Traditional institutional investors once considered cryptocurrencies an investment for the bold or the stupid: a niche market with a bad reputation and high volatility. In 2017, J.P. Morgan CEO Jamie Dimon called Bitcoin a fraud.
In 2020, J.P. Morgan started offering banking services for cryptocurrencies and its analysts predicted Bitcoin’s price could hit $146,000 in the long term. Bitcoin’s price surged to $20,000 last year, entering the mainstream. On Jan. 9, 2021, it briefly hit $41,000. As of the time of writing, one Bitcoin costs $36,500.
Over the last year, affluent Chinese have flocked to blockchain-based digital assets as an investment—and a safer place to stash their money—industry insiders told TechNode. There are no hard figures on how much Chinese investors are putting into the largely untraceable world of crypto, but multiple insiders TechNode spoke with agreed that the virtual assets have caught on.
Chinese investors have historically preferred parking their assets in US markets through investments in stocks, funds, real estate, and more. The US is a mature and liquid market, with relatively tight control over corporate structures and low taxes on capital gains, making it a popular destination for the world’s wealth.
High income Chinese are now looking at cryptocurrencies as a safe haven for their assets, said Flex Yang, CEO and co-founder of Babel Finance, a Hong Kong-based Chinese cryptocurrency asset management company.
About $50 billion in cryptocurrencies was moved from East Asia to overseas accounts in the 12 months ending in June 2020, according to an August report by US-based crypto analysis firm Chainalysis.
“China is a large part of this activity in East Asia,” a spokesperson from Chainalysis told TechNode, though it has not yet analyzed country-level data.
Based on their own interviews with experts, Chainalysis said that at least some of this $50 billion represents capital flight.
Tech war ripples
Yang said that after March, he noticed increased demand for his firm’s services from wealthy Chinese investors.
Lennix Lai, director of financial markets at OKEx, the world’s largest cryptocurrency exchange by trading volume, and El Lee, COO of Singapore-based crypto asset custodial firm Onchain Custodian, agreed that cryptocurrencies have garnered more interest in the last year from wealthy Chinese individuals as well as the country’s institutional investors than in the past.
Politics is one of the reasons for the shift, Yang said. Investors appeared concerned about the political environment in the US, following rising tensions with China.
“Before, they thought it’s impossible for their assets to be frozen in the US. Now, the chances have increased by 100%,” he said.
The tech war has accentuated an existing trend away from traditional assets and towards cryptocurrency trading in China, said Lai.
Investors have come to question the centralization of financial industries, especially given the potential of a decoupling between the world’s two largest economies, he said.
Lai brought up the example of the SWIFT system that underlies cross-border transfers of money, which is based on the US dollar. “There are a lot of discussions and rumors in China right now that this [reliance on US currency] could jeopardize the Chinese money flow,” Lai said.
Follow the lead
Concerns about the US dollar is “one reason, but is not a major reason” why Bitcoin prices are soaring, according to Lee.
“If that was the case, we would see our clients switching 80% of their fiat [currencies] into Bitcoin,” he said. The new interest is primarily driven by investors who want to diversify their portfolio, and people who see an investment opportunity in cryptocurrencies, said Lee.
Central banks and financial heavyweights around the world have started endorsing cryptocurrencies in the last year, which has given them more credibility among mainstream investors.
China is plowing ahead with its ambitious digital yuan project. The International Monetary Fund, European Union, and even several governments have taken up the development of their own digital or crypto currencies.
These moves are part of a trend toward a more “robust decentralized system” according to Lai, one that isn’t controlled by a few stakeholders.
In 2020, non-crypto companies invested in Bitcoin and other coins, receiving widespread attention from media. Around the world, many people reading the news about Bitcoin prices want in on Bitcoin, Lee said.
Fintech giant Square, Nasdaq-listed business intelligence software provider Microstrategy, and Stone Ridge Asset Management announced they are investing millions in cryptocurrency. Microstrategy owns more than $766 million in cryptocurrencies, and plans to buy an additional $400 million.
In December 2020, Massachusetts Mutual Life Insurance, a Fortune 500 pension fund, bought $100 million worth of Bitcoin for its general investment fund. J.P. Morgan analysts viewed this as an indication that Bitcoin is “spreading from family offices and wealthy investors to insurance firms and pension funds,” Bloomberg reported based on an investment note.
Another significant source of cross-border cryptocurrency flows from East Asia, particularly China, are cryptocurrency miners. China is home to around 65% of the world’s mining activity as of April, research from the Cambridge University Center for Alternative Finance indicated.
Miners need to convert their freshly minted cryptocurrencies into fiat currency to pay for bills like electricity and payroll. They prefer to convert them into stablecoins before converting them into fiat currency like US dollars, according to Chainalysis. Stablecoins are easier to convert to traditional currency and more resistant to cryptocurrency market fluctuations.
While the trend for Chinese investors has been to shift away from US-based investments, Chainalysis found that Chinese investors have a strong preference for Tether over other cryptocurrencies, a stablecoin pegged to the US dollar. It analyzed Bitcoin conversion into the most popular fiat currencies stablecoins in the last 12 months. All bitcoin converted from China went to Tether purchases, whereas in Korea and Japan it was mostly converted directly into local national currencies.