What is the national pastime of China? If you answered gambling, you probably have a few Chinese friends. What is the national pastime of Chinese business people? If you answered tax evasion, corruption and money laundering, then you’ve tried to do business in China. When a handful of businessmen merged these two pastimes, they made a fortune by building casinos in Macao. Now, the Chinese government is cracking down on Macau, but cultures don’t change—they find new outlets. Is Bitcoin the next combination of these pastimes?
I’ll be honest, until about a month ago, I hadn’t thought much about Bitcoin. It seemed like a fringe product for people to buy illicit goodies. Then, a friend forwarded me a chart of Chinese Bitcoin usage and I saw the light. Over the past two years, the Chinese went from a negligible percentage of daily Bitcoin trading volume to between 90% and 95% of the trading volume. That’s a huge increase in usage. They can’t all be buying Bath Salts and Moly and a quick google search laid out a number of creative schemes to launder money out of China using Bitcoin. The wealthy have Macau and now the peasants have Bitcoin for moving their wealth out of China.
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
In rough numbers, there are about US $7 billion of Bitcoin in existence, of which about US $2 billion are owned by early creators and adopters—hence these Bitcoin do not change hands often. A US $5 billion pool of Bitcoin is tiny in today’s world. A certain quantity must be owned by those who are in the act of facilitating all this money laundering in China. As demand increases, so will the size of this frictional Bitcoin pool. What happens if Bitcoin continues to increase in value? Won’t the Chinese who are actively trading it, start buying it up, instead of using it to simply facilitate transactions? Besides, it’s much sexier than the rebar futures they all chased last month.
Coming back to the US, the big blow-off move in Bitcoin two years ago was a pure speculative bubble. Since then, over US $700 million has been invested by various VC firms in Bitcoin startups. They call it the “Bitcoin Economy” which sounds ridiculous to me, but for these investments to have value, they will have to create products to facilitate the use of Bitcoin and then market those usages. That could be a huge source of incremental demand.
Finally, everyone agrees that global central banks have collectively lost their mind. Gold is seen as archaic. Will a hipster in San Francisco buy a product often associated with guns and right-wing politics? Of course not—but he may be willing to buy Bitcoin to diversify out of paper currency. Besides, his liberal friends now work at Bitcoin start-ups. I know it’s a long shot, but I can see a lot of reasons for Bitcoin to go higher, potentially a whole lot higher. Speculative bubbles can have a mind of their own, especially given the tiny size of the total Bitcoin pool.
Over the past week, I bought some Bitcoin and am long from an average of about US $450. I am using a stop of US $350. I rarely use stop loss orders as I usually buy assets that have downside protection, hence lower prices make for better bargains. In the case of Bitcoin, there is no natural value—value is driven by emotion. However, I feel like I can risk $100 and maybe make many times that. Besides, look at the chart below. If you didn’t know what the product was, wouldn’t you want to be long and with size?