Amid the focus on spot Bitcoin (BTC) exchange-traded funds (ETFs) in the U.S. and how they are causing weakness in BTC price, the crypto market is getting support from an unlikely source: Chinese investors.
Despite the ban on trading crypto in China that has been in effect since 2021, a report from Reuters shows that the three-year run of losses in China’s stock market has pushed investors back into the crypto market.
"Bitcoin is a safe haven, like gold," said Dylan Run, a Shanghai-based finance sector executive, in a conversation with Reuters. Run said he started moving some of his funds into cryptocurrencies in early 2023 after he realized that the Chinese economy and stock market were in dire straits.
Due to the ban, investors have to get more creative in how they invest. Run said he used bank cards issued by small rural commercial banks to buy cryptocurrencies through grey-market dealers and made sure to limit transactions to less than 50,000 yuan ($6,978) to avoid attracting the attention of authorities.
More than half of his investment portfolio is now comprised of cryptocurrencies, and his crypto investments are up 45%, while his Chinese equities have underperformed.
The Chinese crypto market is now a grey area, as citizens can still trade tokens like Bitcoin on crypto exchanges like OKX and Binance, or via over-the-counter channels. Another option is to open overseas bank accounts to buy crypto assets.
Hong Kong also offers an avenue for accumulation as Chinese citizens are allotted an annual forex purchase of $50,000, which some have used to purchase crypto within the Hong Kong market.
And with China’s real estate market – estimated to be worth $135.7 trillion – continuing to struggle, more citizens could soon turn to crypto to make up for lost gains.
The country’s property market ended 2023 with the worst declines in new home prices in nearly nine years, despite government efforts to prop up the sector that was once a key driver of the world's second-largest economy.
One anonymous crypto exchange executive based in Hong Kong told Reuters that they see mainland investors entering the crypto market “almost every day.” China's economic downturn “has made investment on the mainland risky, uncertain, and disappointing, so people are looking to allocate assets offshore,” he said.
And it's not just retail investors. Chinese brokers and other financial institutions have also started to wade into the crypto waters as the lack of growth opportunities on the mainland has pushed them to explore crypto-related businesses in Hong Kong.
“If you are a Chinese brokerage, facing a sluggish stock market, weak demand for IPOs, and shrinkage in other businesses, you need a growth story to tell your shareholders and the board," said the exchange executive.
Fintech platforms such as Ant Group's Alipay and Tencent's WeChat Pay have also made it easier for citizens to invest in crypto as they allow users to convert yuan into stablecoins with dealers, which can then be used to trade cryptocurrencies on various exchanges.
According to blockchain data platform Chainalysis, “The increasingly close relationship between China and Hong Kong leads some to speculate that Hong Kong’s growing status as a crypto hub may signal that the Chinese government is reversing course on digital assets, or at least becoming more open to crypto initiatives.”
Chainalysis data shows that crypto-related activities in China have bounced from their lows, and its global ranking in terms of peer-to-peer trade volume jumped to 13th place in 2023 from 144 in 2022.
The report said that a large portion of China's crypto activity “takes place through over-the-counters or through informal, grey market peer-to-peer businesses.”
As recently as 2020, China was home to one of the most active crypto markets in the world and accounted for more than 75% of the global Bitcoin mining hashrate. That all changed after the government cracked down on all things crypto, but it now appears they are loosening their grip as investors struggle to find sources of alpha on the mainland.
China’s crypto market processed $86.4 billion in “raw transaction volume between July 2022 and June 2023,” Chainalysis said. The proportion of large retail transactions of $10,000-$1 million is nearly twice the global average of 3.6%.
Chainalysis said the recent developments in Hong Kong “have created speculation that the Chinese government may be warming to cryptocurrency and that Hong Kong may be a testing ground for these efforts.”
“Hong Kong functions as a Special Administrative Region of China, meaning it has autonomy over many aspects of policy, including regulation of cryptocurrency,” they noted. “Over the last year though, Hong Kong has implemented rules allowing retail crypto trading within a regulated environment. It has also seen Chinese state-owned businesses launch crypto-focused investment funds and collaborate with local crypto businesses.”
According to Merton Lam, founder of the Hong Kong-based OTC firm CryptoHK, his company has been working with a variety of high-end customers. “We work with many investment banks, private equity firms, and high-net-worth individuals. For them, cryptocurrency is part of their investment portfolio. They mostly want Bitcoin and Ether, though some have shown interest in smaller altcoins recently, which is interesting,” he said.
And it's not just Chinese citizens and businesses that are looking to crypto as a way to preserve their wealth. “Anecdotally, I hear from other crypto exchanges that many Russians and Ukrainians are coming to Hong Kong to get their money to safety using crypto,” said Merton. “These aren’t multimillionaires either – ordinary people are doing this too.”
“It’s much easier for many businesses to, say, pay a supplier via stablecoin transfer than through banks,” he added. “It can take as long as three days for a SWIFT transaction to settle, and payments can be especially difficult when dealing with counterparties in developing countries such as in South Asia and Africa.”