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Bitcoin – The new global trading currency

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Bitcoin – The new global trading currency




How cryptocurrency hedge funds will change the world (for reasons that have nothing to do with cryptocurrency)

I’m currently working as an adviser for two cryptocurrency hedge funds ( and, and I’m talking to a few more.  I’m quite excited because I happen to think that we are about to see a revolution in fund management that has nothing to do with cryptocurrency investment.

Here is the problem…..  It turns out that hedge funds have to spend a lot of time and resources on back office and legacy processes.  A lot of this involves simple things.  You issue an order to your broker.  You need to match up what your broker thinks you ordered versus what you actually ordered.  The trouble is that all this is a manual process.  What you really want, and what people are promising with blockchain is that all of this stuff will happen automatically.

The fact that the back office is expensive means that you don’t have time for things like customer service.  Also because all of the systems are connected to existing financial markets, it’s very difficult and expensive to “on-board” new products.

The logical solution is to move to new technology.  The trouble is that if you have an existing hedge fund, you fall into the “legacy trap.”  It turns out that it’s much more expensive to create a new system than to maintain an old system, and it turns out to be even more expensive to convert an old system to a new system.

But if you suddenly have funding to create a new hedge fund from scratch, at that point, you have the startup capital funding to use completely new systems.  At that point you can “leapfrog” old systems.

The thing about crypto-tokens is that they really aren’t limited to cryptocurrency.  So you have a hedge fund that trades EC20 ethereum cryptocurrency tokens.  At some point, someone is going to be able to “wrapper” a stock certificate, a bond certificate, a land transfer, or any other financial product in a standard token.  When that happens, then your hedge fund will be able to trade *anything* and then all of the trading records and back office will happen automatically.

Also using new technology gives you some *immediate* benefits.  Suppose, you have a hedge fund in Asia, and you have a ten clients that want to each invest USD 10k in your fund, but it so happens that they happen to be in ten different countries.  It turns out that setting this up is going to be more trouble that its worth if you go the traditional way.  But since this is a crypto-currency fund, you ask each of them to buy bitcoin and send them to your address.  If you need to send money back, then rather than dealing with the mess of wire transfers to ten different countries, you just get their bitcoin addresses, and send the amounts back.

The other thing is that it means that you can do smaller investments.  With traditional hedge funds and back office, you have to have an investor that is willing to put in a large amount of money of say USD 200k, in order to make it worth while to invest.  Once you automate back office, you can take investments of USD 20K or even USD 20.  You might ask, so who would be interested in buying USD 20 in a hedge fund.  Well, it turns out that I’m trying to work with African coffee farmers.  If it turns out that I can boost their incomes by USD 20-30/month, at that point they have extra funds to save.  They might be interested in buying Microsoft stock.

Also you have the opportunity to buy and sell new products.  All you have to do is to tokenize the product, and your fund can sell it.

All of this is possible because you are building everything with new technology from the ground up rather than trying to retrofit old technology.

Note on JPMorgan bitcoin trades and Jamie Dimon

Just a note on the JPMorgan bitcoin trades.  It’s very ironic, yes, but there’s a lot of incorrect speculation on what is going on.

First of all, banks are not allowed to do proprietary trading.  So JPMorgan cannot make money off the swings of bitcoin (or in the price swings of everything else).  The regulators put in this rule after the 2008 financial crisis, and it’s a pretty strict rule.

Where JPMorgan does make it’s money is to be a prime broker.  You call up your broker and you want to buy X shares of Apple stock.  It turns out that the broker is legally obligated both by their contract to you, exchange rules, and often regulatory requirements to execute that order.  So what happened was that after the price of bitcoin went down, one of JPM’s clients (or many of JPM’s clients) sent an order to buy a tracking index for bitcoin.  At that point JPM is legally obligated to execute the order, not withstanding what the CEO thinks about bitcoin.

One thing that you have to understand about JPMorgan or any big company is that it is a huge bureaucracy, and it’s not as if the CEO can just order people to do something.  There were only two times while I was there that I saw Dimon.  Once when he gave a speech at a “thanks for your hard work” Friday party the week Lehman Brothers collapsed, and the other time in which he visited Hong Kong.  He apparently walked through the trading floor, but I was too busy working with my computer so I missed even seeing him.

The big problem with Dimon’s comments is that it’s terrible for the future of the company….  It’s impossible to know exactly who traded the bitcoin, but they almost certainly are a big hedge fund client or really rich person that has a choice of brokers, and if the CEO of one of the companies that you are putting trades through thinks that you are a drug pusher, you might be thinking about using another broker.   If it happens to be someone that is deep into crypto, then right now there are likely to be some uncomfortable conversations with the fund’s relationship manager, as the relationship manager is trying to explain away Dimon’s comments.

And it’s terrible for morale.  Trying to be an innovator in a big company is an incredibly difficult and frustrating job.  It’s like teaching an elephant to dance.  You have to deal with mind numbing amounts of politics and spend frightening amount of time dealing with legacy systems and bureaucratic inertia.  Yes, you get paid well, and you have a steady paycheck, but unlike a small company where you must innovate or die, you have the option of just punching the time clock, doing what you are told, and collecting the paycheck at the end of the week.

As with innovation elsewhere, ultimately you do what you do because you care about the company and you want to do a good job to generate shareholder value.  The CEO is like the Queen of England.  They are so far away that they have no direct influence on what you are doing.  What the CEO can do is to provide tone and a vision.  You are fighting the day to day battles to get something new done, and you want to give up, but then the CEO talks about how important innovation is, and you keep fighting.

But one day you come to work and find out that senior management really isn’t interested in what you are doing.  It can be a very painful and traumatic experience, so at that point you leave.  But as the people that are interested in innovation leave, things get colder and colder.


Bitcoin is not the cheapest way of money money – It’s the best way of moving money (sometimes)

tl:dr Bitcoin is a really, really expensive way of moving money.  OTOH, it turns out that FedEx and DHL are far, far more expensive ways of sending mail than first-class post, but people do that anyway.

I have to respond to one linkedin post that claims that bitcoin is superior to traditional ways of moving money because it is the cheapest way of moving money.  This happens not to be true, and it turns out that from a transaction fee point of view, bitcoin is substantially *more* expensive than bank wires.  But understanding that the value proposition of bitcoin has nothing to do with cheapness.

It turns out that bitcoin is expensive because it’s very “high touch.”  If you want to use bitcoin to transmit money then you have to go through a lot of hoops to get it done, and you have to go through a lot of people in order to do it.  For example, if you want to buy bitcoin from me, I will typically charge a 1.5% fee spread versus the exchange.  If you add all of the fees together you end up with about 3% which is much, much higher than a bank wire.  Also the price of bitcoin is highly volatile which means that either you handle the volatility yourself or else you pay someone to do it, and that gets expensive.

So why to people do it…..

reliability and traceability – Bank wires are cheaper *when everything works*.  The trouble is that every person has some experience where a bank has messed up a bank wire.  The problem with the bank wire system is that it is literally “pay and pray.”  Once a bank sends out a wire there is literally *no way* that the bank can trace where the money is, and *when* some bank messes up a wire, you are literally looking at days of headache.  Reliability and traceability also matters when you are dealing with people that you have only moderate levels of trust.  If someone tells me that the funds have been bounced and I need to resend the funds, I have no way of knowing if they are telling the truth or they are scamming me.

coverage – Bank wires are better when you can send a bank wire, but try sending a bank wire to someone in Tanzania, who does not have a bank account and wants the money in Tanzanian shillings.  It gets more interesting.  If I have a business that needs to pay *only* to Tanzania, there probably is a better way to do that then bitcoin.  However, suppose I have a business that needs to pay people in 50 different countries.  At that point, I can’t handle 50 different payment systems especially if I just have one person in Tanzania.  But I can set up my system to just use bitcoin, and then the person in Tanzania or the Ukraine or Vietnam figures out what to do with that.

speed and hours – Bank wires can take 2-3 business days.   Bitcoin is instant.  Also bitcoin doesn’t have this concept of a “business day” so if you want to send the stuff on a weekend, you can.

small transactions – The cost of a bitcoin transaction scales with the amount of the transactions, and it’s always about 2-3%, whereas a bank wire has a fixed cost that is about USD 100.  The reason for that has to do with the nature of the technology.  My biggest risk is that something will go wrong with the transaction, so I have to charge an amount that is proportional to the size of the transaction.

better customer service – Big banks have terrible customer service because they are trying to squeeze every cent out to cut costs.  One reason that my customers are willing to pay me 1.5% transaction fee is that I’m just nicer than a bank teller.  Also this happens to reduce my other costs such as credit risk or anti-money laundering.  Basically, I know that the people that buy bitcoin from me aren’t drug dealers so I don’t treat them like suspected drug dealers.  Also, one thing that I can do with a repeat client is that I can send them the bitcoin immediate if they show me a bank receipt.  Since I’ve done business with them before, I know they won’t forge a bank receipt.  Conversely, they’ve done business with me, so they know that I won’t take their money and run.

specialization – The other thing that you get with bitcoin is that you end up dealing with people that specialize in certain types of transactions.  For example, I end up buying and selling bitcoin for at the USD 1-10k range for Hong Kong dollar.  If you need 3 million USD in bitcoin, USD 300K, or USD 30K in bitcoin, I can’t do that but I can point you to people who can.

One other thing is that bitcoin can reduce costs, but not from transaction fees.  It turns out that if you pay a 1.5% transaction fee, but you don’t have to spend weeks tracking down a payment that’s much better for you if you are running a business.

The other thing to point out is that at least in Hong Kong, bitcoin is a B2B play and not a B2C play.  It turns out that when you are dealing with consumers, consumers don’t like to change the way that they pay, and they want convenience.  Part of the reason we have stores and retailers is that this is a way for consumers to push the pain onto the store.  You buy your potato chips, you give the store cash.  If the store has troubles with the bank, it’s not your problem.  Now the store has to handle the headaches of something going wrong so if the store has to pay an extra 1.5% but saves the cost of tracking stuff down.  It’s a bargain.

I should point out that the fact that bitcoin isn’t a cheap way of moving money explains why I’ve never gotten my China money moving business with bitcoin to work.  Because people move money from China to the United States or Mainland to Hong Kong all of the time, there are just better ways of doing it than using bitcoin.  The one client that is interested in buying bitcoin from me happens to be a remittance business that needs to move small amounts of money from China to places like Indonesia.

It’s really important to understand why bitcoin is useful because it indicates what business models work and models don’t.  It turns out that most Silicon Valley investments are based on the ideas of “cost cutting” and “disintermediation” and “horizontal integration” which works against bitcoin.  Bitcoin *increases* your costs and creates more middle men, but the value is that you end up with a faster, more reliable method of moving money with better customer service.

The wrong question – Are we in a cryptobubble?

This is the wrong question.  OF COURSE.  We are in a bubble.  Every single technology that has been introduced has created a bubble.  Railroads. telegraphs, cars, radios, microcomputers, video games, the internet.  But that’s sort of a useless question.

The real question is what part of the bubble are we in, and I think that we are just at the very beginning of a bubble.  The other question is what is the natural price of bitcoin?

For that you have to understand what bitcoin is actually used for.  If it’s just a speculative instrument, then the price is going to be close to zero.  But one thing about the price of bitcoin is that the fact that it went down and bounced back when the Chinese exchanges were closed suggests very strongly that it’s not just a speculative bubble.

So what do people use bitcoin for?

If you are living in a middle class house in the United States, its hard to imagine why someone would use bitcoin.  I mean you can use your credit card to buy anything from Walmart or Amazon.  But try this, use your credit card to buy something from Africa, and you will find that it turns out to be really, really painful.

Once you are in Hong Kong, it becomes more obvious what bitcoin really is being used for.  Hong Kong happens to be one of the world centers for money movement,  You can go to the shops at Worldwide House or Chungking Mansions.  It looks like a scene from Blade Runner.  A lot of small shops.  Odd-food that you’ve never seen before.  People speaking 10 different languages and then buying and selling stuff.  All that buying and selling involves moving money between the Middle East, Southeast Asia, and China.

Now a year ago, no one would have heard of bitcoin, but it turns out that a lot of these shops are using bitcoin to move money.  They don’t advertise it.  But you’ll find that they’ve found that it’s just a better way of moving money.

Now you think about all of the trade that can take place between China, India, Russia, Africa, Southeast Asia, and the Middle East.  Three billion people.  Now put in the fact that bitcoin happens to be the fastest and most convenient way of moving money at the wholesale level.  You have to pay someone in Kenya or Indonesia, so how are *you* going to do it.  It’s only in the last three to six months that the money movers have figured out that this is the best way of doing it.

So yes, we are in a crypto–bubble, but we are just at the very start of it.

Why the Chinese government shut down the exchanges….

Just to start out with a mea culpa.  Just like I dismissed bitcoin when it first came out, I didn’t think a week ago that the exchanges would get shut down.  My positions reflected this and this month was a really bad month for my trading.  For most of the week, I was thinking that this wasn’t going to happen, but there were three things that bothered me.  The first was that someone that I know seemed to be certain that this was real.  The second was after the initial “dead cat bounce” from the initial Caixin report, the markets didn’t rebound which suggested that there was some inside information.  The final thing that bothered me was that after thinking about it, I figured out a reason *why* the Chinese government would want to shut down the exchanges.

First of all, two common explanations are “they are idiots” or “they want control.”

The “they are idiots” doesn’t make much sense, since they’ve actually been pretty sharp about bitcoin and blockchain policy.  The “they want control” also doesn’t make sense because it turns out that forcing bitcoin and ethereum into OTC trading will substantially reduce the amount of control the government has over cryptocurrency trading, and assuming that the government doesn’t know this gets back to the “they are idiots” explanation.  So I was pretty sure that the government wouldn’t shut down the exchanges if they wanted control, because this in fact reduces their control….

But then I thought of another reason why they would want the exchanges gone…..

I think the one big thing that caused the People’s Bank of China to be alarmed was the report a few weeks back that the major exchanges were taking their cash deposits and then investing them into wealth management products.  You take people’s cash and then you buy these wealth management products which invest in property and can make 15%.  The problem here is at this point you have just become an unlicensed bank.  If you put your spare cash in property and the property bubble pops, then at that point you have pretty much exactly what happened to Lehman Brothers in 2008.  The thing about wealth management products is that they are supposed to be only for rich people that can absorb the loss if they go bust, but if the exchanges were investing in these products, then any bursting of the property bubble could cause the economy to crumble as the a collapse spreads through the economy.

You can imagine even worse scenarios.  A bitcoin exchange has a whole bunch of spare cash.  What happens if they put their money into ICO’s.  Or what happens if the exchanges put money in each other’s ICO’s.  In that situation, you could very quickly set up scenarios by which bitcoin causes the Chinese economy to collapse.  Maybe the exchanges aren’t quite a Lehman Brothers scale yet, but the fact that they aren’t that big is likely why the PBC acted now.

You don’t have this problem with OTC trades.  OTC trades are invariably “payment for delivery” or “cash and carry”.  People don’t deposit cash in advance.  They give you cash, you give them bitcoin.  This means that you don’t have a pool of cash which you can use to run an unlicensed bank, and that means that if you go bust after you do the exchange, it doesn’t matter.

The interesting thing about the PBC’s actions is that they in fact create an infrastructure in China that is more decentralized and harder to control, but I’m pretty sure that they realized that.  But this means something else.  The fact that you can come up with a plausible scenario by which Chinese bitcoin exchanges could destroy the Chinese economy means that this isn’t a science experiment.

One interesting thing is that after the news that the two big exchanges were closing came out, the price of bitcoin spiked upward.  The reason for that was that once it was clear what the situation was, that removed a lot of the uncertainty that was pushing the price down.  One thing that people don’t quite realize is that bitcoin is not a fringe experiment, it’s become an integral part of the Chinese economy, because it happens to be the easiest way of doing trade with places like Russia or the Middle East.


Notes on PBC ICO Notice

Here is the notice + English translation

Some notes:

  1. There is an English/German loophole that this regulation doesn’t plug.  Basically English law says that you can sell anything you want, but it restricts being able to market and buy something.  German law restricts what you can sell, but there are few restrictions on buying and marketing.  So this was a standard loophole for creating products in England and selling them in Germany, which is part of what caused the financial crash.  It turns out that Mainland law is based on German law, and Hong Kong law is based on English law, and so the regulation doesn’t prevent you from letting people know that a non-Mainland ICO exists.
  2. With Mainland Chinese regulations, the important thing isn’t the actual wording of the regulations but rather you look at a) who issued the regulations and b) what the intent of the regulations are.  At that point, you really need to read the details.  Simply saying the “Chinese government has banned ICO’s” doesn’t tell you enough.  What you need to do is to dig into the regulations and figure out what exactly they are doing and why they are doing it.
  3. First of all, the most important thing about a Mainland Chinese notice is *who* issues the notice.  For example, I remember at one point, the Ministry of Culture issued some regulations on the internet which everyone ignored, because no one cares what the Ministry of Culture thinks.  In this situation, it was issued by the People’s Bank of China, the Cyberspace Administration Commission, the Ministry of Information Industry, the State Administration on Industry and Commerce, and the three financial regulations (Banking, Securities, and Insurance).  The order is important because it means that the PBC is the lead agency.  Also interesting is that the CAC is high up on the list.  Finally, it’s really interesting (and not surprising) that there were no law enforcement people in the list.
  4. The first thing that they are worried about is that they are worried about people getting scammed.  The second thing that they are worried about are people using ICO’s to evade capital controls.  The last thing that they are worried about is banks and other financial institutions getting involved in ICO’s.  These things happen to be things that they should be worried about.
  5. Using ICO’s to evade capital controls is why they’ve specifically banned ICO exchanges from exchanging with fiat, and they also specifically banned the use of coins to be used as cash (i.e. like tether).  What they are still allowing is to exchange ICO’s with BTC and ETH.  At that point they monitor the big BTC and ETH exchanges and use those to implement capital controls.  The thing about capital controls, is that the Chinese government doesn’t seem to mind if you move out USD 2 million or so.  They really, really do care if use this to move out USD 100 million, and it seemed pretty obvious to me that a lot of the big ICO fund raises in the Mainland were specifically to move out tens or hundreds of millions of USD.

Personally I think it’s a good thing, not withstanding the fact it’s giving my portfolio a short term hit.  I’ve been involved in an ICO that currently being marketed in Mainland China (Atlant ICO and also a regulated US hedge fund that’s investing in cryptoassets (Fund3 and another fund that is starting up (, and the environment in Mainland China was totally insane and quite unpleasant.  People were asking basically for money to get into the right wechat groups and on the exchanges, and this was annoying because no one seems to care about whether we were creating solid businesses, and it was pretty obvious that most of the coins that were getting listed were just garbage, but no one seemed to care.

That’s all been crushed, which is good since people will now start to care that the funds are going to actual real businesses.  My mind is working through the legal structures that are needed to work through the regulations, but they shouldn’t been too hard to figure out.

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