Why A Hedge Fund Manager Who Made A Killing From Subprime Is Buying Bitcoin

Tyler Durden's picture

Long before "The Big Short's" Michael Burry was a household name for his insight into the upcoming subprime crisis of 2006-2007, there were many others among them John Paulson, Kyle Bass, and Corriente Advisors' Mark Hart. Just like Bass, Mark is another Texas-based hedge fund manager who correctly predicted, and profited from, the subprime crisis. He is also an expert on China, and in fact, just last month in the aftermath of the recent Chinese devaluation which roiled markets, he said that "China should weaken its currency by more than 50 percent this year."

In fact, it was Hart who (alongside ex-PBOC advisor Yi Yongding) first proposed the idea of the one-off devaluation that promptly afterwards become the conventional expectation for this weekend's G-20 summit in Shangai. To wit:

Hart believes that the Chinese crawling devaluation is an error as it carries with its the latent threat of much more devaluation in the future, thus encouraging even more outflows, which in turn forces China to sell even more reserves, which destabilizes the economy even further, forcing even more devaluation and so on.

 

Instead, a one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. He adds that China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.

According to Hart, while a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position. He said the country could explain the move by saying it would put the yuan at a level more reflective of market forces and allow the currency to catch up with declines in international peers.

As we said one month ago, "Hart is correct, and China will have to pick one option: either a sharp devaluation, or failing that, debt defaults: the current course of gradual CNY debasement will only results in an acceleration in capital outflows until ultimately China's $3 trillion rainy day fund is whittled away to nothing (and as a reminder, according to some estimate just a little over $1 trillion in it is actually liquid assets)."

And while we explained that Hart's "devaluation" trade consists of buying Yuan puts, according to a recent interview he gave to Raoul Pal RealVision, he has also put another trade on alongside his FX deval: buying bitcoin.

Why bitcoin?

The same reason we gave back on September 2, 2015 when Bitcoin was trading at $215 in a post titled "China Scrambles To Enforce Capital Controls (Which Is Great News For Bitcoin)" and long before the topic of China's capital controls, and their circumvention, became a routine topic of conversation. As we explained simply, with Chinese capital controls increasingly more strict, the local population, which was nearly $25 trillion in deposits in local banks, will rush to transfer these massive amount of savings offshore, and will end up using bitcoin to do it. This is specifically what we said:

... while China is doing everything in its power to not give the impression that it is panicking, the truth is that it is one viral capital outflow report away from an outright scramble to enforce the most draconian capital controls in its history, which - as every Cypriot and Greek knows by now - is a self-defeating exercise and assures an ever accelerating decline in the currency, which authorities are trying to both keep stable while also devaluing at a pace of their choosing. Said pace never quite works out.

 

So what happens then: well, China's propensity for gold is well-known. We would not be surprised to see a surge of gold imports into China, only instead of going to the traditional Commodity Financing Deals we have written extensively about before, where gold is merely a commodity used to fund domestic carry trades, it ends up in domestic households. However, while gold has historically been the best store of value in history and has outlasted every currency known to man, it is problematic when it comes to transferring funds in and out of a nation - it tends to show up quite distinctly on X-rays.

 

Which is why we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented "forking" with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

 

Yes, bitcoin may be slowly but surely leaving the domain of the libertarian fringe, but in exchange it is about to be embraced as the most lucrative and commercial "blockchained" way to capitalize on what may soon become the largest capital outflow in history...

Two months later the value of bitcoin rose by more than 100%, but what was delightfully amusing to us was attempts by the self-appointed guardians of monetary wisdom to explain the move not as one of Chinese capital flight but because of some tiny, alleged Chinese Ponzi scheme. Apparently in the mainstream media if one can't predict what happens, one tries to explain why something happened... and gets that wrong too. Because if bitcoin's surge was only due to some two-bit Russian scammer exposed four months ago, it would be back at $215 if not lower, instead of trading at $432 as of this moment. 

What really happened is what we said happened, and here is Mark Hart confirming precisely that. Here is the excerpt from an interview he gave to Raoul Pal's RealVision:

Bitcoin is interesting to me as a route for capital flight. I am not opining on the long-term viability of bitcoin - I do think there is something there - but I am long bitcoin specifically to capture capital flight from China.

Sounds quite identical to what said 6 months ago. Full clip below:

 

But this is where it gets really interesting: if one wants to bet on a massive Chinese devaluation (which is coming, the only question is when) one can simply short the Yuan as so many hedge funds have done in the past 2 months only to find that by "fighting the PBOC" they are gambling not only with their AUM, but their professional careers due to not only the unlimited downside of their trades, but to the substantial leverage involved in such FX trades.

Furthermore, relentless interventions by a belligerent Chinese central bank in recent weeks have shown that even as the Yuan will ultimately devalue, and dramatically at that, the PBOC will do everything in its power to crush the "hated" speculators, among whom such brand names as George Soros, along the way by inspiring sudden, violent and massive surges in the currency, in the vein of the Bank of Japan circa 2011.

So what is one trade that can be put on to bet on further Chinese devaluation (or outright economic collapse) with limited downside, with unlimited upside, and one which is guaranteed to be profitable if and when the local Chinese depositor herd gets out of Yuan en masse after the next 10%, 20%, 50% or more devaluation and rushes into bitcoin? Simple: do precisely what we said in September, and precisely what Corriente's Mark Hart is saying now: buy bitcoin, because once the Chinese buying frenzy is unleashed, and $25 trillion in deposits scramble to be packed into a product with a $6.5 billion current market cap (but only when the price of a bitcoin is $430; the market cap does rise to $25 trillion if every bitcoin is worth $1.6 million) one thing will happen: the price of bitcoin will soar exponentially.

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38BWD22's picture

 

 

Bitcoin is a perfectly reasonable asset to own as part of a diversified portfolio.  I would keep it at less than 2% of your total assets unless you are very rich.

Gold at 5% - 20%.

Think of BTC as a Lotto ticket...

CounterPartyVice's picture

BTC is so last years, ETH is hot now ...

froze25's picture

This isn't a bad move for a long play, 435 to get in serous upside potential 435 max loss. I think I'm in.

nope-1004's picture

Is he "investing" in the Blythe Masters version of Bigcoin?  Does he have a choice not to? 

Regardless, my condolences sir, as you pursue this "free and open medium" that you assume the .gov's of the world will allow to hyperinflate their own fiats.

Oh but I know the story:  Bigcoin is easier to travel with than PM's when TSHTF.  See, the first thing you're going to want to do when the world implodes, is travel - I guess.  Head off to another country that will, for some apparent reason, let you in without proper documentation.  Oh ya.... documentation and work visas.  Oops.

Securing the fort and taking care of loved ones are down the list for bigcoiners.  None of them obviously have aging parents, young children, sick family members requiring medical attention, or old grand parents.  So, the story goes, you're gonna wanna up and leave everyone and everything.  Ya sure in theory traveling with bigcoin is easier than PM's, but whose to say traveling at all will be easy?  Gotta get your body out of the country and accepted into the next one.  I think people need to consider those parameters first.

And we won't discuss if .gov pulls the plug on the net, which it can easily do.

The whole bigcoin story has been cheapened to death by the computer geeks talking about ease of travel.  Give it a rest already.  Let's concentrate on what is really needed:  A system of transacting and exchange that bypasses the Wall Street banks, period.  All the other garbage introduced by trolls is just that.

Is BTC the answer?  I don't know.  I think it is a step in the right direction.  But we need the banks out of the way first and the Fed dissolved before I'd jump in Fonestar-style.

 

38BWD22's picture

 

 

If/when other countries take a big time shine to BTC (like Peru in my case), then the value of the whole Bitcoin Ecosystem goes way up.  Alas, Peru has virtually NO ONE using BTC now.

Granted, I am not a typical case.  But, you can argue that Bitcoin's highest and best use is for discretely carrying value anywhere you may wish to go...

The 'Net or the grid going down (a set of scenarios often trotted out) is not very likely IMO.  Possible?  Sure, of course.

Quite true re other preparations being more important.

SilverRhino's picture

BTC or other metals is the question.   

 

If fiat completely fails I struggle to see why someone with wealth would continue to trust something with no inherent value.  

dark pools of soros's picture

The inherent value is a trusted public ledger with a capped max...aka the blockchain.   a bitcoin is just part of the blockchain real estate

And if the grid goes down, the world doesn't switch back to Gunsmoke it goes to Mad Max 

VinceFostersGhost's picture

 

 

 

Reaping the wind....hoping to monopolize the whirlwind.

new game's picture

 a system with wild gyrations is not sound money. lets see a loaf of bread is what today? 10 bitcoins? yesterday it was 5. yea fucking right. it is bad enough with inflation...

another shill in a new an improved casino. fuck off marky boy, bitcoin is another ponzi scheme that can be turned off by tptb, end of story, no access, you dumb fuck...

I need more asshats's picture

Let me pose a question as I'm opining as it is, do I sound like an elite erudite when I use such delicate wording to elicit your opinion about opining? What says you? Ooooh la la.

new game's picture

how about gazing and listening to wispering pines from a comfortable chair. opining defined...

USisCorrupt's picture

One Word !

 

DIVERSIFICATION !

 

AKA

 

The EASY Button !

847328_3527's picture

What the most reputable bitcoin place to buy and sell, if there is one?

USisCorrupt's picture

Coinbase 2nd to NONE !  Also offers a REAL TIME DEBIT CARD>

 

Feel free to use this link, you will get an extra $10 of Bitcoin with your first $100 purchase as will I.

 

https://www.coinbase.com/join/55fade0681d9245e3300006f

JRobby's picture

Monetary crisis - internet shut down

mmanvil74's picture

The Chinese will not be the only ones whose capital will 'flee' into Bitcoin and other crypto currencies. Negative rates will gradually push the bond market, cash under the mattress, regular old savings accounts  - even gold holdings - into crypto as the legacy financial system attempts to hold on to (punish) what 'real money' is left in the system.

Whether it is Bitcoin or altcoins matters not - that is an interesting but trivial debate. Forget about the price of Bitcoin, watch the total market cap of all crypto currency, up from around $6 billion to start the year, now pushing $8 Billion. That's the sound of fiat getting sucked into crypto, and under current systems I see no reason for that trend to reverse. As for volatility - big deal - look at oil, look at copper, look at the GBP or the Colombian Peso. Think USD is stable? Just wait.

emersonreturn's picture

sincere but stupid question...if tptb are intent on nirp to cripple cash why wouldn't they also disable bitcoin?  unless they control (own) it thereby ensuring their control, bitcoin is at odds to the supposed goal?

Panopticon 131's picture

TPTB control it because:

1. They control the internet.

2. Long before Bitcoin emerged, intelligence agencies had been working on a cryptocurrency.

3. At the November 2013 IMF meeting, the Godfather of international banking Larry Summers announced it was time to implement NIRP and move to a digital currency = global cashless society, then voila, shortly thereafter the main stream media begins running articles on Bitcoin.

4. If Bitcoin had been a true threat the promoters would have been given the Liberty Dollar treatment - raided and prosecuted.

5. Larry Summers joins the board of 21 Inc, a Bitcoin startup software company gearing up to make Bitcoin transactions through smart phones (their globally favored tracking device).

6. Goldman Sachs, of which Summers is an alum, invests millions in a Bitcoin venture.

7. The endgame for the new international economic order is a global technocracy of tight rationing based on energy credits - energy credits coincidentally a meme inoculated into Bitcoin?

emersonreturn's picture

thank you, P131.   another sincere, yet dumb question...if tptb have given their blessing to the family of bitcoin should it be assumed tptb also favour the flight of capital it allows?  or is that the point?  to herd the sheeple into the vast grand corral they control, created, monitor?  if there should be a celestial bank holiday will all seeded clouds be vapourized or shall they remain happily unruffled?    

MayIMommaDogFace2theBananaPatch's picture

I saw the head of risk from CoinBase give a talk at University of SF last year. 

No hype at all -- it was a very reasonable, sober talk about why there are some very smart people who feel strongly that BitCoin technology is a game-changer. 

To this guy's credit, he began his talk with CV type information, sharing with the audience that his first experience with BitCoin amounted to putting most of his savings into Mt. Gox only a few weeks before Mt. Gox went poof. 

In spite of that painful experience he still decided to take a position within the BitCoin industry less than two years later.

One could argue that he is a fool for doing this, but the point I'm trying to make is that his message was pretty squarely focused on technology, rather than get-rich-quick-hype.

dussasr's picture

The volatility is largely because the market cap is so small - only around $6 billion.  As bitcoin grows it's volatility will subside and it has huge upside.  What's the upside of fiat when national debts can't be repaid?

L_Estasi_dell_Oro's picture

" a system with wild gyrations is not sound money. lets see a loaf of bread is what today? 10 bitcoins?"

 

True price discovery in action..

slimycorporatedickhead's picture

there are now 632 other "crypto currencies" and counting.. along with bitcoin. noone seems to mention that tidbit.. I have a hard time understanding why anyone would pay $400+ for a virtual coin.. to each there own

Harrison's picture

Because all but a couple of the others were jokes or scams or also-rans or centrally controlled by one issuer.

Dogecoin was a joke from the beginning -- the people who created it intentionally set it up to inflate into worthlessness to be funny.

Most of the other altcoins were "pre-mined" -- people created them, ran the algorithms for a while to generate lots of coins for themselves, and only then went public about them. Anyone joining would only make money for the founders, who could crash the value at any time by selling their pre-mined stash.

A few companies have pushed their own "blockchain technology based" products which have no purpose other than to speed up transactions that they already control -- except that if one party controls everything anyway, then there's no benefit over maintaining a centralized database.

Litecoin is the only other cryptocurrency that is actually used in real-world transactions. Its software was designed around a different algorithm that required lots of memory and relatively slow processing so that the centralization due to FPGA and ASIC based "mining" rigs that Bitcoin had started to see happen was not possible. Even so, it doesn't have the acceptance, any more than Conch Republic currency does.

Bitcoin? I can buy stuff from a lot of merchants, fund projects anonymously, remit money to family back home, donate to charities, buy stuff in local convenience stores, whatever. It's spreading rapidly. If you're in the U.S,, you might not see that, thanks to KYC/AML regulations that are being used to suppress its availability and acceptance.

Mr.Sono's picture

Bitcoin, could go to 1 trillion, but average person does not use it or care for it. Then if your Bitcoin goes to that price, how do you cash out when new system is implemented? With 1 trillion Bitcoin, when there is only 4 billion of sdrs for example. At age 33 Bitcoin is to complicated for me. I rather own shares to a company.

dussasr's picture

By the time bitcoin goes to very large values large numbers of people will be using it and it will be very easy to use.  Right now it's like the Internet was in 1994 - not many users and hard to understand.  This will change very much in 5 years.  Bitcoin rewards early adopters.  You should take the time to learn now.

commander gruze?'s picture

There is no such thing as inherent value. All value is subjective. Proven time and again. Now, comparing to gold, bitcoin has more utility than pet rock.

One more thing from the article: "sit back and watch as we witness the second coming of the bitcoin bubble" - that would be fifth or sixth bubble by now. Before the last one it was $266, earlier $40, and if I remember correctly $5.

Father Thyme's picture

Water has inherent value. Proven time and time again.

VinceFostersGhost's picture

 

 

 

As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

OverTheHedge's picture

And in sunny Greece, with its capital controls and obvious bank insolvencies, no huge uptake in Bitcoin. Odd. I was hoping all the market traders would start taking it, but not yet.

Oh well, maybe soon. 

Harrison's picture

Oddly enough, you can withdraw Euros from your Greek bank account, hop a flight to Germany, and deposit them in a German bank with no loss in value, no exchange fees, no currency controls, and no problems.

Try doing that with Chinese Renminbi.

Going Loco's picture

Try doing that in a few months' time.

chunga's picture

Sounds to me like this guy Hart is betting that Chinese with savings are about to get fucked by China's bank. All he's trying to do is skim a profit off the people who are getting fucked, which pretty much sums up the world of finance.

dussasr's picture

There are so many countries there bitoin would be a HUGE improvement over the existing currency AND where citizens already have widespread computer and smartphone access.  India, China, Russia, Brazil and South Africa just to pick on a few.  There are definitely o other countries that need bitcoin more, but often only the wealthy in those countries have access to the infrastructure needed to use it.  Solutions are rapidly approaching, however, such as $10 smart phones. 

ShortCommonSense's picture

You're right, however, the rich people who have actual capital to try to escape with, by and large have been able to do even without bitcoin.  It just makes it that much easier and safer for them to do it now.  The average person with a respectable savings..probably not, but technically possible in some scenarios.

overmedicatedundersexed's picture

No no no.."the rich people who have actual capital to try to escape with,"

we got this wall street vampire wanting to suck the blood of china's biggest criminals, getting wealthy off of illicit money leaking from china's elite..

sorta like visa and master card if you think about it.

but I know this hurts some, cause well the wealth was earned by these chinamen in noble business ..

corruption does give some oppertunity, so what the heck.

zerocash's picture

If .gov shuts down the net you won't be able to access your e-trade account and companies like Google will become worthless instantly. Also world trade would screech to a halt as it is largely dependent on the net. Likely scenario is it not?

CPL's picture

Depends on the application.  How much do you know about estate taxes and avoiding them?

Now consider short and medium term demographics with the problem presented and the technology application of BTC given it's scope in how it can be applied to estate tax issues.  Then sprinkle in the idea that IRA, RRSP, whatever horseshit offered by the banks isn't worth sweet fuck all.  Combine that with a real estate market that is phony in pricing and management.  There's a much larger problem in the short and medium term to facilitate a economic transition without the same idiots that caused the issue to begin with.

Kirk2NCC1701's picture

There are those who see Hitlery as a Lotto ticket and have invested in Bitchcoin. At $250k per barking session. That's a lot of coins in that slot.

Escrava Isaura's picture

 

 

I was told by Zero Hedge that the Chinese were in long lines to buy gold.

Anyway, this gambler, pardon me, wink wink ‘hedge fund manager' reminds me of this post:

Cognitive Dissonance: How interesting (and possibly sociopathic) it is to attempt to 'profit' from global economic collapse. Exactly how are you going to extract your pound of flesh if the currency you eventually cash out in also collapses?

Then, this quote:

“United States is becoming a failed state, and thus a danger to its own people and the world.” – Noam Chomsky, 2006

 

VinceFostersGhost's picture

 

 

I was told by Zero Hedge that the Chinese were in long lines to buy gold.

 

I thought you only listened to Noam Chomsky.

 

Pretty much a Saul Alinskey guy myself.

Escrava Isaura's picture

 

 

I use Chomsky as a baseline because Chomsky has lots of inside information and other researchers collaborating with him. Also, Chomsky has a deep understand how the world works, great memory as well as a great speaker and writer.

Anyway, ‘your’ Alinsky is the real deal. Most in state power are scare to death of his ideas. Private power can’t stand him even that both probably read him.

http://www.amazon.com/Rules-Radicals-Practical-Primer-Realistic/dp/0679721134

The Saint's picture

I feel 100% better with a gold coin in my hand than a bitcoin in the cloud.  You can call me old fashioned but I call it prudent.

dussasr's picture

You know you can use both, right?

new game's picture

direct hits to the messanger makes me wonder if anybody here understands what you say?

popularity is important at zh, don't cha know?

i hear ya.

Escrava Isaura's picture

 

 

So, let me summarize:

Savings in digital currencies you’re grasping at straws. It won’t work.

Now you’re probably wondering, in case you agree with my statement, why would people invest in such nonsense, downright fraud?

Because there aren’t any more ways to organically grow the real economy thus to grow out of financialization. So, the new money, as well as the savings, has no place to go but into financial tools such as Bitcoin, derivatives, and so on that will grow into infinity back by nothing.

So, if you consider that ¾ of the US economy is consumption, means, financialization, these will become very dangerous, not only for all Americans but for the world, because it can’t be sustained.

 

2015 - IT IS 3 MINUTES TO MIDNIGHT           

2020- IT WILL BE 1 MINUTE TO MIDNIGHT

http://thebulletin.org/press-release/doomsday-clock-hands-remain-unchanged-despite-iran-deal-and-paris-talks9122

 

babkjl's picture

After much study, I'm holding and market making with Bitcoin, Dash, and Ethereum in that order. Dash is what Bitcoin tried to become: near instant transactions, completely anonymous through built in coin tumbling plus good governance and budgets for improvement. It took Dash less than 24 hours to vote to double the block size (I was one of the yes voters) while Bitcoin is still fighting over it two years later. Ethereum seems to have lots of impressive promise, but it's still at the vapourware stage because you can't really do much useful stuff with it yet. Bitnation was recently launched on Ethereum as a competitor to existing government services. I'm looking forward to the imminent deployment of OpenBazaar (uses only Bitcoins) as a potential strong rival to eBay and hopefully a good place to sell gold and silver coins. There's no point in protesting / fighting / voting within the existing deep state system. Just ignore it and move on to something that works much better. Exciting times. 

I need more asshats's picture

"I was one of the yes voters"

With such privilege to be surrounded by the VIP crowd on ZH.

I bow and offer a shoe shine for you kind Sir?