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As we often see with markets, people tend to confuse forced capital flows with genius.
We’ve seen it in the tech giants. The “disrupters” in Silicon Valley were only able to disrupt long-entrenched industries because of the hundred billion dollars that flowed from Washington to Silicon Valley as part of the American Recovery and Reinvestment Act. When the government is pouring that kind of money into “new technologies”, private equity (i.e. pension fund money) will follow it. Plenty of funding, regulatory advantage, and no pressure to (in some cases, ever) produce a profit turns out to be a recipe for destroying industries. The entrepreneurs are credited for their genius, but they have those capital flows from Washington, at the depths of the economic crisis, to thank for it.
Bitcoin is another case of confusing capital flows with genius.
It’s no coincidence that the ascent of Bitcoin coincided perfectly with the crackdown on capital flight in China. In late 2016, with rapid expansion of credit in China, growing non-performing loans, a soft economy and the prospects of a Trump administration that could put pressure on China trade, capital was moving aggressively out of China. That’s when the government stepped UP capital controls — restricting movement of capital out of China, from transfers to foreign investment.
Of course, resourceful Chinese still found ways to move money. Among them, buying Bitcoin. And that’s when Bitcoin started to really move (from sub-$1,000). China cryptocurrency exchanges were said to account for 90% of global Bitcoin trading. Capital flows were confused with Silicon Valley genius.
But in September of last year China crackdown on Bitcoin – with a total ban. A few months later, Bitcoin futures launched, which gave hedge funds a liquid way to short the madness. Bitcoin topped the day the futures contract launched.
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