Justin's note: Today, Palm Beach Letter analyst Greg Wilson explains why China is going to be a massive force in the growth of bitcoin and cryptocurrencies. And why today is the perfect buying opportunity…
By Greg Wilson, analyst, The Palm Beach Letter
Gong Yi Feng kept checking his phone. He couldn’t believe his eyes.
His portfolio losses now topped $30,000.
Retired, and with most of his assets in the stock market, Mr. Gong was naturally worried.
For nearly three years, it had been smooth sailing. The Shanghai Index had risen 127% during that time.
But in July 2015, regulators pricked the bubble.
During that time, China’s stock market was experiencing a margin lending-fueled bubble. Margin lending is a process in which brokerages lend money to customers so they can buy more stocks.
From 2013–2015, China’s margin lending grew 780%. And that powered stock market growth.
The wild growth attracted fraudsters. And Chinese regulators quickly stepped in.
First, they banned the biggest brokerages from opening new margin accounts. Then they targeted the grey market. Those markets are outside authorized channels… and a hotbed for fraudulent activity.
The crackdown on margin lending put the brakes on China’s bull market.
From its peak in June 2015, the Shanghai Index dropped 43% in less than three months.
Nearly $2 trillion in market value vanished. And like many in China, Mr. Gong got caught up in the regulatory storm.
If you own bitcoin or cryptocurrencies, you likely feel the same right now as Mr. Gong did back in 2015.
In the last month, not only has China banned initial coin offerings (ICOs), but cryptocurrency exchanges, too.
Peak to trough, the cryptocurrency market fell 44%. Bitcoin fell 40%.
The price action is scary. But as I’ll show, regulatory bans by China don’t stunt growth in the long term. In fact, China just provided us with a buying opportunity.
China’s History of Cracking Down, Then Relenting
Introducing regulation to growing financial markets is nothing new in China.
One example is China’s lending market.
From 2003–2010, Chinese loans rocketed 250% to over $1 trillion.
The rapid growth caught the eyes of Chinese regulators. And they started to “crack down” on the lending industry.
In 2010, they halted loan repackaging.
In 2013, they went after shadow lenders and put limits on interbank loans.
In 2014, they issued tougher guidelines for lenders. And they continue to impose new regulations on the industry to this day.
If you look at the history of Chinese regulations on the finance industry, you’ll see that their goal is largely to identify the players and clean out the bad actors.
They’re not looking to kill the industry.
Lending, for example, continues to grow. Outstanding loans have grown 80% since the start of the regulatory crackdowns in 2010.
We saw the same with peer-to-peer (P2P) lending in China. P2P lending is when individuals both lend and receive loans from each other without an intermediary or middleman. An example is Lending Club.
From 2010–2014, P2P lending became quite popular in China. The number of platforms grew from 50 to 1,575.
Meanwhile, the amount of P2P loans increased from next to nothing to $17 billion.
Like with margin lending, Chinese regulators stepped in.
Once again, they wanted to identify the players and clean out the bad actors. And they implemented a number of regulatory reforms.
But P2P lending continues to thrive. Today, there are over 4,000 P2P lending platforms in China with over $120 billion in loans.
And remember China’s margin lending? It’s starting to grow again, too.
A Temporary Pause
China’s new regulations haven’t been the death of any of these industries. And it won’t be the death of bitcoin or cryptocurrencies.
Based on history, it’s the opposite. China has given us a big buying opportunity.
It reminds me of a quote from Fred Wilson, a partner at venture capital firm Union Square Ventures. And mind you, he said this in 2014.
The lesson from the internet is, anything that China bans, invest in it.
China is going to be a massive force in the growth of bitcoin and cryptocurrencies. The recent regulation doesn’t change that.
Use this sell-off to buy bitcoin now.
Analyst, The Palm Beach Letter
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