Over the past few years, the world has witnessed the rapid rise of “cryptocurrencies”, which pose an unprecedented challenge to financial regulatory authorities.
The idea of cryptocurrencies dates back to the 1980s. Yet, it wasn’t until the appearance of “bitcoin” in 2009 that cryptocurrencies came of age.
Also known as “decentralized digital currency”, bitcoin is a worldwide online payment and transaction vehicle that works without any central repository or “brick-and-mortar” financial institution.
Transactions of bitcoin take place between users directly without any intermediary, and are then verified and recorded in a digitized financial ledger maintained by a network of computers known as “blockchain”, thereby substantially reducing the cost of transactions.
In fact, bitcoin is such a huge game-changer with unlimited potential that its emergence has opened Pandora’s box just as the internet did 20 years ago.
Apart from being a currency that can be traded freely, bitcoin has also become a mode of payment for some retailers and a vehicle to transfer funds without the need of any third party.
At present, there are at least 1,000 different types of cryptocurrencies in circulation on the open market, and their estimated combined value has hit US$158.5 billion, with bitcoin accounting for half of the total value.
On the other hand, as bitcoin and other cryptocurrencies are becoming increasingly popular, it has also given rise to virtual derivatives.
For example, in 2014, 20-year-old Vitalik Buterin wrote a white paper and raised US$18 million worth of bitcoin in order to develop his own cryptocurrency platform known as “ethereum”, through which he has distributed his own cryptocurrency “ether”.
Such revolutionary and largely unregulated means adopted by startups to raise funds through the sale of “tokens” (i.e. virtual shares) to the public is known as “initial coin offering” (ICO), which has caused a huge sensation among global investors in recent years.
In the first half of 2017 alone, at least 65 ICO projects were completed in China, raising capital with a total value of 2.61 billion yuan.
In fact, the ongoing global ICO frenzy reminds me of the “dot.com bubble” in the late 1990s.
Back then, most market participants had no idea how to value such companies, only to find out later that a majority of them didn’t have any sustainable earnings, leading to subsequent collapse of their share prices.
However, people investing in cryptocurrencies could even run a higher risk this time, since both the virtual currency market and ICOs are totally unregulated and completely volatile.
Besides, the threshold for issuing virtual money is very low, which means basically everybody can distribute their own currency.
While ICOs might be highly lucrative for professional speculators, they are also highly risky for the average and unwitting investors.
In July this year, the Financial Services and the Treasury Bureau publicly warned of the potential risk of cryptocurrency ventures and ICOs, and urged small investors to be cautious about investing in virtual currencies.
Nevertheless, since cryptocurrency is still in its infancy at this stage and remains unregulated, so far there are only a handful of companies around the world that accept bitcoin as payment. Given that, it is still very much premature to say that bitcoin would replace the conventional currency in the foreseeable future.
However, as virtual currencies and ICOs are becoming increasingly popular, no government, including ours, can afford to ignore the risks and challenges they pose to investors.
This article appeared in the Hong Kong Economic Journal on Aug 31
Translation by Alan Lee
[Chinese version 中文版]
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