoin (which will maintain or increase their energy purchasing power over time), how do you convince investors to keep holding government bonds that lose money?

The reality is that there is no compelling reason for investors to stick with such a losing bet. Therefore, the government has to force investors to sell – typically by setting up barriers that prevent capital from exiting the financial system. However, this is a bit tricky for the US, as if it were to impose explicit capital controls that affect cryptocurrencies or any other assets outside the system, the dollar would cease to be the global reserve currency due to the closing of its capital account. However, it appears that the US has realized that if acquiring crypto assets becomes painful and expensive, most of the wealthy and below may choose to give up as their attention spans are short and will be distracted by various social media and entertainment content. Is chasing instant gratification focusing on long-term considerations?

The US is very keen to support the Sharp World as it is the biggest beneficiary of the Sharp World’s existence. American universities are the enlightenment centers of the Sharp World. These people are scattered around the world to ensure that everyone follows a global financial system, which continues to elevate the global financial system that places the dollar, long-term bonds, and major currencies (JP Morgan, Goldman Sachs, Citibank, etc.) on a pedestal. Given that the US stopped making things decades ago and instead decided to export financial engineering, it makes sense for the US to continue to ensure that everyone follows the rules of the Sharp World. When this status quo is threatened, the entire system will unite and take necessary measures to ensure that capital never leaves.

Substitutability

The US population accounts for about 4% of the world’s population. This is just a tiny slice of the pie, but these 4% of people are relatively wealthy compared to everyone else in the world. This is why we as investors care about how this small group of people use their money.

However, this wealth is not evenly distributed among the American public, but is highly concentrated at the top. 70% of the wealth in the US is held by 10% of Americans.

The majority of Americans are penniless and thus disconnected from the global capital market. You might argue that the casinos make a lot of money from poor people. My answer is, although there are desperate gamblers everywhere in the casino who are eager to get rich quick, the real profits and quarterly income are earned in the private rooms upstairs, where the rich dominate. You can’t rely on people playing penny slots to build Las Vegas, Macau, Monaco and other places.

Leaving aside the richest 10%, let’s focus on the next level on the US economic ladder: the mass affluent. As I mentioned earlier, I define this term as all households earning between $100,000 and $200,000 a year, which accounts for about 25% of the national population.

The importance of this group is that they are likely to be engaged in work that can be done at home when the pandemic breaks out. Therefore, when the blockade and economic stimulus checks arrive, they do not need to rely on government relief to make a living. They basically have extra income to spend or invest in anything they like.

It was this group that drove the surge in online brokers like Robinhood. It was this group that first tried crazy trading in cryptocurrencies in 2020 and 2021.

This group drove the market up during the pandemic cryptocurrency boom. However, this group is not actually rich. They may have some savings, but financial intermediaries aimed at the rich will not open accounts for this group. The mass affluent are completely within the scope of retail investors, so their access to cryptocurrency is limited. Coinbase, Kraken, Gemini, Crypto.com, Binance.us, and Robinhood are the main platforms that these retail investors are forced to turn to.

During the last bull market, these exchanges and fintech companies were so highly valued because they catered to the needs of the mass affluent, who had a lot of disposable income to invest, thanks to the support of the US government. However, without the services of these fintech companies aimed at retail investors, the mass affluent would have no easy way to access the global cryptocurrency market.

Let’s do a little thought experiment. Suppose that due to changes in the US regulatory environment, these fintech companies suddenly have to remove most of the cryptocurrencies from their trading lists, or stop offering cryptocurrency trading services altogether (Crypto.com is an example of a recent exit from the US market). This would completely remove the affluent US masses, eliminating a seemingly large pool of funds that would otherwise reinvest in the cryptocurrency market when they feel wealthy. It sounds bad, but it doesn’t matter in practice.

This group initially got involved in cryptocurrency because of government relief. However, the pandemic stimulus check clearly and deeply triggered inflation, and I don’t think monetary authorities will take this action again anytime soon. Instead, the Federal Reserve and the US Treasury will redistribute money for free to the rich through the interest on government bonds and central bank deposit arrangements. This is how they usually stimulate the financial market.

If the government chooses to distribute newly printed currency again in the form of interest, rather than stimulus checks, these funds will not flow to the affluent masses, as they have almost no savings. Instead, these funds will flow directly to the top 10% or even just the top 1% of the richest people in the US, who control most of the country’s wealth. Then, this wealth will flow into various hard assets and value storage methods. Due to their wealth, this 1% of people have a large number of advisors pushing them to adopt various solutions to get as much return as possible. They are the wealthiest bank customers in the world. Although they are Americans, they can access any financial asset traded globally, which means that if this wealthy group believes that Bitcoin and cryptocurrency perform well in an inflationary environment, they can easily buy from dealers who specialize in selling cryptocurrencies to the rich, including Cumberland, NYDig, and over-the-counter trading desks at US-based cryptocurrency exchanges.

What I want to express is that although there is a lot of confusion in the cryptocurrency market, whether the affluent masses and the following people can own or trade Bitcoin or some junk coins is actually completely irrelevant. They are penniless, and the government no longer issues checks. Even if Robinhood still allows them to trade some kind of junk coin, they do not have enough available funds to purchase it. On the other hand, the capital of the rich is more abundant and has substitutability on a global scale-thanks to many intermediaries who provide services to American rich people and are willing to do anything to get generous commissions.

The Real Trade War

China and Japan are the two largest holders of US Treasury bonds. This is because they have adopted similar economic models:

  1. Reducing the ability of labor to organize collectively.
  2. Undervaluing their own currency, so that the increase in labor productivity flows offshore as income denominated in US dollars to industrialists and the state.
  3. The undervalued currency keeps goods cheap so that developed countries can continue to outsource manufacturing to other countries.

This is the simple economic model of “Asia”. At this stage, competition between the main exporting countries in Asia is mainly in terms of price, and price is mainly determined by the value of each country’s currency. Therefore, Chinese and Japanese people are more concerned about the cross-rate between the renminbi and the yen than the cross-rate between their currency and the US dollar.

So who is the most price-competitive country now?

The difference in price between the US dollar and the Japanese yen and the US dollar and the renminbi

From January 1, 2009, to June 12, 2023, I set the exchange rate of the US dollar to the renminbi and the US dollar to the yen at 100. As you can see, during this period, the yen depreciated by about 50% compared to the renminbi, but perhaps the most noteworthy thing is that the price difference between the two has greatly widened since the outbreak of the COVID-19 pandemic.

Below, I have added CNYKRW (China vs. South Korea, white) and CNYEUR (China vs. Germany, yellow) to complete the competition pattern of major exporting countries in the world.

Measured by this simple standard, China is 3% cheaper than South Korea, but 25% more expensive than Germany.

It makes perfect sense that the yen has depreciated so quickly against the renminbi, as the Bank of Japan has been printing more and more money in an attempt to keep the yield on Japanese government bonds at a certain level. This is called yield curve control (YCC). Since the outbreak of COVID-19, China has not engaged in such large-scale money printing or credit issuance to artificially fix bond yields at a certain level. Therefore, it is entirely reasonable that the yen has depreciated by 46% against the renminbi since 2009.

CNYJPY cross rate

Chinese goods are more expensive than Japanese goods. This has had an impact on export volumes, which recent data confirms.

China’s export growth rate

The blockade mainly began in the summer of 2022 – we can see from the chart above that exports collapsed at that time. Then, Beijing gave up overnight and reopened. As people returned to work, exports soared again. This trajectory from depression to prosperity masks the general weakness of global consumption and the weakening of China’s competitiveness in terms of commodity prices.

China’s manufacturing PMI>50 expansion, < 50 contraction

This chart is similar to the export situation.

China is now fully open and should not have any after-effects. However, exports are currently declining year on year. Not optimistic. At the same time, the yen has depreciated significantly against the renminbi. If the global pie is shrinking, China needs to become more competitive to maintain necessary growth and pacify its people. Japan (remember, the two countries’ economic models are identical) is China’s number one competitor. The renminbi must depreciate against the yen to help drive China’s economic growth.

The biggest reason China needs to grow is that they have a large unemployment problem. Specifically, the urban youth unemployment rate exceeds 20%. High school and college graduates do not have enough jobs.

China’s urban youth 15-24 year old unemployment

For those who don’t know, graduating from a Chinese university is a big deal because getting into a university is so difficult. High school students take the so-called “gaokao” exam. If your score is not high enough, you cannot enter university. The education system is more focused on academia and knowledge. Therefore, from primary school onwards, children and parents are completely focused on this exam. In such a large country, how do you evaluate who to hire or not to hire? Compared to the West, China relies more on metrics such as test scores and university attendance rates.

Over the past 40 years, parents have spent all their energy and money guiding their little ones through the school system, and they got returns. College graduates found higher-paying jobs than repetitive physical labor, moved to cities, and obtained a hukou. Success!

But now, after learning a lot of meaningless content that could have destroyed childhood vitality and fun, you have graduated from college but can’t find a job. There are a lot of well-educated young people in China. This is something the government cares very much about.

When there are doubts, China will adopt policies that support exports and infrastructure projects to promote growth and employment. The supply-side economic measures that brought China to where it is today are likely to be repeated, even if it means adding more non-productive debt on top of the already huge debt. This requires yuan depreciation.

To depreciate the yuan, the People’s Bank of China will encourage credit growth in the “good” economic sectors. Semiconductors, artificial intelligence, clean energy, real estate, etc. will all have higher loan quotes. Banks will be instructed to provide a certain amount of yuan loans to these sectors, otherwise they will be ordered to stop. Whether these companies really need funds is not important.

As credit expands, the currency will be allowed to depreciate. The People’s Bank of China may conduct a one-time shock devaluation and then guide the yuan to slowly depreciate, and over time, the exchange rate of the yuan against the yen will gradually weaken.

China Producer Price Index (white) and Consumer Price Index (yellow)

With both PPI and CPI negative, the People’s Bank of China can relax monetary policy without worrying about inflation

Because some high-quality companies do not need these funds, they will “leak” into financial assets (just like the stimulus checks for the American masses). Companies that were supposed to produce small parts will eventually obtain loans in various ways and use these loans to speculate in the financial asset market. Most importantly for this article, China’s wealthy masses—who see what is about to happen—will begin to move capital out of China.

In the past, the People’s Bank of China may have been concerned about capital outflows, but the accumulation of Western fiat financial assets “owned” by China has become a liability, not an asset. This is because the West has gone from being a friend to an enemy. Who knows what the Western political elite will do when faced with Chinese capital. It is entirely possible that one day we will wake up and find that some of China’s assets have been frozen due to actions that have displeased Western political elites.

China Foreign Exchange Reserves (Million US dollars)

As you can see, China has about $3 trillion “problems.”

A better policy is to allow the wealthy to purchase hard assets like cryptocurrencies and ensure that these assets are stored in China by trustees owned or controlled by them. I have previously predicted and continue to believe that Hong Kong will become a channel for Chinese capital to own cryptographic financial assets. When I say financial assets, I mean ownership of financial returns on underlying cryptographic tokens or currencies, which may be through funds or derivatives. In this way, Chinese investors sell fiat currency on the national balance sheet and replace it with bitcoin and other cryptocurrencies. As a collective whole, the Chinese nation will have a stronger balance sheet after such actions.

This is the process as I imagine it:

1. Hong Kong allows various asset management companies to offer exchange-traded funds (ETFs) supported by cryptocurrencies. Let’s take the Bitcoin ETF as an example.

2. A wealthy Chinese investor somehow converts RMB into HKD. It shouldn’t be difficult, otherwise the Hong Kong property market wouldn’t be so active.

3. The Chinese investor then buys one of the Bitcoin ETFs listed on the Hong Kong Stock Exchange.

4. The ETF manager buys physical bitcoins from the global market, which are then held by a licensed Hong Kong-based custodian.

5. The Chinese investor now owns an ETF, which is a bitcoin derivative but not physical bitcoin. Investors can only participate in the price performance of bitcoin, not hold bitcoin itself.

This solves many problems for China:

1. It provides a channel for wealthy Chinese people who want to escape the continuous depreciation of the renminbi to invest in hard assets. The wealthy feel wise and happy for their capital being “protected”.

2. The destination of this exported physical Bitcoin is an institution that must comply with any rules set by Hong Kong regulatory authorities, which essentially means that the physical Bitcoin is controlled by the Chinese government. This is no different than any Bitcoin held by an ETF or trust listed in the United States ultimately being controlled by the US government.

3. It reduces the amount of Western fixed assets held by the Chinese government. When wealthy Chinese investors sell renminbi and buy Hong Kong dollars, the People’s Bank of China buys renminbi and sells Hong Kong dollars. The Hong Kong dollar is essentially the US dollar, as it is pegged to the US dollar. The People’s Bank of China can make these trades because China has a large amount of US dollar assets. See the chart of the $3 trillion savings jar above.

For us cryptocurrency holders, this is a good outcome. Chinese cryptocurrency traders returning through Hong Kong’s financial channels will reignite the market, while bankrupt American plebs are effectively shut out. The beauty of doing this is that every action by a national country will push other national countries to take more of the same actions.

China’s weakening of its currency and allowing its loyal comrades to purchase Bitcoin derivatives in response reduces the amount of Western fixed assets held by the country. The more China is unwilling to buy US treasuries with its export income or hold any form of US dollar assets, the harder the US must work to ensure that its citizens’ capital does not leave the Sharpie world, as the usual buyer of long-term debt, China, is on strike. This is a positive feedback loop that should bring glorious returns to the disciples of Satoshi Nakamoto.

Trading Strategy

As confusion continues about what kind of crypto industry (if any) US regulators want, registered companies in the US will cease to offer or severely restrict many crypto trading services. Many different junk coins will no longer be available for sale, and many financial intermediaries registered in the US will indiscriminately sell any junk coins that make their compliance departments feel painful on the public market.

Poor mood + forced selling = lower prices

I like high-quality, smelly, cheap stuff. Some of the junk being sold off is definitely worthless – why would an L2 scaling solution need a token? It’s puzzling… but there are also some projects that are actually building technology related to the AI economy. I’m watching a specific L1 blockchain project and will be outlining my investment thesis in a series of articles this summer that delve into the intersection of AI and crypto.

Timing is critical and since I can’t predict when some of the larger US market-facing crypto exchanges will halt trading or sell off their crypto, I have to buy in increments and not use leverage. Specifically, I will be using a volume-weighted average price (VWAP) algorithm to gradually accumulate some of these coins over the summer.

Last weekend was a perfect example. Someone needed to dump a large amount of crypto quickly and didn’t care about the market impact. Great, I got some coins at a very low price. But the price may drop another 20% next weekend. My view is that I must have absolute confidence in the value of the product and service to continue buying during severe market downturns. Macro factors (impending Chinese devaluation and Fed/US Treasury interest payments expanding dollar liquidity) and micro factors (forced selling creating real value in junk coins) are aligning, meaning I can just close my eyes and buy.

Many crypto social media warriors might argue, “Arthur, the market is sideways or down and you’re blindly bullish.”

That’s a fair criticism. However, if my timing is off (which is almost certain), I will take slow action during the bearish accumulation phase and not use leverage. I have confidence in the macro outlook and things are unfolding as I expected, albeit slower. For those readers engaged in short-term trading, I agree my analysis is almost useless because you’re plagued by false breakouts and severe corrections.

I don’t expect news coverage to get better. Many companies that rely on the prospect of developing a large number of wealthy American retail investors will go bankrupt. Any company that relies on trading fees will suffer losses. There may be more prestigious companies that choose to drop out because they cannot see the glorious future that is coming. It is hard to imagine the beauty of the next bull market when the smell of failure is all around you.

One day, the sell-off will stop, and we will usher in a frightening sideways market. This boring sideways price movement will continue until some factor triggers the speculative mentality of cryptocurrency traders. I propose a possibility – the shock devaluation of the yuan against the yen. I will closely monitor the exchange rate of the yuan against the yen and China’s export data. The lower China’s economic growth, the more credit will be issued. Then the currency will depreciate, capital will be allowed to “flow” into appropriate investment channels, and finally, sparks of hope that will stimulate the cryptocurrency capital market will be ignited, and hopefully open up the autumn market.

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