Arthur Hayes: Capital is fungible, Chinese capital will seek refuge in cryptocurrencies

BitMEX founder Arthur Hayes published a lengthy article "Fungible", in which he mentioned that the impact of the United States on cryptocurrencies is actually not significant because capital is fungible. Cryptocurrencies are assets that can transcend borders and political systems, allowing people to have control over their own money freely. He also predicted that Hong Kong will become an important channel for Chinese investment in cryptocurrencies, and that the Chinese Yuan will depreciate significantly compared to the Japanese Yen.

US Stimulus Fuels Wealthy Americans' Entry into Crypto Markets

Arthur Hayes mentions the wealthy Americans, specifically referring to the second wealthiest tier with household incomes ranging from $100,000 to $200,000, constituting about 25% of the US population. During the COVID period, this group likely continued working from home and did not rely on government aid to get through tough times. They had extra income to spend or invest in things they like.

As shown in the chart below, the two spikes in US personal savings were due to government fiscal stimuli, with most of the funds spent between 2020 and 2021, now returning to long-term average levels. In the meantime, this wealthy group started experiencing the cryptocurrency craze, using platforms like Coinbase, Kraken, Gemini, Crypto.com, Binance.US, and Robinhood, which also contributed to these exchanges and fintech companies receiving high valuations in the previous bull market.

However, the US has recently started cracking down on these crypto platforms, and the recent round of money printing may not be broad-based, possibly benefiting only the wealthiest class. Will the new wave of crypto enthusiasm move away from the US to Hong Kong, which has been actively promoting crypto compliance recently? Let's see how Arthur Hayes interprets the current situation in China and Hong Kong.

Economic Challenges Facing China

Arthur Hayes normalized the USDCNY and USDJPY exchange rates to 100. During this period, the Japanese yen depreciated nearly 48.763% against the Chinese yuan. This was due to Japan's previous quantitative easing measures and yield curve control to maintain the yield of Japanese government bonds at a certain level.

Chinese goods are more expensive than Japanese goods, affecting China's export volume. Combined with Beijing's strict controls and lockdown measures, China's economic performance has been relatively weak in recent years.

Massive youth unemployment is also a problem in China, with the urban youth unemployment rate for those aged 15-24 exceeding 20%. In a China that heavily emphasizes education and where parents invest significant effort and money in educating their children to have the opportunity to move from factories to cities for better jobs, these numbers are a frightening nightmare.

Depreciation of the Chinese Yuan and Credit Expansion Needed

Arthur Hayes believes China will resort to policies supporting exports and infrastructure projects to promote economic growth and employment. This means adding more debt on top of the already massive debt pile, requiring the Chinese yuan to weaken and encouraging credit expansion.

What about the capital flight that the People's Bank of China has always been worried about? Arthur Hayes believes that China's over $3 trillion in foreign exchange reserves has turned into a liability rather than an asset. Due to tensions with the Western world, if China continues to hold a large amount of US government bonds, there is a risk of sudden freezing.

Arthur Hayes's Cryptocurrency Dream in Hong Kong

Arthur Hayes believes that a better policy is to allow wealthy Chinese to buy hard assets like cryptocurrencies and ensure they are stored in China by trustees controlled or owned by the government. Here's how he envisions the process:

1. Hong Kong allows various asset management companies to offer ETFs supported by cryptocurrencies on exchanges. Taking a Bitcoin ETF as an example here.
2. A wealthy Chinese investor somehow converts yuan into Hong Kong dollars.
3. Then, the Chinese investor purchases the Bitcoin ETF listed on the Hong Kong Stock Exchange.
4. The ETF manager purchases physical bitcoins from global markets, which are then held by local licensed custodians in Hong Kong.
5. The Chinese investor now owns an ETF, which is a Bitcoin derivative but not actual bitcoins. Investors can only participate in Bitcoin's price performance, not hold Bitcoin itself.

This solution addresses the following issues for China:

1. It provides a channel for Chinese wealthy individuals who want to hedge against yuan devaluation to buy hard assets. The wealthy are happy because their capital is protected.
2. The endpoint of this export must be an institution regulated by the Hong Kong regulatory authority, essentially meaning that physical bitcoins are controlled by the Chinese government.
3. It reduces the amount of Western fixed assets held by the Chinese government. When wealthy Chinese investors sell yuan and buy Hong Kong dollars, the People's Bank of China will buy yuan and sell Hong Kong dollars on the other side, as the Hong Kong dollar is essentially pegged to the US dollar. With China holding a large amount of disposable US dollar assets of $3 trillion, the People's Bank of China can freely engage in this trade.

For our cryptocurrency holders, this is a great outcome. Chinese cryptocurrency traders returning through Hong Kong's financial channels will reignite the market!

Arthur Hayes's Trading Strategies

Due to ongoing US regulations, companies registered in the US will cease or significantly reduce many crypto trading services. Many US-registered financial intermediaries will indiscriminately sell any compliance-challenged junk coins on the open market.

However, some tokens are actually building the technology needed for an AI economy, and Arthur Hayes is particularly focused on Layer 1 technology. He teased a series of articles to be released in the summer. He will also use a volume-weighted average price (VWAP) algorithm to slowly accumulate certain tokens during the summer.

Arthur Hayes also put his strategy into practice last weekend. For more details, see: Arthur Hayes Doubles Down on GMX, Is it Time to Bottom Out in the Cryptocurrency Market?

Despite the criticism from many cryptocurrency Twitter warriors, he acknowledges it as fair criticism. If the timing of the current purchase is wrong, he will slow down and not use leverage during the accumulation phase in the bear market. Arthur Hayes is confident in the macro outlook, and although progress may be slow, things are developing as he expected. For readers who only engage in short-term trading, he also admits that his analysis is almost useless.

In addition to cryptocurrencies, Arthur Hayes also presents another possibility—the significant devaluation of the yuan against the yen. He will continue to monitor the yuan-yen exchange rate trends and China's export data. The slower China's economic growth, the more credit issued, and the easier it is for the yuan to devalue, allowing capital to "escape" into appropriate tools, ultimately igniting hope for a fall rebound in the cryptocurrency capital market.