Analyzing the Chinese Ban and Build Model - Sept 27, 2021

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The Bitcoin Economic Calendar:

Week of Monday September 27th to Sunday October 3rd.

Interest Rate Announcement:

As of October 1st, 2021, the interest rate for BTC Savings Accounts will continue to be 6.1% APY for balances up to 2 BTC, and 2.25% APY for any balance over 2 BTC.

For USDC Savings Accounts, the interest rate as of October 1st, 2021, will remain at 9.0% APY on your full USDC balance (no tiers).

Market Commentary:


Bitcoin:  It was a very active and volatile week in most markets as investors continue to react to international and domestic newsflow. Bitcoin closed the week down -8.55% at $43,204. 

Bitcoin held the key $43,000 support level that we highlighted a few weeks ago. This is a positive sign from a technical standpoint.

There are two strong narratives impacting markets right now: the U.S. Federal Reserve tapering its bond purchase program, and the ongoing collapse of Chinese property developer Evergrande. Additionally, the Chinese government seems to be intensifying its crackdown on the cryptocurrency industry. 

In today’s bitcoin section, we are going to tackle how the news from China is impacting bitcoin, and we’ll address the Fed in the S&P section later today.

After announcing that it is continuing its pursuit against bitcoin miners last week, the Chinese government also stated that it was banning “all cryptocurrency transactions”, declaring them illicit activity. 

It went on to say that “bitcoin and tether are not fiat currency and cannot be circulated”.

This is reminiscent of China’s previous technology bans. Let’s go down the memory lane for a second, to see if we can find some clues as to what might come next:

In late 2007, the Chinese government banned YouTube. In 2008, YouKu was created. (Chinese YouTube). 

In July 2009, the Chinese government banned Facebook after a series of protests erupted. In August 2009, Weibo (Chinese Facebook), was created.

In November 2012, the Chinese government banned Google. Although Baidu (Chinese Google), had already been created in 2000, it’s stock price doubled within a year of Google being banned.

In 2017, the Chinese government banned WhatsApp. Weibo (Chinese Whatsapp) had already been created in August 2009, but it took over the Chinese market after the WhatsApp ban. 

For many years now, the Chinese government has “banned” bitcoin. Here’s a headline from 2013.

And here’s another one from 2017:

And here’s another one when they tried to ban Initial Coin Offerings from 2017:

We get the point that they are trying to “ban” bitcoin - and cryptocurrencies. The question is, what are they trying to build in order to create the Chinese Communist Party-equivalent?

If history rhymes, a push for the digital yuan should be in the cards soon. 

The Chinese government might think that it will be able to “replace” bitcoin and crypto-currencies with its digital yuan. 

While this playbook may have worked in the case of Facebook, WhatsApp, Google, and YouTube, it may not work for bitcoin and cryptocurrencies. 

There are a few reasons why this approach hasn’t been working for bitcoin. For one, Facebook, WhatsApp, Google and YouTube were all unique in that they had a chokepoint  - their websites and apps. Nevertheless, many in China were able to get around the ban by accessing the websites using VPNs. 

With bitcoin and digital currencies, the Chinese government is up against a new type of technology. It is not just one app or website - it’s hundreds, if not thousands of websites and apps that allow people to access bitcoin. Moreover, it is not necessary to download a particular app or go to a particular website to transact with bitcoin. A computer with an internet connection is all that is needed. 

In our opinion, the CCP will not be able to stop bitcoin.

While the recent news has impacted price in a negative way, a look at the on-chain data reveals some fascinating insights. 

On-chain activity indicates that over 95% of the bitcoin traded on September 20th had been purchased less than 3-months ago. In the context of the news we just shared, this makes sense. The recent sellers are relatively new hodlers that have not been through a “China bans bitcoin” cycle. Historically, buying bitcoin when China bans it has paid dividends in the long run.

S&P 500: Equity markets sold off heading into Tuesday’s FOMC meeting but found comfort after Wednesday’s statements, rallying to close the week higher. The S&P 500 finished the week +0.93% after being down almost -2% intra week. The Nasdaq closed barely higher at +0.02%, and the Dow Jones closed higher by +0.62%. 

Although the Fed once again reinforced that it would start pairing back its bond purchasing program “soon”, Jerome Powell comforted markets by saying that policy would remain “accommodative” until the Fed’s unemployment and inflation targets are reached. While we have more than overshot the inflation targets, unemployment stubbornly remains at 5.2% - which is far from the Fed’s target rate of 4.4%. The Fed, and the market, will likely place more and more emphasis on labour market data going forward.

The Evergrande story out of China continued to impact markets throughout the week. 

The Chinese developer missed a bond payment last Thursday. Although the payment is not technically in “default” for another 30 days, it is an ominous sign of trouble. 

While some investors talk about an “imminent default”, others argue that Evergrande is “too big to fail” and that the Chinese government will not allow it to collapse and bring down the real estate industry with it. The Chinese economy is already in a fragile state.

Markets could very well remain volatile until the situation resolves itself. 

Gold: Bond yields soared after the Fed meeting, pushing the real return of treasury bonds higher, and gold lower for the week. Yields on the 10-year note soared by 6.57%, while the yield on the 30-year note increased by +4.14%.

Gold finished the week +0.20% at $1,749/oz.

The current macroeconomic is not favourable for gold unless inflation data surprises  to the upside. 

It is all but certain that the Fed will start tapering its bond purchases. As they stop buying, bond prices go lower and yields go higher. 

Gold has a negative correlation with the real return of U.S. treasury bonds. These are poised to keep rising - and inflation seems to have peaked. 

This means that real returns of U.S. treasury bonds should be on the way up for the rest of the year. This should strengthen the U.S. dollar and put pressure on gold prices to finish the year.

DeFi: The DeFi index finished the week -10.47%, with Ethereum finishing down -7.95% at $3,064. Importantly, ethereum maintained the psychologically important $3,000 level. 

It was another wild week in NFT land, with a headline that made waves in the entertainment industry but did not have the same pick-up in crypto media. 

Snoop Dogg revealed that he is behind the NFT twitter account @CozomoMedici, which has been engaging with the community and actively participating in the market. 

Snoop Dogg sharing his story will certainly drive more mainstream attention to the NFT space, and the trend for artists and athletes getting involved seems to be alive and well. 

Over the weekend JP Morgan analysts wrote that NFT activity was, in part, why some institutional investors had been rotating from bitcoin futures and into ethereum futures. It pointed at the futures vs. spot premium on ethereum as a signal that institutional activity is healthier in that market at the moment.

DeFi activity should also get a boost from the recent crackdown in China, as centralized exchanges slowly wind down their operations and they will be looking for new ways to meet their trading needs. 

Difficulty Commentary: Not much has changed on this front, with the next difficulty adjustment projecting a moderate +1.1% increase in difficulty.

Mainstream media continues to write more favourably about bitcoin mining with recent articles pointing to the fact that they are acting in a more environmentally-conscious way. 

Recent advances in flared gas mining, along with signals towards use of nuclear energy continue to get informed coverage. 

The mempool remains very quiet with transaction costs and speeds at optimal levels. 

What's ahead for the week:

To close, we wanted to highlight 2 events from last week that could very well signal the continuation of two very important trends. 

As governments like China literally chase the industry out of the country, others worldwide continue in their campaign to develop and attract as much of the industry as possible. The most recent example is Dubai.

Numerous  governments across the world are  choosing to embrace  this new technology rather than trying to stop it or ban it. 

On that note, U.S. Senator Pat Toomey said last week that China’s crackdown on crypto represents a big opportunity for the U.S. 

One country’s trash is another country’s treasure. 

Last week also gave us some great examples of how bitcoin continues to weave its way into every-day life. 

Twitter rolled out bitcoin tips via lightning for some iOS users through an integration with Strike. This is part of its “turning fans into funds” strategy - as it tries to lure creators and become the hub for them. 

Twitter’s 300 million monthly active users will soon be able to tip their favourite content creator worldwide, in real time and paying virtually no fees.  The team is also said to be exploring other digital assets for tips. Either way, by becoming the currency of social media, digital assets are one step closer to becoming the currency of the internet.

Additionally, last week one of the Netherland’s most renowned and historic soccer clubs, the PSV, announced that it holds bitcoin on their balance sheet. 

Having bitcoin and transacting with it is slowly becoming “normalized”. Whether you look at social media, governments, sports teams, billionaires, athletes, celebrity investors,  publicly traded companies, and even politicians - the trend is clear. People are interested in what bitcoin can do for their future.

As always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:


9.00 AM EST - S&P Case Shiller Home Price Index

Expectation is for an increase of 18.6% year-over-year. The market will likely cheer a lower number and sell if the number comes in higher than expected.

10.00 AM EST - U.S. Consumer Confidence Index. 

These index readings have been very strong lately (over 100). Expectation for August is north of 100 once again. It will be interesting to see if U.S. consumers have started to shift their views from excitement to cautious. Again, markets might cheer a lower than expected number and sell off on a higher than expected number.


8.30 AM EST - Initial and Continuing Jobless claims in the U.S. 

8.30 AM EST - U.S. Gross Domestic Product revision. 

The Fed is closely following the jobs market in the U.S. Any unexpected jump in unemployment benefits could hurt the pace of the economic recovery and hence force the Fed to continue being accommodative. 

Similarly with the U.S. GDP revision. Any “positive” economic data will likely cause the market to sell off. “Negative” economic data should have the opposite effect.


8.30 AM EST - Core Inflation (expectation for a 0.3% month-over-month increase)

10.00 AM EST - 5-year expected inflation rate (expectation is for 2.9%)

Friday will deliver 2 different views of inflation, and this allows us to exemplify the “transitory” inflation argument. At the core inflation level, which tracks month over month increases, the expectation is for 0.3%. If we annualize that number, the current inflation rate is 3.6%. 

If we look at the expectations for 5-year inflation, it's sitting at 2.9% - considerably lower. However, at 2.9% - this is already significantly above the Fed’s targets of 2%. 

The Fed, and the markets, would love to see both inflation rates come down. If rates move higher, it could impact equity markets negatively as the Fed may have to accelerate its tapering timeline. 

It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account.

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