Over the weekend, we brought you “Bitcoin Gains Will ‘Ignite The Spirit’ Of The Samurai, Boost Japanese Economy.”
That post was dripping with sarcasm (starting with the title), but based on some of the reader feedback, it seems as though some folks found the idea of Bitcoin gains igniting animal spirits compelling.
As noted, Japanese retail investors account for large percentage of leveraged FX trading and so, it doesn’t take a leap of logic to come to the conclusion that they’re likely knee-deep in the cryptosphere. Throw in the fact that Japan has taken a comparatively liberal approach to cryptocurrencies and you’ve got a recipe for rampant speculation by “Mrs. Watanabe.”
Recent stumbles notwithstanding, Bitcoin has been a one-way ticket to the moon, so you have to assume that some of these margined Japanese traders are sitting on hefty unrealized gains. The idea – as communicated in a Nomura note out late last month – is that those gains will lead directly to an uptick in consumer spending.
If that does indeed turn out to be the case, our contention is that it’s rife with risk because after all, those gains – if not booked – can evaporate in minutes.
Still, the thesis is at least worth mentioning and due to reader interest we thought we’d highlight some actual excerpts from the Nomura piece.
“Figure 2 shows the proportion of trades on the Bitcoin market by currency. This shows that about 40% of trades are on a yen basis, higher than the weighting of US dollar trades,” the bank writes, in a note dated December 29. “We attribute the rise in share of yen trades to the April 2017 revisions to the Payment Services Act, which enabled systems for providing cryptocurrency exchange services and thereby encouraged individual investors to enter the market,” they add.
Next, Nomura notes what everyone has noted since China began casting a wary eye towards cryptocurrencies as part of a broader effort to crackdown on capital flight – namely that the clampdown by Beijing led to a relative increase in the share of yen trades.
So how much Bitcoin do Japanese people own? Well, a lot. Here’s the bank’s estimate:
Of course, the weighting of yen trades does not necessarily indicate the weighting of trades by Japanese investors, but it does indicate that Japanese investors are a major presence. In view of this, Figure 3 shows Bitcoin market cap and market cap divided by the weighting of yen-based trades. Assuming that the weighting of yen-based trades is equivalent to Bitcoin holdings by Japanese people, we estimate that Japanese people hold Bitcoin with a market cap of about ¥5.1trn. Assuming that the bulk of this ¥5.1trn belongs to Japanese investors, the scale of this increase in assets can hardly be ignored.
Ok, so what’s the unrealized gain on that? Well, assuming 3.7mn Bitcoin held by Japanese people (multiplying Bitcoin circulating supply of 16.22mn coins in Apr-Jun 2017 by the 22.8% share of yen trading at the time) and taking into consideration that Bitcoin rose by some ¥866,000 between Apr-Jun 2017 and Oct-Dec 2017, Nomura pegs unrealized gains on Bitcoin held by Japanese people at ~¥3.2trn (3.7mn × ¥866,000):
Now cue the “wealth effect.” The assumption here is that an increase of ¥10bn in the value of assets of Japanese people boosts consumption by roughly ¥0.2-0.4bn. That’s based on prior studies. So, if you assume that, then the ¥3.2trn unrealized gain could result in “an increase of around ¥96.0bn in personal consumption [and] given that Japan’s real GDP is around ¥522trn, the y-y boost to GDP from this spending works out at just 0.07ppt,” Nomura calculates:
Now think back to what we said in the post linked here at the outset. Namely this:
That raises the following obvious follow-on question: what happens in a crypto rout when all of those unrealized gains become unrealized losses which are eventually “realized” by default when cryptocurrencies crash to $0?
As Nomura readily admits, “[there is] a difference between the wealth effect impact resulting from an increase in asset value caused by a rise in the price of Bitcoin, and an increase in asset value resulting from share price gains.” Right. Namely that Bitcoin is so damn volatile that anyone who is sane would not boost their spending habits materially until the gains were booked. Here’s Nomura one more time:
Particularly in the case of Bitcoin, the high level of price volatility means that the formation of expectations vis-a-vis future asset value will doubtless be unstable compared with share prices and other financial assets on which the earlier studies were based.
Draw your own conclusions.