Imagine if Facebook, Amazon, Apple, and Google had just gone public. You were a programmer building the platform — but you couldn’t own any shares.
That is exactly what is happening in China today.
Mr. David Li, the founder of Trinity recently explained on an AMA an interesting difference on how blockchain projects are valued between China and the West.
“For the Chinese who are working on blockchain projects, the price of the underlying project means nothing to them — since they can’t own it. They are focused solely on the tech.”
Thinking about the significance of that statement, I looked at the current daily trading volume for bitcoin to Chinese Yuan (BTCCNY).
The Chinese Yuan accounted for only 0.79% in daily trade volume to bitcoin.
Interesting.
When was the last time the Chinese public had a straight forward onramp from Yuan to bitcoin anyway?
December 2013. Almost 5 years ago.
China stopped mainstream financial institutions on the mainland from dealing with bitcoin in December 2013, when the overall market cap for all cryptocurrencies was only $15.7 billion U.S.
Logarithmic chart from 2013 to Present — Total Cryptocurrency Market Cap
Closer look at May 2013 to December 2013 market capitalization
The last time there was direct Chinese participation, the total market capitalization went up 881% in 6 months.
Since then, almost 5 years, the market has risen 1310% without the Chinese having a direct path to market participation.
That is a lot of pent up demand.
Imagine working in Shenzhen, seeing the market go up over 1300% while you are programming a blockchain project — and you can’t legally own any of it.
But that still doesn’t paint the entire picture.
The other part to remember is the difference in projects which made up the market in December 2013 at $15.7 billion compared to today, at $221 billion.
It’s a different world.
Here are the Top 25 cryptocurrencies by market cap in December 2013. I pulled this off archived pages from www.coinmarketcap.com
Some of these projects no longer exist from five years ago.
Today is a very different picture where the projects in scale and function go well beyond the scope of most projects in the Top 25 in 2013.
In fact, just the four Chinese projects below in today’s Top 25 by market cap would have equaled 44% of the entire market capitalization of all blockchain projects in 2013.
#13 Tron — $1.4 billion
#14 NEO — $1.2 billion
#16 Binance — $1.1 billion
#19 VeChain — $719 million
With China not having a direct route to cryptocurrency markets and western institutional investors not in the Chinese blockchain space yet, these current valuations are based mostly on western individual buyers.
The next questions then are:
If China has no direct route to buy any of the projects they are currently working on, are they really even accurately valued at current prices?
Would China want their projects to be accurately valued before the Chinese had a chance to buy their own projects?
How is it possible to gauge current western institutional involvement in the Chinese blockchain space?
The impact on the value of Chinese projects when the People’s Bank of China (PBoC) has their own cryptocurrency in place.
Yesterday, it was reported “Bank of Communications (BoCom) a Chinese state-owned commerical bank has issued RMB9.3 billion (US $1.3 billion) of residential mortgage backed securities (RMBS) through its proprietary blockchain network, Jucai Chain.”
China is getting closer to issuing a Chinese sovereign cryptocurrency. That day is coming.
President XI is calling blockchain a breakthrough technology, the PBoC have filed for 41 blockchain patents this year, and China State Television say blockchain will be worth 10x more than the internet, estimated at $34 Trillion U.S. dollars.
The Digital Currency Research Lab (DCRL), the research wing of the People’s Bank of China, is the organization furiously filing blockchain patents.
From a report in November 2017, the DCRL said:
“ — it’s inevitable for the central bank to launch its own digital currency to upscale the existing circulation of the fiat currency.”
When that happens, we will see China reopen exchanges on the mainland.
But it won’t be a bitcoin to Chinese Yuan pair.
It will be a — for lack of a better term —a CryptoYuan, paired not just to bitcoin, but to most other Chinese blockchain projects as well.
Similar in function to tether pairings currently, but fully backed by the PBoC and stable in value to the Yuan.
Where Chinese can transfer CryptoYuan direct from their bank accounts to an exchange and buy projects through the direct pairing.
In essence, the Chinese government is signaling their intent of competing directly with stable coins like Tether and cutting out BTC completely as a reserve cryptocurrency, all while maintaining control of their own money supply.
By launching a CryptoYuan, controlled by the People’s Bank of China, this will align the interests of the government, banks, and people simultaneously.
It will give the Chinese government the taxing mechanism that they need through financial transaction transparency. They will not be relying on people to self report like what is currently happening in the West.
Think of it like a 1099 from a brokerage account. The person gets a copy for their records, as does the taxing authority for the Chinese government, but it’s on the blockchain and immutable.
Also, this will not be unique to the Chinese government. The West will eventually follow as taxation through transaction transparency is a driving factor for countries with record low, or negative interest rates as they all seek maximum tax revenues available.
It is the reason the Common Reporting Standard (CRS) has been adopted by most major economies in the world through the Organization for Economic Co-operation and Development (OECD) to determine which country has taxing jurisdiction over assets without relying on the owner to self report.
A Chinese sovereign currency will also give the Chinese banks a secured place in the new Chinese blockchain future. The banks will be running the nodes for the blockchain, tracking the transactions from CrpytoYuan to digital assets and back in all accounts.
Notice how you never hear so much as one Chinese banker ever say a bad word about blockchain?
Compare that to the West, where every week it seems like a different banker is on CNBC espousing his personal views on why blockchain will never work and cryptocurrencies are a terrible idea.
Not in China.
The only person that occasionally speaks is the PBoC Director and when he does, all he says about blockchain is “the blockchain belongs to the public and serves the public interest.”
And he calls bitcoin “inspiring”, saying it gives “ordinary people (the) freedom to participate.”
The PBoC sets the tone for the entire financial sector in China.
The silence from the rest of the bankers in China is deafening.
They know their government is putting the pieces in place for their entire country to participate and they will play a key role. They don’t have to say anything.
A sovereign cryptocurrency will give the Chinese people a direct link to their bank accounts to buy blockchain projects.
We will see what the final product looks like when it launches, but if it is what the government is hinting at, China will actually have a more frictionless way to buy blockchain projects and cryptocurrencies than the West.
The Western Disconnect in the Way Chinese Blockchain Projects are Viewed
Global Coin Research recently wrote a fascinating article describing the difference in mindset between Chinese market participants vs western market participants.
Market participants in China know there are bad actors and fraud to watch out for in all markets, cryptocurrencies and blockchain included.
For most western investors, blockchain and cryptocurrencies are their first taste of what an unregulated market feels like.
For individual investors in the blockchain space, we willingly accept this is the digital frontier and know there is no safety out here.
Win or lose, it is completely on us.
There is no regulatory body coming to save us. No bank to call when we send funds to the wrong address on the blockchain or lose a private key.
But for institutional investors, all of that sound terrible, and being comfortable with it completely insane.
In the last two to three years we have seen institutional money start to make forays into the western blockchain space.
But it has been completely safe expeditions.
A long only bitcoin fund.
Possibly buying tokens at steep discounts before the project launches to the public.
Buying a percentage of platforms or exchanges with known entities from previous deals in traditional markets.
Why?
Think about the makeup of the investors who are in these institutional funds. The smallest Limited Partner (LP) allowed in these funds are Accredited Investors who have $1 million liquid net worth. There are different opportunities and rules when these investors hit the $5 million and $10 million mark depending on the fund.
The average age of a millionaire in the U.S. is 59 years old, almost perfectly in the middle of the baby boomer generation in America which is the massive aging population born between 1946–1964.
Talk to most baby boomers. What do they have to say about bitcoin, let alone the blockchain or other cryptocurrency projects?
How about investing in China?
If they have an opinion, far and wide, it is mostly negative on both accounts.
This mindset is what institutional Fund Managers are up against when they bring blockchain deals to their LP’s to invest in.
Chinese markets and Cryptocurrencies combine their clients worst fears.
If the millionaire baby boomer isn’t comfortable with the deal, they won’t invest. If they don’t invest, the fund doesn’t make money.
So the fund managers have stayed with the majority of western projects and traditional type venture investing in the space so far in order to close deals and keep the funds viable.
This is the greatest strategic advantage to the individual investor currently available, but will not last forever.
Eventually the fund managers will have the right connections in China to convince their baby boomer clients to invest in Chinese blockchain deals.
Just look at Global Coin Research’s twitter followers. Venture Capitalists and Institutional Investors reading the same research individual investors are — all looking for an edge in news which is not usually translated to english.
This is not by accident.
China is the only level playing field currently for western individual investors competing at the same price point as institutional investors for projects — for now.
The Dragon Awakens
There is a lot of action currently behind the scenes in the West as institutions prepare custody solutions to allow institutional money from endowments, hedge funds, state pension funds, etc. to join us brave privateers that beat them to this New World of cryptocurrency and blockchain.
Bakkt even announced yesterday their first contracts for BTC in November will be a one to one ratio.
All this is bullish.
But the real news has not been announced yet.
China launching the first sovereign cryptocurrency in the world and reopens exchanges so their country can participate.
When that happens we’ll see how high this dragon can go with five years of pent up demand and the largest middle class in the world reentering the cryptocurrency market.
And this time, it will be with the full support of the Chinese government.
Combine that with institutional money eventually flowing into Chinese blockchain projects and we’ll see Chinese projects accurately valued for the first time since they launched.
We will also see if this is when the West wakes up to the fact they are losing the blockchain race.
Whether China launching the CryptoYuan and reopening exchanges is the 21st century Sputnik moment the West needs to spur them into action remains to be seen.
None of this is financial advice. I only know I cannot accurately value any Chinese projects until the PBoC Director lets China participate again.
See you there. — Radigan
