Compilation: tianyi, fanfan; DeThings
On September 15th, the closed-door summit “Web3 Connect” hosted by C² Ventures, a cryptocurrency venture capital firm, and Web3 media DeThings, was held at the Fullerton Hotel in Singapore. At this summit, Arthur Hayes, co-founder of BitMEX, gave a keynote speech on the topic of “Cryptocurrency Trading Market Structure in the East and the West”.
The following is the transcript of the speech:
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Yes, it has been a tough time for everyone recently. Thank you all for attending this speech. Last week, I gave a similar version of this speech in South Korea, so there are some concepts that I want to further expand on and include some content related to ETFs and other matters. So, have we succeeded now? The market is relatively reasonable, but that is not the focus of my discussion today.
I believe today I will focus on the liquidity part of market demand. Obviously, this is a concern for us in the market. Where does the buying pressure come from? How can we use the currency in our hands to buy more cryptocurrencies? Can we sell the cryptocurrencies we already have to make more money?
So I think one of the most misunderstood concepts at the moment is real interest rates. If you ask economists or others, you will get different definitions, such as some inflation indicators, bond yields, or various government-released data using core inflation, super core inflation, etc. to tell us that $1 last year is equivalent to $2.5 this year, which is not real inflation. So I want to ask, how much money have we actually made?
I simply decompose this question into government debt interest rates minus GDP growth rates. So we won’t get into a discussion about what the actual GDP growth rate is, I just want to know how much economic activity there is and what the growth rate is. Then I want to compare the yield of government bonds that investors want to invest in with what the people of that country can get. Now, every successful country has operated very similar policy guidelines since World War II.
After World War II, everywhere else in the world was destroyed except for the United States. So how did the United States win the war? Starting from the late 1940s, the United States had a very large-scale fiscal deficit and issued a large amount of bonds. Therefore, once the war is over, all this debt must be repaid. Taxes have already increased significantly after the war and cannot be further raised. So how does the government make money without taxes? If your growth rate is higher than your debt interest rate, according to the mathematical definition, you will actually make a profit. Therefore, you can suppress savers using your central bank and banking system, making their savings return lower than the economic growth that the government can achieve. So from the late 1940s to the mid-1950s, the United States suppressed savers through the Federal Reserve System and the US Treasury. As a result, savers could only get an interest rate of 2.5%. However, the United States had high single-digit growth rates after the war because it was the only economy spared from the devastation of war and became a manufacturing power.
This is the strategy of the United States. Think about the situation in Asia. The major Asian export economies, such as China, Japan, South Korea, Taiwan, and Singapore, have adopted similar strategies, but to varying degrees. The U.S. market is where all the funds go. So how do we raise funds to develop manufacturing industries for the production of electronic products and various goods in East Asia and Northeast Asia?
Everyone puts their money into the banking system. At that time, there was no Bitcoin, so putting money in the bank was the only option. Users would receive interest rates of 2%, 3%, or 4%, and the banks would then lend the funds to large companies, whether they were government-owned companies like China’s state-owned enterprises, or large companies in Korea, or major trading companies in Japan, or large family businesses deeply connected to the government. They could obtain very cheap loans. So users made money in the banks, but the interest rates were still lower than the government’s growth rate.
So if I were in China, where the economy has grown at 8% per year in the past 20 years, but if you look at the returns on users’ bank accounts, it’s only about 2% to 3%, which is the deposit interest rate. So the government is actually making money. That’s why these Asian countries have trillions of dollars in assets because the government doesn’t hand over these funds to depositors. The problem was that there was no Bitcoin or digital finance at that time. So everyone could only continue to leave their funds in the banking system and couldn’t do anything. But if we come to today, there are alternative choices available, and I can transfer my funds to exchanges with different fiat currencies.
The global SGA ratio is about 360% and has been growing rapidly over the past 10 years. China is about 300%, Japan is lower at about 60%, and the United States is around 30%. So our current situation is that we used to be wealthy, but we wasted this wealth, whether it was used for social projects, arms, etc. Now we find ourselves in a situation where we must make adjustments.
The worst part is that we actually don’t have more population to consume goods. According to projections, by the end of this century, China will lose half of its population. Japan is also a country with a declining population, and the United States is in a stable state in terms of net population growth, at most stable, without growth. So obviously, central banks and governments need to run deficits and print money. But unfortunately, I think all the inflation has occurred after 2020 because everyone stayed at home due to the COVID-19 pandemic. Did this lead to significant inflation in energy and commodity prices? Now central banks and governments are completely confused, but inflation has arrived, and now they must start raising interest rates.
This is the situation of real interest rates in the United States. Starting in 2022, it sharply decreased, and according to my formula, the credit interest rate is now around -5%, basically stable. In the largest market in the world, we have extremely low real interest rates if you use this formula. This is also one of the reasons for the skyrocketing asset prices because the money I make from economic growth is not as much as the bank deposits or government bonds that I own.
Now everyone is facing the same problem, we need growth. Governments can drive economic growth through massive spending, such as the United States, where growth is accelerating in the current tight credit environment. The Federal Reserve Bank of Atlanta has released real-time estimates of actual GDP growth rates, so I took a look at it. This is data from about a week ago, and the nominal GDP growth rate for the third quarter of this year is expected to be close to 10%, which is absolutely huge.
If you open a newspaper, you will see all these economists talking about a recession within six months, and all these bankruptcies, people being hurt, what is happening? However, the paper-based economy is booming because the United States is returning to its old strategy of suppressing savers to generate high inflation and high growth, but offering them very low yields. Now I think a lot of people don’t understand this concept, because they see 2.5% relative to US Treasury bonds, oh, wow, that’s amazing, because two years ago I could only get 0%, which is in some sense an improvement, but if you really get the actual yield of economic growth, that’s 10%.
This is a huge game. If the US dollar continues to run for 5 to 10 years, it will greatly reduce its leverage. The same is true for China and Japan. When we come to East Asia, these are all major exporting countries, and they also want to run this strategy. They want to sell more cheap goods to the United States, right? But the problem is, they also have high domestic demand. So when they do this, their currency will appreciate.
In Japan, if they want to run this high-growth strategy, what should Japan do? Export goods, mainly to the United States. So they become so wealthy and start running this strategy, they will continue to print money and keep their currency under control. The Japanese government owns almost 60% of the bond market, which is not a real market, it is basically separate, the government borrows somewhere and then ships the product to the United States, because it is completely open to capital accounts and currency policies. At the same time, the pressure on the currency is reduced, so you will see the yen depreciate, from about 120 a few years ago to close to 150 now. This is good for the Japanese currency. If you are a Japanese, you might think, well, why should I hold this US Treasury bond in my bank account? Maybe I should buy some cryptocurrencies.
But the problem is, there are other countries on the chessboard. So the same problem, China also has huge domestic demand. How do they get rid of this situation through exports? What does this lead to? If you think about China’s huge capital, whether it is controlled or uncontrollable capital outflows. I believe some of you have been to Singapore and have seen all these luxury cars and mansions, which are all Chinese funds. So what about cryptocurrencies in Hong Kong? The Hong Kong government is very positive about cryptocurrencies, they are granting licenses to cryptocurrency companies and providing clear frameworks. A few weeks or months ago, the Hong Kong Monetary Authority sat in the office and said, you need to open a bank account for cryptocurrency companies, they are formulating policies on cryptocurrencies. Every country wants to run the same policy, which is to generate growth but maintain control over the industry. Instead of letting funds leave the country in an unusual way, I don’t know where they are going, I can’t control them, it’s better to spread a good story about cryptocurrencies around the world, so that people believe that cryptocurrencies are actually valuable, that’s why China is doing this.
I believe that the United States should also take similar measures as they are facing the same problems. You will see that the U.S. banking system has suddenly fallen in love with Bitcoin, with both BlackRock and Fidelity, two large asset management companies, having applied for ETFs. The strategy in the U.S. market is the same. I don’t want funds to actually leave the system because I won’t be able to operate this strategy. Therefore, I want a Bitcoin ETF. So, in my opinion, the current attitude in the United States is that we need more Bitcoin so that the banking system can also operate the same strategy. If I were a banker, I wouldn’t want you to withdraw funds from the banking system because it would lower my deposit base. So, I would create a financial product, namely a Bitcoin ETF, which you can hold, and I would make money between the price at which you buy and sell, just like I do with stocks and bonds.
In my opinion, I believe that China will be the first country to approve a Bitcoin ETF because they have already implemented similar strategies in the banking industry. They know it is a good strategy, so they will allow this ETF because they know it will direct these funds into the banking system and prevent them from leaving. So, I think this is a very important development as it will have a positive impact on the liquidity and acceptance of the cryptocurrency market.
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