All you need to know about what's driving the China crypto narrative.
This week’s edition of our weekly Crypto Twitter round-up featured a lot of talk of this “crypto China narrative.”
But what exactly is that all about?
The China narrative has become so prominent that it warrants a full explainer. This article explores:
- What the “crypto China narrative” is
- How the narrative works
- What Hong Kong has to do with it
- Which coins are considered “China coins”
- Which accounts to follow for news about it
- The outlook for the crypto China narrative
What Is the Crypto China Narrative?
The Chinese narrative is the notion that crypto will experience a rally because of liquidity flowing in from China. Exactly how long the rally would sustain, or if it will bring back the bull market, however, is not known.
There’s at least as many theories on the origins of this narrative as that of COVID.
However, the earliest mention of it came from GCR, a regular appearance in our weekly Twitter round-ups:
Narratives in crypto are a dime a dozen. But this one caught on hard. Crypto Twitter is now tweeting in Chinese and even CoinDesk is reporting on it.
So how does all of this work exactly?
How Does the Crypto China Narrative Work?
There is obviously — hopefully — a bit more behind the narrative than just one whale on Crypto Twitter.
The fundamental reasons can be traced back to December. China abruptly ended its strict COVID policies, which tedtalksmacro correctly pointed out as a bullish catalyst:
Why would that be bullish?
Remember what happened in the US during Covid? The Federal Reserve turned on the proverbial money printer and doled out the infamous “stimmy checks.” When lockdowns eased and the economy started opening up again, people started spending money.
This is a highly simplified explanation but good enough for our cause.
That means for this narrative to play out, we would need the central bank in China to “turn on the money printer,” correct?
Bingo!
The equation goes like this:
More liquidity in the global financial system = Volatile assets (including crypto) prices go up
The consensus these days is that crypto reacts to liquidity injections, not to inflation. You can read the full explanation for this in our article: Here’s Why Everything You Know About Bitcoin And Inflation Is A Lie.
Now, China is injecting liquidity not only because it ended COVID lockdowns. Rumor has it the real estate market in China is in a crisis, too. Be that as it may, Bitcoin’s correlation with the S&P 500 is turning negative for the first time in a while. But its correlation with liquidity from China seems to have been increasing in the last few months:
This development was fuel to the fire of GCR’s thesis — that the next bull run would originate from Asia. And lo and behold, Bitcoin has rallied off its lows. And then there was also news from Hong Kong…
The Role of Hong Kong for Crypto in China
Hong Kong used to be China’s traditional crypto hub. As Arthur Hayes explained in an essay, China’s crackdown on crypto drove many big exchanges out of Hong Kong.
But it looks like China wants crypto back in Hong Kong.
Last week, Hong Kong's Securities and Futures Commission (SFC) proposed rules to license crypto exchanges. It is also planning to regulate stablecoins starting in June this year.
Is this a coincidence that this is happening now?
Crypto Twitter thinks no:
The argument goes that China was to position Hong Kong as a financial hub rivaling London and New York. And in today’s day and age, you can’t do that while completely ignoring the cryptocurrency market. Moreover, “outsourcing” crypto to Hong Kong, which has a tradition of liberal economic policies but is now firmly under the control of Beijing, would be a convenient way of adopting crypto without adopting crypto.
Which Coins Are Considered “China Coins?”
There has been an interesting bit of Inception-like game theory going on:
Westerners buy the coins they think Chinese people will think Westerners will buy.
Case in point:
Here’s another list that has been making the rounds:
Should you buy any of these?
Totally up to you, none of this is financial advice.
Moreover, many of them have already pumped violently.
These are just a few examples. You be the judge whether this rally has some legs left…
Whom to Follow for China Narrative Updates
Academy, of course!
If you want real-time updates on Twitter, every account mentioned in this post is worth a follow. Here is another list of China-related accounts:
Even though Ran conveniently put himself on the list of highest-alpha accounts, this is a good compilation of Chinese crypto alpha.
Is the Crypto China Narrative Real?
The most important question of all.
Is this a real narrative? If yes, how long will it last? Has it already topped?
Well, here’s where it gets complicated.
It depends on who you listen to. Check out some of these Chinese accounts, and they will tell you it’s realer than real:
But how do you know you are not just exit liquidity?
You don’t:
Some think the correlation between Chinese stocks and crypto is not strong enough to draw any conclusive evidence. Others say you need to look at real estate prices instead of stocks. Bitcoiners don’t think the narrative matters at all.
The takeaway: no one really knows.
But you are more likely to be late than early to this narrative. Some coins are already cooling off from the local high Bitcoin set around $25K. Whether there is another leg left in this will depend on two factors:
- How much liquidity to expect from China.
- How the Federal Reserve will manage liquidity in the US.
Regardless of how the China narrative develops, it’s worth monitoring on Crypto Twitter. At least you will come out of it with some transferable skills:
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. As always do your own research.
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