China Emerging As Surprising Source Of Bitcoin Demand

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Last week, I put the massive buying pressure coming to bitcoin in context, but there is another — perhaps the largest — source of potential demand entering the scene.

We already know the Bitcoin ETFs, MicroStrategy issuing more shares to buy more bitcoin, Tether’s constant buying, and the halving will all be major sources of demand this cycle. For example, in the first two weeks of trading alone, the “newborn 9” accumulated 125,000 BTC. That has, so far, been offset by GBTC outflows, but it is unlikely that all GBTC holders are captive sellers who will get out ASAP. This outflow should start to wane in the coming weeks.

A somewhat unexpected development is emerging in China of all places. Readers of my content here and on won’t be strangers to what’s happening in China over the past couple of years. They are experiencing the end-of-an-economic-model transition. The China we have grown to know was built on debt, producing goods for over-indebted foreign customers. They are heavily dependent on globalization and a highly elastic monetary environment. That era is coming to an end, and the crash of the Chinese real estate market, and now their stock market, are visible signs of the end of that paradigm.

Source: @Schuldensuehner

On January 24, China Asset Management Company (China AMC), a gigantic fund manager and ETF provider in China, halted trading on their Nasdaq 100 and S&P 500 ETFs to stop the flood of money out of other funds and into these US-connected funds. On Tuesday, other US-connected ETFs on Chinese markets opened limit up, and had a 21% premium over NAV. The flight to safety is also affecting Chinese-based Japanese ETFs. Tuesday saw the China AMC’s Nomura Nikkei 225 ETF rise over 6% to a 22% premium.

Source: @Sino_Market

Chinese investors are in full-on panic mode, and the authorities are barring the door. It is only a matter of time until more Chinese investors start tapping bitcoin for its store-of-value and portability. Many Chinese are already familiar with bitcoin. China used to be a dominant source of demand for bitcoin until the CCP banned it in 2021.

While bitcoin is still officially banned in Mainland China, investors can still use exchanges like Binance and OKX. They can also buy OTC, person-to-person, or via off-shore bank accounts. Last year, Hong Kong very publicly opened back up to bitcoin. They have been following in lockstep behind US regulators giving Bitcoin the official blessing in Hong Kong. It is unlikely that Hong Kong authorities would make such a public push for legalizing bitcoin only to turn around the next year to ban it.

This morning, a piece from Reuters quotes a senior executive of a Hong Kong-based bitcoin exchange, who confirms this capital flight story. “Investment on the mainland [is] risky, uncertain and disappointing, so people are looking to allocate assets offshore. […] Almost everyday, we see mainland investors coming into this market.”

The source added, “If you are a Chinese brokerage, facing a sluggish stock market, weak demand for IPOs, and shrinkage in other businesses, you need a growth story to tell your shareholders and the board.”

Source: Reuters

We have been talking about Bitcoin providing a parallel world of green shoots, and now it is being recognized everywhere.

The flows from China will be a big source of demand in this cycle, and the approval of bitcoin spot ETFs in the US will create a perfect synergy via allowing sophisticated foreign investors to buy bitcoin and US-based assets at the same time.

We cannot forget about the faltering European markets either. Europe is likely already in recession. By December, EU factory activity had contracted for 18 straight months. Germany barely avoided a technical recession despite 2023 GDP being negative at -0.2%. The relative attractiveness of bitcoin is very high in a world of capital flight and negative growth. Many bitcoiners are worried about a recession bringing a stock market crash, which would force selling of bitcoin like it did in March 2020, but it might be the opposite this time around. As investors realize that the old system is stagnant and decaying, Bitcoin’s unique convergence of properties as revolutionary tech, a fixed supply asset, and economic growth potential will be where capital flees into.

Bitcoin Price Update

Bitcoin’s price performance has been disappointing since the ETF launch. However, in the context of FTX receivership selling $1 billion worth of GBTC and other large entities selling GBTC to rotate into lower capital fees of the new ETFs, price has held up extremely well.

RSI is one of the most widely used indicators and, as such, has a Schelling point effect. People and bots are watching for the daily RSI to hit oversold. Therefore, it is likely we won’t see any significant upside in price until 30 on the RSI is broken. That can be achieved by one more sell-off into support, since we are so close to 30 already. A more unlikely possibility is we could form a hidden bullish divergence, where the price makes slightly higher lows, but the RSI makes lower lows. I do not expect any significant downside either with the confluence of demand described above:we are at a temporary stalemate.

Staying on the daily chart below but zooming in, we see the 100 DMA is providing support currently. I also am watching the $37,877 level; an important price from back in November. Any dip that pushes RSI to oversold might not close below that.

The 100-day typically does not provide much support in bitcoin, with the 50- and 200-day moving averages being the most influential. However, below I show September 2020, right before the monster bull rally to end that year. The 100-day was the star back then. It is possible to hold along the 100-day and then rally with a pause in GBTC selling. Another interesting note from that period in 2020: the RSI stopped shy of oversold, catching many off guard as it shot to the moon. That is not my base case, but it does have precedence.

Bottom line, we are seeing massive and new sources of demand for bitcoin from the ETFs and now China capital flight. The ETF launch dynamics have been complicated but price has been relatively steady all things considered. It is only a matter of time until demand becomes apparent in price.

30 January 2024 19:02

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