Cryptocurrency Exchanges Emerge as Alternative Investment Channels for Chinese AI Stocks

Cryptocurrency exchanges are emerging as alternative channels for overseas investors looking to invest in Chinese artificial intelligence-related stocks.

According to a report by the Financial Times on the 25th, trading platforms such as TradeXYZ and Gate.com have launched perpetual futures contracts that track the stock price of Chinese semiconductor company CXMT, which is set to be listed on the Shanghai Stock Exchange. According to CoinGlass, which aggregates cryptocurrency derivatives information, the trading volume of CXMT perpetual futures in the last 24 hours reached approximately $19 million.

CXMT is considered a leading semiconductor company in China. While it is popular among domestic investors betting on China's AI capabilities, foreign investors find it difficult to access. CXMT plans to raise nearly $10 billion through its initial public offering (IPO), which is expected to be the largest IPO in mainland China since 2010.

As perpetual futures linked to stocks spread, the boundaries between the cryptocurrency market and regulated finance are also becoming blurred. In particular, there is a growing demand to trade assets that are restricted in traditional financial markets on cryptocurrency exchanges.

Matthew Fisher, CEO of decentralized finance platform Katana, stated, "We have moved from the stage where we can tokenize short-term government bonds to a stage where a market is forming that provides real-time liquidity for assets that are difficult for global investors to access, such as foreign stocks and pre-IPO companies."

On the 22nd, TradeXYZ also announced perpetual futures for semiconductor company Gigadevice Semiconductor, which is listed in Shanghai. This product offers up to 10x leverage.

Perpetual futures originally emerged in the cryptocurrency market to bet on price fluctuations of cryptocurrencies like Bitcoin. Investors do not hold claims on the underlying asset and there is no expiration date.

Due to this flexibility, perpetual futures have also gained popularity as a means to bet on the prices of stocks and other traditional assets. They are typically listed on cryptocurrency exchanges and purchased with stablecoins. They have also been used to gain exposure to pre-IPO companies like SpaceX and OpenAI.

In the case of CXMT, perpetual futures serve as a means to circumvent the complex system established by Chinese authorities to control foreign access to the Chinese capital market.

Foreign investors can only access Shanghai and Shenzhen stocks through the Hong Kong Stock Connect program or the Qualified Foreign Institutional Investor (QFII) system. Both systems have limits in place. The Hong Kong Stock Connect program also restricts the range of investable companies.

The Shanghai STAR Market, where CXMT is set to be listed, imposes additional requirements on individual investors. Individual investors must have at least 500,000 yuan, approximately $74,000, in assets and also need two years of trading experience.

The price of perpetual futures before the listing reflects the market's expectations of the value at which the company will be evaluated upon listing. If the stock is listed at a price higher than the perpetual futures price, the holders of the derivatives will profit.

Lee Ki-iope, Chief Investment Officer of Theo, a company that tokenizes real assets, explained that the expectation that perpetual futures prices will eventually converge with the prices of the underlying assets is at play. After trading of the underlying assets begins in the public market, data feeds align the perpetual futures prices with the prices of the underlying assets.

Due to the price linkage structure and the absence of an expiration date, investors can continue to track price fluctuations through perpetual futures even after the stock is listed. Chinese individual investors have used this product to secure exposure to SpaceX investments and to circumvent capital controls aimed at preventing capital outflows.

Russ, head of trading at cryptocurrency market maker Aurox, stated that pre-listing perpetual futures could also serve as a hedge for insider ownership stakes. He explained that this method was also utilized in the case of SpaceX.

Russ noted, "The reason perpetual futures are gaining attention is that they demonstrate financial innovation. We are talking about a new asset class that does not exist in traditional finance but has real demand and use cases."

Perpetual futures also pose challenges for regulators. The key issue is how to define their status as financial products.

Andy Liu, chief analyst at HTX Research, stated that the biggest question is whether perpetual futures represent the underlying securities, are based on custodial rights, or are synthetic derivatives. He assessed that they are closer to a leveraged prediction market rather than true stock ownership.

The Monetary Authority of Singapore added Hyperliquid, the main trading venue for CXMT perpetual futures, to its investor warning list last month. This list indicates institutions that may be misperceived as being licensed, approved, or regulated by the MAS.

Russ believes that it will be difficult for regulators to suppress products that are outside their jurisdiction. He stated, "I think it is a very open question whether individual governments can stop this."

Russ views perpetual futures as part of a long-term trend of deepening connections between traditional finance and cryptocurrency. He remarked, "I wouldn't be surprised if, within five years, all U.S. stocks, Hong Kong stocks, and Japanese stocks are traded in the cryptocurrency market.",