Beware of exchange risks under tightened foreign exchange regulation

1. Is the market maker short selling fake news?
This afternoon, everyone was flooded with a piece of news. "Foreign media: China will restrict transactions that circumvent foreign exchange management through Bitcoin"

According to Bloomberg, following Hong Kong insurance, electronic virtual currency has also entered China's sight of blocking capital outflow. According to an unnamed insider, the central bank and other regulatory authorities are studying measures to restrict the exchange of RMB into US dollars through Bitcoin transactions and the remittance of funds abroad. The measures under consideration may include restricting domestic trading platforms from transferring Bitcoin to overseas platforms, or limiting the amount of Bitcoin transferred to overseas platforms.

There are also two related news items that were just released today: "As RMB exchange rate fluctuations intensify, will Bitcoin become a new channel for capital outflows?"
"Tracing the secret passage for RMB to go overseas: Bitcoin's "underground bank" is comparable to an aphrodisiac"

First of all, it should be pointed out that this is a "smoke bomb" news. Although it has been circulated everywhere in China, the original text of the news cannot be found on Bloomberg (bloomberg.com). Although the original text cannot be found, it cannot be simply dismissed as fake news. People with a little more experience should remember the waves of news released by Caixin.com in 2014 that were difficult to distinguish between true and false. Many people scoffed at it, thinking that it was fake news of short selling by bankers, but what was the result? In the end, it was confirmed to be true news - a large number of exchange bank accounts were frozen and cancelled by banks, which led to multiple waves of continuous declines in the price of Bitcoin.

Now, what Caixin released should be regarded as an early warning to the market by the regulatory authorities before the implementation of regulation. As a trading market with a market value of tens of billions, Bitcoin can avoid catastrophic market collapse and reduce social stability issues through early warning.

Looking at today's news, there is an obvious error in the news: Bitcoin addresses are not divided into domestic and foreign ones, and it is impossible to restrict Bitcoin withdrawals to foreign platforms. This error, on the contrary, confirms the identity of this news as a warning message - in any case, this news that was reprinted by major websites in a short period of time must have its purpose. If it is a false news of short selling released by the banker, then the banker must try to make people believe it, so it should use logical measures such as "restricting deposits to trading platforms" and "re-negotiating the 415 notice" , instead of measures that everyone in the circle knows are jokes. Therefore, this news is more like Caixin.com's multiple warning messages that were gradually confirmed at the time.

2. Exchanging Bitcoin for US dollars does not consume foreign reserves?
Some people were very dissatisfied after reading the news, thinking that buying BTC in China and selling it abroad is clearly earning dollars from foreigners without consuming foreign reserves. This is to relieve the central bank's worries, and the central bank is stupid to want to ban this channel.

Yes, you have to know that under the Chinese system, there are many fools in the government departments, but there are also a large number of elites. Those who think that the central bank is stupid are probably stupid themselves. You don’t need to use complicated logic, just an extreme value method of middle school mathematics to figure out the problem: if exchanging BTC for US dollars does not consume foreign reserves, what will happen if the central bank prints 100 trillion yuan for exchange?

Obviously, as long as there is a large amount of BTC bought domestically and sold abroad, the RMB price will have a high premium to the USD price (converted at the official exchange rate). As long as the premium is high enough, it will attract funds for reverse arbitrage (buy BTC with USD and sell RMB domestically) . Where does the USD for reverse arbitrage to buy BTC come from? It comes from personal foreign exchange purchases, false trade, and false capital projects. In the final analysis, it comes from foreign reserves. In this world, except for the Federal Reserve, whether it is the People's Bank of China or the Bitcoin community, it is impossible to print US dollars out of thin air.

Some people also say that miners mine bitcoins and sell them abroad, which is an act of exporting and earning foreign exchange. This is true, but the amount is too small. If 70% of the computing power is in China and 50% of the currency is exported, it is only 630 coins a day, earning 3.15 million RMB, which is completely negligible for the capital market. What actually happens may be: 10,000+630 coins are moved to China every day and sold abroad (individuals get US dollars), and 10,000 coins are moved abroad every day and sold to China (consuming foreign exchange reserves). The essence of this closed loop of exchange is that the exchanger bears a certain exchange rate loss, uses Bitcoin as a medium, and uses the US dollar purchase quota from individuals to organizations to convert RMB into US dollars. This situation is elaborated in detail in What is Bitcoin? - Jiang Zhuoer's answer - Zhihu's "3.1.4, Bitcoin cross-border remittances under capital control".

3. Bitcoin cannot be exchanged for much US dollars?
Indeed, the amount of funds that can be exchanged for USD through Bitcoin is very limited. The intuitive data is that the RMB price is only about 1% higher than the USD price. But the wonderful thing about BTC to USD exchange is that it is a completely compliant exchange method - whether it is buying BTC with RMB in China, sending BTC to foreign exchanges, or selling BTC to USD for cash (to foreign or Hong Kong USD accounts), every step is legal and compliant.

Most people don’t have access to underground banks, nor do they have the courage to transfer money to illegal underground banks. Whether it’s the underground banks that run away, or the underground banks that are shut down and the money is confiscated, it sounds terrible. But BTC to USD is something that even individuals can do on their own (as long as they have an overseas or Hong Kong USD account), and if they use both sides to hedge and buy and sell at the same time, there is no risk of currency price fluctuations.

Therefore, when all channels are tightened and even the use of credit cards to buy insurance in Hong Kong is banned, more and more funds will inevitably be squeezed into the Bitcoin channel - even if this channel is just a single-plank bridge, it will be stretched wider and wider. The early warning and regulatory actions of the regulatory authorities also reflect the excellence of Chinese technical bureaucrats. When the "Notice on Preventing Bitcoin Risks Issued by the People's Bank of China and Five Other Ministries and Commissions", Bitcoin was only the size of a mid-cap stock, but it did not affect the authorities' attention to it at all .

4. How to supervise?
Under the current exchange rate and foreign exchange reserve conditions, tightening regulation of Bitcoin is inevitable. The only question is when and how. It is purely a fluke to think that the authorities will turn a blind eye to Bitcoin and not regulate it . So how will the authorities tighten regulation?

Obviously, it is impossible to restrict domestic trading platforms from transferring Bitcoin to overseas platforms, or to impose a quota on the amount of Bitcoin transferred to overseas platforms. Is it possible to restrict withdrawals? It seems difficult. Requiring all trading platforms to share user information and withdrawal quotas, and limiting each person to withdraw an equivalent of 50,000 US dollars per year? It seems unreliable. In addition, the five ministries and commissions have already defined Bitcoin as a commodity in the notice. Do they want to put Bitcoin under foreign exchange supervision? This is a joke in legal terms. The authorities are not so stupid.

It is even more impossible to restrict purchases. Restrictions are the same as real estate restrictions, which is to advertise that Bitcoin is a good thing, and everyone should buy it quickly. It is impossible to restrict the purchase of a certain commodity in China. Don't underestimate the wisdom and strength of the people. By then, there will be 100% of people borrowing the ID cards of their aunts and uncles to open accounts in every exchange to buy Bitcoin.

Therefore, the most likely scenario is to continue the direction of the 415 notice and tighten the deposit channels of exchanges. It may even be more severe than the last time, completely cutting off the deposit channels of exchanges for a period of time to suppress the price of the currency. The size of the BTC channel depends largely on its total market value. The higher the total market value, the more foreign reserves can leak out. If these measures are not effective, in the most extreme case, exchange futures and spot leverage may become non-compliant or even illegal . Chinese law has pocket crimes, and they are pockets after pockets.

5. Market Trends
Regulation by the authorities is inevitable, but it can only affect the price of Bitcoin, not the value of Bitcoin. It can even increase the value of Bitcoin by making more people aware of its status as a free asset. Do you think Bitcoin is a scam? Do you look down on Bitcoin? If you don't have Bitcoin, can you exchange some dollars for me?

Therefore, Bitcoin is still likely to rise in the long term (1-2 years), and may even become more valuable due to regulatory crackdowns. However , in the next phase, exchange risks will be significantly more prominent, and it is recommended to reduce the use of futures and leverage, and spot investors should resolutely implement buy-and-sell to avoid extreme risks and being shut down by regulators.

Finally, to avoid being criticized for writing articles about short selling, I will show you the 3,000 BTC in cold storage at the Litecoin Mining Pool: "20 Million Assets Disclosure of Litecoin Mining Pool". This is a matter-of-fact article that warns of risks. Please don't criticize me for holding 3,000 Bitcoins and writing articles about short selling at the same time:)

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