The information and cultural gaps between China and the U.S. are profound. I’ve been fortunate to fully appreciate this firsthand as a native Chinese citizen living in Hangzhou working at a U.S.-based investment firm.
In crypto markets, information bifurcates across the Pacific Ocean, actionable information doesn’t travel across as quickly as data packets travel over fiber. While you may be familiar with the Western channels – Telegram, Twitter, Discord, Medium – there is an entirely separate universe of crypto that exists and operates in Chinese channels – on WeChat, Weibo, Bihu and others. But that’s just the tip of the spear. The lack of overlap between these two markets is further compounded by additional cultural, timezone and language barriers.
How information flows, how relationships and ties between parties differ, how varying social norms create friction and differing consumer behaviors all combine to form the unique and idiosyncratic market structures for crypto in the U.S. and China.
As we look to the year ahead, the high demand of interpersonal trust, the preference of mobile user interface, the WeChat-oriented information flow and the “pragmatism” in the Chinese culture will continue to hold true. Yet, as more channels for cross-cultural communication come around, Chinese and American crypto operators should be able understand the nuances between these cultures and more effectively market their services in the other market.
One of the most important differences I’ve observed between China and the U.S. is how market participants build and develop trust with each other. People in China prefer to trust someone they know or someone they can interact directly with, whereas people in the U.S. tend to trust brands.
In our investment thesis for dForce (the China-based decentralized finance super network), I argued that one of its unforkable moats was its local business ties and distribution channels. Mindao Yang, dForce’s founder, is a well-respected influencer in the local community and was able to forge strong relationships with key players in the Chinese crypto ecosystem because of his prominent position. Having personal relationships with the local community gatekeepers, crypto operators and key distribution channels in China is an unquantifiable, yet undeniable, edge.
DeFi protocols are not businesses. They are, in theory at least, permissionless, headless organizations. Despite this, Chinese users expect customer service to be available in chat rooms, from real people who can explain using real words how these protocols work. This is why we often see the senior officials from Asia-based exchanges like Binance, Huobi, and OKEx make themselves available in WeChat groups to answer customers’ questions.
These trust requirements uniquely shape how business gets done in China. For example, prime brokerage in the U.S. typically refers to three separate business lines: lending, trading and custody. Unlike in the U.S., most prime brokerage firms in China emphasize lending and asset management services.
Almost none of the major Chinese crypto prime brokers offer custody as a standalone service because they know Chinese people prefer managing their private keys as opposed to delegating (trusting) it to someone else. This is a function of healthy, ever-present suspicion in Chinese culture. Chinese "whales" [those with large positions] guard all of their holdings closely, sometimes exclusively on their phone.
In the U.S. on the other hand, many crypto institutions not only entrust their capital with Securities and Exchange Commission-regulated custodians, they actually require it. They don’t want to take on the custody risk themselves because, in their minds, the “system” is more trustworthy. In the event a Chinese whale delegates his or her capital to a quantitative trading firm, they usually only authorize an exchange API to the trading team instead of allowing them to take direct custody.
Again, Chinese users live by “not your keys, not your coins” because of higher trust requirements embedded in Chinese culture. Entrepreneurs need to understand these subtleties to most effectively compete on a global basis.
For these reasons (and many others), I typically try to help our non-Chinese portfolio companies hire someone on the ground who speaks the local language so that person can engage users and potential business partners on an interpersonal level.
Understanding user preference
User behaviors and preferences across markets differ widely, and those preferences have resulted in localized product strategies for the dominant players in each region.
In China, smartphones dominate internet usage. Even some of the most sophisticated derivatives trades are executed on smartphones. This stands in stark contrast to the U.S. and other Western countries where traders would much prefer to log into a website on their desktop.
For a significant number of Chinese, their phone was their first and still only computer. Because users’ prefer (and rely on) mobile interfaces, these mobile applications naturally compete with each other on user retention. Under such pressure, the most successful ones have grown into the superapps, like WeChat and Alipay, which allow customers to solve all their problems in one place without going anywhere else.
Despite the fact that crypto is a borderless phenomena, user behaviors are still largely shaped by the ingrained user behaviors from the Web 2.0 era. For example, Asian exchanges are more likely to become superapps that offer cross-product services. Binance is a great example of this; over the last two years it has aggressively "blitzscaled" by continuously expanding its business from basic spot and futures trading to the more sophisticated options trading, to new staking services, mining pools and fiat over-the-counter applications. Binance is attempting to offer every crypto financial service imaginable – all within a single app.
Coinbase, for example, reflects Western business strategy, with separate business lines and products for Custody, Prime, Pro and Retail.
Understanding user preferences and locationization is still a strong differentiator. That won’t change in 2021. Entrepreneurs need localized strategies in China and the U.S.
Understanding information flow
Platforms like Twitter, Discord, Telegram and Medium in the U.S. welcome permissionless, pseudonymous online participation and the (relatively) free flow of information across platforms. It’s no secret that the primary venue for crypto information exchange in the U.S. is Twitter: users openly comment and freely follow whomever they like.
China couldn’t be more different. The primary venue is not Weibo (China’s version of Twitter), nor is it Bihu (a crypto-native discussion forum like Medium). Rather, it’s WeChat.
WeChat is a superapp and its information flows are close-ended. This makes WeChat a microcosm of information that originates exclusively from within. Everything starts and finishes in WeChat groups, WeChat embedded hyperlinks and WeChat Moments.
As a result, the hurdle to build a community is higher in China because everyone has to use WeChat and it’s not easy to form a large WeChat group. For example:
- Groups are capped at 500 people
- QR codes have an expiration date
- When the group is larger than 200, people cannot join via the QR code and the group manager needs to manually pull people in
On Twitter anyone can easily unfollow someone else. In a WeChat group, especially in the ones that have fewer than 100 people, members face social pressure for “quitting” the group. Some influencers in China go so far as to monetize their “private domain traffic” by charging fees for entry to their groups, which gives its members a special sense of community (and creates a perceived cost for leaving).
Yet, the closer binding relationship on WeChat creates a more level playing field among whales, institutions and retail participants. A “thought leader” in the U.S. with a few hundred thousand followers on Twitter does not necessarily follow back all his followers, and as a result he or she cannot see all of the feedback. This one-way relationship effectively draws a line between crypto influencers and professional institutions and retail players.
On WeChat, however, representatives of institutions and retail players commonly end up in the same group. This “flatter” setting essentially enables bi-directional communication between the professionals and retail investors.
Projects trying to market in China or the U.S. have to understand these information flow differences. In China, media is controlled and influenced by contractual relationships. In the U.S., media is “earned.” As crypto grows in relevance, more communication channels will emerge and the structure of information flow will continue to fragment.
Understanding pragmatism vs. idealism
BitMEX's Arthur Hayes once joked about how good marketing to a Chinese audience could make any token look promising. His joke was not all in jest; it reflects a deeper reality of crypto capital markets.
Despite the fact Vitalik received tremendous support in China during the early days of Ethereum, today ETH maximalism is on the decline in China relative to the U.S. This stands in contrast to Crypto Twitter, where ETH maximalists passionately promote Ethereum.
Participants in China tend to be less evangelical than the participants in the West. While there are many factors, one of the more salient is that Asian culture has stronger roots in trading. As traders, it is rational for them to look at all the potential coins and choose the ones they believe have the best risk/reward profile.
Traders by definition are not ideological, and so they tend to be more open-minded to ideas that challenge their existing beliefs. Meanwhile, the choices of local developers are also partially impacted by the optics of the market. Developers value the ecosystem having enough public attention and offering marketing and PR support when they consider which ecosystem in which to build.
In China, established blockchains like Ethereum no longer serve the role in their portfolio they once did – being long ETH is just another way to get beta exposure; opportunities for alpha are further down the market cap list. On the other hand, a newly emerged layer 1 can be far more attractive because of its potential upside, especially if traders believe they have knowledge or information that the market does not.
Thanks to initiatives like the “Open the Door Policy" initiated by Deng Xiaoping, China's former leader, Chinese people are more inclined to accept new ideas and value practical problem solving. This extends to the Chinese crypto community, which is known to favor blockchain performance over embedded ideology.
We’ve seen this time and time again, first with Ethereum after Bitcoin, then with EOS after Ethereum and most recently with Polkadot, Cosmos, Solana, Avalanche and Near, not to mention all of the Chinese cousins of Western DeFi projects. (Disclosure: Multicoin Capital is long SOL and NEAR.)
The year ahead
Going into 2021, crypto entrepreneurs must realize the products and protocols they are building are becoming increasingly more local and more global simultaneously. The U.S. and China are clearly the two most pivotal markets, and winning both would mean unprecedented success.
Two years ago, the idea of going to market in America and China was unthinkable. Today, entrepreneurs absolutely must plan and execute unique strategies for both the U.S. and China or risk being left behind.
While the number of channels between the U.S. and China grows, the cultural moats and user behaviors I described above show no sign of materially evolving anytime soon. As firms look to deploy capital next year, they are looking for teams who understand and appreciate the opportunities that cultural differences unlock and those who see the distance between our two countries as an unique advantage to exploit rather than a hindrance on global expansion.
Such cultural bridges are more easily described than built. The winning strategy is going to be idiosyncratic: There is no single template that will guarantee market share.
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