Bitcoin: Bank Position Issues in Digital Asset Trading

After the exit of the RMB position, the bearishness of the price movement of crypto assets such as Bitcoin trading depends on the regulatory risk and the market reaction. The key is the standing volume of the USD position.

Bitcoin: Bank Position Issues in Digital Asset Trading

The bearishness of the price movement of crypto assets such as Bitcoin trading after the exit of the RMB position depends on the regulatory risk and the market reaction. The key is the standing volume of USD positions.

Zhou Ziheng, Chairman of Zhejiang Institute of Modern Digital Financial Technology, writes for

The recent bitcoin price volatility has sparked a lot of discussion, including the issue of bitcoin’s bank position, which should also be taken seriously.

What is a bitcoin bank position?
Although named “digital currency” or “cryptocurrency,” crypto assets such as bitcoin are broadly divided into coin transactions and fiat currency transactions. Most of the transactions in both segments reflect trading activities under crypto asset exchanges, and both have the problem of “withdrawals”. As asset trading activities, the goal is to eventually get more “fiat” currency. This means that no one is unconcerned about the fiat price of crypto assets, and there is no one who does not think that a continuous increase in the fiat price is the best vision. In the stock market, although the power of capital is huge, people still believe that value investing plays the ultimate role, and that share prices cannot be completely divorced from the value of a company, and that too high or too low share prices mean an inevitable pullback.
Unlike the stock market, there is no value constraint on crypto-asset trading. Even though the production cost of crypto-assets is getting higher and higher, and “mining” is starting to be seriously questioned or even criticized by all parties, the production cost cannot be equated with its value, nor can it be used as a basis to support a strong or even rising fiat price.

If there is a signal of “value” to be assigned to crypto-asset trading, it is the amount of money invested in the bank’s position, especially the marginal amount invested. That is, the amount of bank money that directly or indirectly supports crypto trading and the cost and efficiency of all aspects of it. Even with cryptocurrency trading, its higher turnover rate brings about a climb in transaction fees, which, ultimately, is still reflected as the amount of bank currency positions incurred. The decreasing bank positions supporting crypto asset trading will directly contribute to the rapid shrinkage of crypto asset trading, which will not only narrow the price fluctuations, but also make it very easy for the self-reinforcing trend of shrinkage up or shrinkage down, which will cumulatively trigger the extreme market. If bank positions are cut off, not to mention whether it is practically feasible or not, then it will directly lead to the collapse of trading. Therefore, the so-called “cryptocurrency trading” is only a secondary trading market, but the fundamental role is played by the fiat currency trading market.

If the fiat currency trading of crypto assets shrinks to a large extent, it will directly squeeze out a large amount of bank currency positions, which will leave the crypto asset trading system and “flow back” to the existing circulation system. This is the trillion-dollar gray rhino effect that Bitcoin and other crypto-asset trading will have on the entire international economic system. In fact, if only individuals hold them, the impact would not be so great, the price would plummet and there would be no corresponding bank positions to follow, and the chain reaction of asset shrinkage from the plummeting price of individual digital assets trading would not have an impact on the balance sheet system of the economy, because it would not be on the balance sheet. However, the impact on the part of financing or leveraged transactions is significant, and the impact on the part of digital assets held by companies is huge. In turn, the bank positions released by the crypto asset trading market will hit other areas as well.

So, what kind of bank positions will be squeezed out?

The RMB position, or the USD position?
In September 2017, the Chinese monetary authorities withdrew crypto asset trading within China, and the result is that bank positions are no longer available for crypto asset trading within China, and RMB positions for crypto asset trading such as Bitcoin are cut off. Holders of crypto assets such as bitcoin within China choose to trade offshore, but as buyers, will bypass bank regulation and settle their own currency positions for the purchase of crypto assets. These inbound buyers, who are taking increasing regulatory risks, are, in fact, directly or indirectly providing RMB positions and even crowding out some of the underground FX trading channels.

Overall, the RMB positions backing crypto assets have been sharply reduced by regulatory policies. The domestic sellers of crypto assets, then, undoubtedly gain more offshore USD positions. That said, the strong regulatory intervention of the Chinese monetary authorities in crypto asset trading has changed the currency type of bank positions traded in crypto assets and even their flow inside and outside the country.

Globally, bank positions in crypto asset trading are undoubtedly funded by (offshore) US dollars. Further severe suppression of crypto asset trading, then, will undoubtedly result in a significant drop in the price of its fiat currency and the inevitable release of large amounts of dollars internationally. Chinese sellers of crypto assets are also faced with a new choice of flow for the dollars they receive from cashing out. It is interesting to see whether the volume of selling that occurred with the price crash directly contributed to the short-term surge in the supply of dollar positions. Without a large follow-through of short-term USD positions, the price dip will not result in a release of trading volume, but only a contraction in trading volume to the downside, and crypto asset prices will quickly find support for a limited exchange of hands.

After the exit of the RMB position, the bearishness of the price movement of crypto assets such as Bitcoin trading price will depend on the regulatory risk, the market reaction, and crucially, the standing volume of the USD position or the movement of its marginal position.

Marginal position issues
Since last fall, the U.S. financial authorities have gradually and significantly adjusted their attitude and position towards crypto assets, from the banking system accepting the custody of crypto assets, to a series of regulatory relaxation and issuance, to the more tolerant and positive statements of some officials, and so on, which can be seen as the U.S. side seems to be more willing to provide more dollar positions for crypto asset trading. In the aftermath, there has been a huge wave of business people who have become fans of Bitcoin. This caused a spike in marginal positions in crypto assets in 2020, and the dollar price of crypto asset trading, led by Bitcoin, continued to move higher. The wealth effect caused by crypto assets such as Bitcoin is more prominently reflected in the wealth effect of excess dollars in 2021.

The increase in marginal bank currency positions for crypto asset trading, mainly from the US dollar, is the same source as Wall Street retail investors going long, with cheap and surplus dollars needing to find more, faster and more imaginative outlets for their release. It is not difficult to find that on the one hand, the relevant authorities are coincidentally controlling housing credit and tightening the pockets of funds in the property market to avoid the influx of excess funds; on the other hand, the US side is opening up or even stimulating the trading of crypto assets. It is with this in mind that we ask the question, how much excess dollars can Bitcoin absorb?

We note that the NFT has brought about more tradable digital asset models, as well as the practice of Defi and others bypassing asset trading and taking bank positions, and even the harsh criticism or pursuit of individual “crypto assets”, all of which are undoubtedly conducive to the consolidation of a “core The “core” crypto asset trading structure system. They either bring in more bank positions or provide a greater variety of options for bank positions, or they structurally strengthen the position of core crypto assets such as Bitcoin and reduce the instability associated with the inherent market competition in the crypto asset system. There is no doubt that a larger funnel of dollar positions is forming to solidify with increase the incremental marginal currency positions traded in crypto assets such as Bitcoin.

However, even if Chinese authorities do not strengthen their regulation of crypto-asset trading, it is not hard to see that global technology innovators, including large US corporations, are cutting budgets and staff in their blockchain segments, or even cutting related departments outright. Crypto-asset trading is losing its established dazzling aura of technological innovation, and if there is no way to solidify and increase the marginal monetary positions required for trading, then a rapid decline in its trading prices will become a probable event. In other words, bank positions will decrease rather than increase, and a full market turmoil downside is inevitable. As crypto assets such as Bitcoin have many holders or fans in China, and there are a large number of “potential” traders, the regulatory warning from the relevant authorities is necessary and timely, and objectively serves to stabilize the crypto asset trading market and prevent it from overheating, rapid and excessive fluctuations, which may affect a series of domestic and international financial systems. The financial chains or joints of the domestic and international financial systems.

How much dollar position is there in the crypto asset market with a market capitalization of $20,000-30,000 billion? How many marginal positions can be leveraged by this standing dollar position? How do the roughly $100 billion in stablecoin assets relate to crypto-asset trading? What will crypto assets rely on to continue to maintain their bearish posture after several rounds of price spikes and drops, when individual investors will be generally fearful and more individual holders will choose the right time to leave the market? In addition to the heavily regulated property market, it is already difficult to find the next transaction species with consistently high prices in the global market, and the situation where crypto assets such as Bitcoin are the only one is now a thing of the past ……

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