DDN Business Insider | Opportunities and challenges for virtual assets intertwine after Fed's rate cut and Trump's victory
Trump returns to the White House as the cryptocurrency market continues to experience volatility, and Bitcoin once broke through $90,000, setting new records repeatedly. How does the Fed's 25 bps rate cut in November affect the virtual asset investment market?
The Hong Kong Stock Exchange launched the Virtual Asset Index Series, as part of the effort to establish itself as a digital asset hub in Asia.
In this episode of DDN Business Insider, Professor Gao Pingyang, Vice Dean of HKU Business School, and guest host Ding Zhaofei, Chief Analyst at HashKey Group, will jointly discuss topics on virtual assets.
【Anchor】Hello everyone, Welcome to the Web 3 interview.I am Ding Zhaofei, the Chief Analyst of HashKey Group.In recent years, virtual assets have become an increasingly important component of the financial market. Hong Kong's innovation in the virtual asset space is also ongoing.
Earlier, the Chief Executive encouraged the promotion of financial innovations, including virtual assets. Recently, the Hong Kong Stock Exchange has also launched the Virtual Asset Index Series to support Hong Kong in becoming Asia's leading virtual asset center. This also marks the formal competition for pricing power in Bitcoin and other virtual assets in the Asian market.
Today, we are fortunate to invite Professor Gao Pingyang, Vice Dean of HKU Business School, to discuss the current developments of virtual assets, especially in light of the significant transformations in the financial market.
In light of recent policy shifts from the Fed and a cycle of monetary easing, how should investors choose between traditional financial assets and virtual assets? Let's start this discussion.
Welcome, Professor Gao.
Thank you, Jeffrey.
【Anchor】Well, Professor Gao, as we know, with the onset of this round of interest rate cuts, how should we interpret and what should our outlook be?
Especially for investors in Hong Kong, this rate cut may be particularly important because, over the past two years, US interest rates have been relatively high, benefiting from its strong economic development. However, Hong Kong's economy has not been able to keep pace with the U.S. during this time. Due to the linked exchange rate system, Hong Kong was forced to adopt a high-interest-rate policy, which has led to a series of economic problems.
Therefore, with the Fed finally starting to lower interest rates now, the Hong Kong government and the Monetary Authority can also follow suit and lower their rates.
Now, investors need to re-evaluate the price of assets that are based on the risk-free rate. We have seen the significant impact of U.S. monetary policies and liquidity easing on global assets. As you mentioned, various assets may open an upward channel.
【Anchor】I would like to ask you to analyze different types of assets, for example, Hong Kong stocks, A-shares, and precious metals markets, etc.
In the past few years, especially since when the pandemic began, it was generally quite challenging to invest in Hong Kong. The real estate market remained sluggish, and in the stock market, the Hang Seng Index and A-shares have also consistently been in the red over the past 15 years. Therefore, this round of interest rate cuts by the Fed is hoped to bring an opportunity for these assets to be re-assessed.
Apart from these physical assets, virtual assets are becoming increasingly popular in recent years, and have appreciated significantly over the past five to six years. This has led many investors to seriously consider whether to include virtual assets, particularly cryptocurrencies represented by Bitcoin, as part of their asset allocation. Thus, Hong Kong's current policies are also very favorable to support investors in understanding this market.
【Anchor】Actually, many people may not have a good understanding of digital assets. So next, let's do a brief introduction comparing the traditional stock market and the digital asset market to see what the differences are.
Professor Gao, could you first introduce the characteristics of the stock market and how we should understand it?
Most of us may understand assets through the perspective represented by Warren Buffett, who often says that assets are capital that can generate future cash flows. For example, if you own a factory, that factory can produce products or provide services, which can then be monetized, and if managed properly, can provide sufficient future returns to investors.
The second type of asset is bonds, this is when you lend money to the government or other listed companies. They will repay you with both principal and interest after a certain period of time. This way, you know that the bond you invest in will generate cash flow.
Real estate is also familiar to many people. By investing in property and renting it out, you can receive rental income.
As for virtual assets, at least at this stage, some virtual assets have certain utility functions. For example, Bitcoin can be used as a payment method, especially for cross-border payments. The market allows it to generate some transaction fees, which represent the cash flow it can generate. However, the vast majority of investment returns from virtual currencies, so far, have come from the price difference between buying and selling.
【Anchor】Thus, this is a type of asset that is different from traditional assets. As a new type of economic asset, it has a low correlation with traditional assets. Many people believe it is an alternative asset outside the banking system and is even completely uncorrelated with it.
【Anchor】We can see that in the past two years, the Hong Kong government was active in the virtual asset market. Whether it's the issuance of exchange licenses or future stablecoin licenses, these provide great convenience for the virtual asset market and its practitioners.
Why do you think the Hong Kong government has placed such importance on the development of the virtual asset market in the past two years? What will it bring to Hong Kong?
Indeed, over the past two years, the Hong Kong government has made great efforts to develop the virtual currency market. From my perspective, this is an important attempt by the government to explore new pathways for Hong Kong's economy. The virtual currency market is relatively new, and there is a lot of uncertainty about how much it can develop in the next decade. However, like other markets, including stock markets and commodity trading markets, it has a first-mover advantage. Once everyone is accustomed to doing business in one place and the business grows, it becomes particularly difficult for others to come in and share the pie. For example, Singapore's financial market are struggling to develop its stock market partly because Hong Kong took the lead.
Currently, the virtual currency market is still in a competitive stage, and we do not know what it will look like in ten years. Therefore, the Hong Kong government's proactive attitude can be seen as a way to invest low costs to buy insurance.
Hong Kong, being an international financial center, already has a wealth of capital, talents, and institutional foundations, which gives it an unique advantage in developing the virtual currency market. I believe this is a smart move by the Hong Kong government.
【Anchor】Many people are also concerned about investing. Of course, I hope to make money, but will there bevarious types of risks? Historically, finance has a history of hundreds of years, while digital currency has only been around for a decade. Are there stories from these hundred years of history that we can share? For example, the "black swan"stories or what risks we might face. There are nothing new under the sun, right? We can share them with everyone.
At the University of Hong Kong, I'm teaching a course called "managing black swans". One example I often use is the significant price volatility of Bitcoin. As Jeffrey mentioned earlier, Bitcoin has been around for about 16 years since Satoshi Nakamoto published that famous paper, but in the public eye, it has only been for less than ten years.
During this period, Bitcoin has created many myths, going from 30,000 Bitcoins being used to buy a pizza to now being able to buy a very good car with one Bitcoin. However, for those who have not yet entered the market, it is important not to only focus on the rapid appreciation over the past decade. As the price rises, you must also consider the downside risk. Historically, Bitcoin often dropped by 10%, 20%, or even 40% in a single day. For instance, in March 2020, when the pandemic began to spread in the United States, the stock market experienced significant volatility, and Bitcoin also saw a substantial decline, losing more than half of its value in a short period.
【Anchor】There have been many black swan events in both the stock market and the digital currency market. For example, a couple of years ago, FTX was the second-largest exchange in the world. This happened because the manager misappropriated client funds and transfer them elsewhere, which was exposed by the owner of another exchange.It led to a run on the exchange. Once the run started, it may have been attempted to be filled, but it happened too quickly and violently. People already had significant doubts about these unregulated and non-compliant exchanges. After this incident, a rapid run occurred, making it very difficult to replenish the funds afterward.
The risk you mentioned is different from market volatility risk. Market volatility is inherently significant, but the risk you mentioned highlights a major difference between virtual currencies and other traditional investment products. The current regulatory framework for virtual currencies is still very inadequate. Many so-called exchanges essentially act as third parties that collect your money and buy coins for you. In this process, when you buy stocks through a brokerage, those stocks are not held in the broker's account but are held in a custodian bank under your name. Others cannot take them away.
However, if you buy virtual currency through an unregulated exchange, your virtual currency is technically the exchange's asset. You give them your money, and they use that money to buy crypto for you, but the crypto is held in their name. While they owe you money, you have no legal rights to the ownership of that crypto.
This creates a significant moral hazard. If the exchange misuses your virtual currency for investments and fails, or if they simply sell your virtual currency and run away with the money, these factors necessitate extreme caution for investors.
【Anchor】I also want to discuss with Professor Gao that whether in the stock market, precious metals market, or virtual asset market, ordinary people often find it challenging to distinguish which investment products to buy or what to invest in. What suggestions do you have for how ordinary investors should participate in these markets?
This is a great question. I have been studying capital markets and investment for many years. Since I came to Hong Kong four years ago and began paying attention to the market here, I found it quite interesting. Many stocks in the Hong Kong market have very low prices, even a few cents. About 75% of the stocks are priced below 4 HKD, and half of the stocks are priced below 70 cents. Many stocks have very low trading volumes, and they can skyrocket or plummet quickly.
This phenomenon is fascinating, and I am still researching what causes it. One reason may be that the risk attitudes in the Hong Kong market are sometimes very aggressive, with people wanting to make quick profits. This aggressive mindset can be very dangerous in the virtual currency market. For such a rapidly developing and enticing market, it's hard to completely persuade people not to get carried away.
Perhaps the best approach is for individuals to invest enough time and effort to slowly understand how blockchain works, what potential application scenarios Bitcoin may have in the future, and what kind of production value it can generate. Ultimately, what does the price volatility look like?
Given the significant price fluctuations we discussed, individuals should reflect on whether this volatility resembles the price fluctuations they are familiar with and whether they can mentally handle such volatility.
【Anchor】I would like to thank Professor Gao for providing such an insightful discussion and in-depth analysis today. It serves as an excellent reference for many investors. We look forward to inviting Professor Gao to share more knowledge and insights on investments, digital assets, and the entire financial industry.
That's all for today. Thank you all, and goodbye!
Edited: Kelly Yang, Jerry Wang | Narrator: Laura Cheung | Translate: Kato Ip | Proofread: Chris Liu
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