In this week's newsletter, we talk about why China’s gargantuan debt rescue package, why bitcoin prices are looking up, Maggi and more.

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Quote of the day 📜

"Don't save what is left after spending; spend what is left after saving." - Warren Buffett

Will Trump take Bitcoin to the moon?

The world’s top cryptocurrency Bitcoin is up over 100% since the start of 2024, but most of those gains have come in the past few months. Zoom in even further, and you’ll notice that following Donald Trump's US presidential win, Bitcoin jumped by over 20% in just a week! From hovering around the $60,000 mark, it's now sitting at around $90,000, and many predict that $100,000 is just around the corner.

That sure begs the question ― What's behind this sudden spike?

Let’s take it from the top.

“I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air. Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity.”

That was Donald Trump in 2019.¹

But today? He has pledged to turn the US into “the crypto capital of the planet.” Quite a shift, right?

Unlike his predecessors, Trump’s administration is supportive of cryptocurrencies, putting the wind in Bitcoin’s sails. That boost likely plays a part in Bitcoin’s surge, beyond just the positive crypto vibes. And if you take a closer look, you’ll see other reasons too.

First up we have Bitcoin mining. See, crypto mining is notoriously energy-intensive, but Trump wants it to be mined, minted and made in the US.² Think about it. If the US becomes the top miner, it could boost its role in the crypto world and strengthen Bitcoin’s infrastructure. Plus, it fits right into Trump’s energy strategy.

How? Well, he plans to deregulate the energy sector, making energy more accessible and affordable.³

Now, it's important to understand that the US is already a net oil exporter, and more deregulation could make energy even cheaper. Since energy makes up 60-70% of Bitcoin mining costs, cheaper energy means more profitable mining.⁴ That’s why crypto holders are excited — lower energy costs could boost miners' margins and strengthen Bitcoin’s network. It’s a win-win.

The second reason is Trump’s friendlier approach to digital assets.

He has hinted at working with crypto advocates like Elon Musk, who’s backed Dogecoin (which also saw a post-election surge).⁵ This is a big shift from previous administrations and boosts market confidence. Plus, Trump plans to replace SEC Chair Gary Gensler, who pushed for tighter crypto rules under Biden. This shake-up could mean less regulation, which Bitcoin fans are celebrating.

But perhaps the most eye-catching promise from Trump is the idea of a US Bitcoin Strategic Reserve.⁶

What's that, you ask?

Think of it as a national oil or currency reserve — but instead of those assets, it’s filled with Bitcoin.

The idea was drafted by US Senator Cynthia Lummis, and she called it the Strategic Bitcoin Reserve Bill. It proposes establishing a network of decentralized storage facilities across the US to securely hold Bitcoin reserves. Then it mandates the US Treasury to purchase 200,000 Bitcoins annually over five years. That's 1 million BTC in total! The government would hold these reserves for at least 20 years and implement a proof-of-reserves system to verify holdings. In case you’re wondering, this system lets the government show that it’s securely holding the Bitcoin without revealing details that could put Bitcoin security at risk. Public audits would then confirm that the government actually has the Bitcoin it claims to.

This is HUGE!

Because at Bitcoin’s current price of about $90,000, this would cost the US over $90 billion. Sure, you could argue that the buying period would span five years, and Bitcoin's price could fluctuate. But the idea of a government entity buying up 5% of Bitcoin’s total supply is bound to push prices up, right? And because it’s the US, investors are taking note.

Plus, this isn't just about Bitcoin. As Lummis puts it, “Our aim was to establish it as a modern parallel to our gold stockpile, serving as a digital-age hedge against economic uncertainty while maintaining the Treasury's historical role in safeguarding critical national reserves.”

So yeah, the US would see these reserves as a “digital-age hedge against economic uncertainty”, much like the gold stockpile.

And remember, this is something no other country has attempted, and if it happens, it could cement the US as the global leader in crypto assets or maybe even spark interest from other countries.

Even without the Trump factor, macroeconomic trends are also giving Bitcoin a boost. The US national debt is at record levels and is expected to grow even further. Historically, when government debt grows out of control, investors look for hedges or protection against weakening currencies. And Bitcoin, with its fixed supply of 21 million coins, is seen as that hedge because it can't be inflated like traditional money.

So all of this seems like the perfect storm for Bitcoin.

But does this mean that Bitcoin is only going up?

Well, we don’t have an answer to that. Because Bitcoin's history is peppered with volatility and it could see wild swings in no time. And there’s no easy way to value it as an asset.

Sure, the fundamentals and buying interest seem strong right now, but market corrections are a natural part of any asset's journey, especially for something as speculative as Bitcoin. Following the 2017 bull run, for example, Bitcoin lost nearly 80% of its value by the end of 2018 before recovering. And similar drawdowns have occurred after each previous rally.

Geopolitical events, regulatory crackdowns, or even technological issues can impact Bitcoin prices, like the 2021 Chinese crypto mining ban, which triggered a major slump. And while Trump’s policies might be favorable now, there’s always the risk of unforeseen reversals or regulatory pressures, especially those concerned about cryptocurrencies’ impact on financial stability.

Bitcoin’s upcoming halving event is another potential driver of volatility. So here’s the thing. Bitcoin miners validate transactions and get rewarded with new coins. But every four years, this reward halves. For instance, when Bitcoin started in 2009, miners earned 50 Bitcoins per block. By 2020, it dropped to 6.25 Bitcoins. And this year it halved again to 3.125 BTC.

And historically, halving events have led to rapid price surges, followed by corrections. Maybe it’s these wild swings that make Bitcoin thrilling, yet nerve-wracking, for investors.

Sidebar: The last Bitcoin is expected to be mined around 2140, but as rewards keep halving, they’ll eventually become so small that some of the 21 million Bitcoin might never be fully mined.

Whatever it is, another interesting bit you can’t ignore here is how companies that are providing power for Bitcoin mining have seen their stock prices surge too. This simply means that anywhere Bitcoin intersects with Trump’s policies, investors are eyeing big gains. And for those not into Bitcoin or its price swings, companies like these could be a solid bet.

So yeah, that’s exactly why Bitcoin prices are on the rise and why it’s one of the hottest topics in finance, again. And we’ll just have to wait and see where prices go from here.

Story Sources: Aljazeera [1], Yahoo [2], S&P Global [3], IEA [4], Economic Times [5], Decrypt [6]

China's hidden problem

India’s stock markets have been in a bit of a slump lately. And sure, there are several reasons behind it — foreign investors selling off shares and Donald Trump’s surprise win as the next US president. But there’s also another culprit stirring up trouble — China’s massive 10 trillion yuan ($1.4 trillion) debt package.¹

This is China’s way of rescuing its local governments from a mountain of debt that’s spiralling out of control. And it’s no wonder that investors are pulling money out of Indian equity markets and shifting to China. They probably see this as a smart move for the Chinese government to prevent a financial crisis and kick-start its economy yet again. But… they could be wrong.

Why, you ask?

Well, let’s take it from the top.

Back in 1994, China overhauled its tax system.² It changed how tax revenues were split between the central government and local governments like municipalities, prefectures, townships and villages. The reform gave the central government a much bigger slice of the tax pie, while local governments were left scrambling. Over time, this shift meant that local governments saw their share of tax revenues drop below 40%, even as their national spending obligations soared past 60%. And to make up for the shortfall, they started leaning heavily on land-related revenue.

Luckily, China’s land system made this easy. Although all land is technically owned by the state, local governments have the authority to manage and lease land within their regions. So, they began leasing out “land use rights” to companies, developers and individuals.

But that strategy hit a wall when the 2008 global financial crisis rolled in. The economy was slowing, and the central government needed a way to stimulate growth without taking on all the debt itself. So, it came up with a workaround ― Local Government Financing Vehicles (LGFVs).

These LGFVs were entities separate from local governments but closely linked to them. Since local governments weren’t allowed to issue bonds or raise money directly back then, LGFVs did it for them. They borrowed mainly from banks to fund big infrastructure projects like roads, bridges and railways — basically, all the things that could boost their local regional economies.

And banks were more than willing to lend to LGFVs, thanks to two big reasons.

One, LGFVs had a lot of land which they bought cheaply from local governments and sold to developers at a profit. This land stash also boosted their balance sheets and made them look financially stable to banks. And two, the loans were essentially backed by local governments, so if an LGFV struggled, the government was expected to step in.

But here’s the catch. LGFVs weren’t regulated the same way as local governments. They were like shadow extensions, borrowing heavily and buying land. And unlike local governments, they could run budget deficits. So naturally, local governments pushed them to borrow more for infrastructure in hopes of higher land revenue.

And over time, this borrowing spiralled out of control.

Besides, since LGFVs didn’t have to report finances like local governments did, much of this debt was hidden or “off the books”.

By 2011, local government debt reached 10.7 trillion yuan ($1.7 trillion), nearly a quarter of China’s GDP at the time. So yeah, if LGFVs couldn’t repay their debts, the banks that lent to them would face massive losses. And that could trigger a financial crisis across China.

That likely spooked the government too. So, in 2015, they stepped in and changed the rules, letting local governments raise debt directly. They could now issue bonds and borrow from banks, pension funds, insurance companies and even regular investors.

The goal? Use these funds to pay off some of the LGFVs’ hidden debt.

And that’s exactly what China is doing again now. It announced another massive debt swap package of 10 trillion yuan.

This simply means that local governments will take on new debt to pay off old LGFV debt through a debt swap program. It’ll convert a lot of the risky LGFV debt into safer, government-backed municipal bonds. In other words, more LGFV hidden debt will come out of the shadows and onto the books, making it easier to track, manage and control.

The plan is to reduce hidden debt as much as possible over the coming years.³

But here’s the thing. This isn’t the first time China has tried this. Between 2015 and 2022, China issued over 10 trillion yuan in similar “swap bonds” to convert hidden debt into official debt.⁴ And while there isn’t any official data on the full scale of the current hidden debt, research from the National School of Development at Peking University found LGFV debt surging to 54.6 trillion yuan ($7.8 trillion) by the end of 2022. This was up from 32.6 trillion yuan in 2018. And that’s a massive two-thirds increase, despite the central government’s efforts to rein it in.

This time around may not be any different.

Because while swapping debt and bringing it out into the open might look like a solution, it doesn’t address the core issue: How will this debt actually get repaid once it’s on the books?

Think about it. Local governments have already drained their budgets after spending heavily on COVID lockdowns to maintain China’s zero-COVID policy. Now, they need more revenue to avoid defaulting on these debts. But that’s not easy because their main source of revenue — land leasing — has dried up. After the Evergrande crisis shook up the real estate market, property sales and land revenue have slowed significantly. So even though some of this debt is now officially on the books, there’s still not enough money coming in to pay it off.

The real problem? The funds needed to repay this debt are closely tied to real estate. And that’s why swapping the debt may not actually help.

So what will?

Maybe it’s time for China to do a full audit of its local governments to understand exactly how much hidden debt they’ve taken on. It could then rebalance the revenue sharing between the central and local governments, giving local governments a bigger slice of the pie to help avoid a financial crisis. Or perhaps they need to explore new forms of taxation to boost local revenue.

We don’t know for sure. All we know is that China needs to tackle the root of the problem instead of just kicking the can down the road by letting local governments take on new debt to delay existing debt repayments.

Will they be able to do it? Only time will tell.

Sources: The New York Times [1], Understanding local government debt financing of infrastructure projects in China [2], CNN [3], Nikkei Asia [4]

Infographic 📜: A Taste From The Past

#AskFinshots 🙋🏽‍♂️

This week's question comes from Aakriti Gupta. Aakriti asked—

“I'm trying to understand how to create an emergency fund and where to invest monthly. How can I do that?”

Hey there! Saving for emergencies can seem complicated. But the truth is, it's not as tough as it looks. Remember Mr. Miyagi's 'Wax on, Wax off' lesson from The Karate Kid? It seemed pointless at first, but repeating those actions turned Daniel into a karate pro without him even realizing it.

And saving works the same way - it's about consistently putting aside money until it becomes second nature.

Now, because everyone's needs are different, start by asking yourself a few key questions:

1/ How much do you need for emergencies? Consider your monthly expenses, and a good rule of thumb is to aim for 6-12 months of expenses.

2/ Can you realistically save this amount? Make sure your target is doable.

3/ What risk level are you comfortable with? You could go with low-risk or a high risk investment. But make sure the money could be liquidated when needed.

4/ Can you automate savings? It’s one of the easiest ways to stay consistent.

If you can answer these questions, you’ll have a clearer picture of how much to save and how to get started.

For beginners, SIPs can be a great option. Regular small investments let compounding work its magic over time. Then, it also helps to diversify your investments. Look into various asset classes—like gold, silver, bonds, ETFs, etc.

And you can also check out our Finshots Money series for more on saving, emergency planning, and all things money.

Have a question for us at Finshots & Ditto? Write to us at colleges@joinditto.in. And we'll get our founders/experts to answer!

Answer of the day:  Infosys was the first Indian company to be listed on the Nasdaq stock exchange, on March 11, 1999.

And that's all for today folks!

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