The China Crypto Narrative Explained
China's Role in the Crypto Market: A Narrative Analysis
According to the crypto China narrative, increased liquidity from China is expected to drive a rally in the cryptocurrency market. Nevertheless, the sustainability of this rally and whether it can trigger a larger market recovery remains uncertain.
The workings of the crypto China narrative can be traced back to December, when China lifted its strict COVID policies. This move was seen by some as a bullish catalyst, as it could lead to increased spending and economic growth. In the US, the Federal Reserve responded to COVID by printing money and issuing stimulus checks. For the crypto China narrative to come to fruition, the central bank in China would need to follow suit and inject liquidity into the economy.
What factors drive the Crypto China Narrative?
The current consensus is that an increase in liquidity within the global financial system leads to a surge in prices for volatile assets, including cryptocurrencies. Interestingly, this seems to be driven more by liquidity injections than by inflation. China's recent injection of liquidity into the system is not only a response to the end of COVID lockdowns, but also to rumors of a crisis in the country's real estate market. In the midst of these developments, BTC’s correlation with the S&P 500 has turned negative, while its correlation with liquidity from China has been on the rise in recent months. This trend has given further credence to the theory of GCR or @GiganticRebirth that the next bull run in the cryptocurrency market will come from Asia and now Bitcoin has rallied from its lows
How is Hong Kong involved in the Crypto China Narrative?
In the past, Hong Kong was considered the hub for cryptocurrency and decentralized finance in China. However, due to China's hunt down on cryptocurrency, many major exchanges had to move out of Hong Kong. Interestingly, it seems that China now wants to bring cryptocurrency back to Hong Kong. Last week, the Securities and Futures Commission of Hong Kong proposed new rules for licensing cryptocurrency exchanges. Additionally, the SFC has announced plans to introduce regulations for stablecoins beginning in June of this year.
Some speculate that this move is not a coincidence, but rather a part of China's larger plan to position Hong Kong as a major financial hub to rival New York and London. Given the importance of cryptocurrency in today's financial landscape, it seems that ignoring this market completely would be detrimental to Hong Kong's financial aspirations. Furthermore, by "outsourcing" cryptocurrency to Hong Kong, which has a history of liberal economic policies but is now under Beijing's control, China could conveniently adopt cryptocurrency without having to fully embrace it.
Examining the Validity of the Crypto China Narrative
The validity of the Crypto China Narrative remains a topic of debate among experts. While some argue that the correlation between Chinese stocks and crypto is not significant enough to establish a clear link, others suggest that real estate prices are a better indicator. However, Bitcoin advocates tend to dismiss the narrative altogether.
Ultimately, it's difficult to say for certain whether the narrative holds true. It's worth noting, though, that those who wait too long to act on it may miss out on potential gains. Some cryptocurrencies have already begun to dip from their recent highs, and the future of the narrative may hinge on the level of liquidity China provides and how the Federal Reserve manages liquidity in the US.
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