2024 Beginner's Guide to Investing in Cryptocurrency in Hong Kong

Hong Kong is quickly establishing itself as a leading crypto hub in Asia. In 2023, Hong Kong introduced a new licensing regime for crypto trading platforms, allowing licensed exchanges to offer retail trading services. 

Another major development is the approval of several spot Bitcoin and Ether ETFs by the Hong Kong Securities and Futures Commission (SFC). These ETFs offer retail investors new opportunities to gain exposure to cryptocurrencies within a regulated environment. 

What is Cryptocurrency?

Cryptocurrency is a digital currency that operates independently of central government control, making it resistant to interference. Most cryptocurrencies are decentralized and use blockchain technology - a distributed ledger that records and verifies transactions across a network. This decentralization makes transactions faster and cheaper, without needing intermediaries like banks. The system is resilient, with no single point of failure.

Cryptocurrencies serve as a medium for storing and exchanging value. Transactions are recorded on the blockchain, where each block contains immutable transactions. The security is ensured through encryption, protecting digital wallets and public ledgers.

The concept was popularized by Bitcoin, the first and most well-known cryptocurrency, created in 2009. Cryptocurrencies are created through mining - using computational power to solve problems, generating new coins. Owners hold a digital key to transfer value directly, bypassing traditional financial intermediaries.

While cryptocurrencies offer many advantages, such as speed and low transaction costs, they also face challenges, including price volatility, potential use in illicit activities, and high energy consumption for mining. Despite these challenges, the use of cryptocurrencies and blockchain technology is expanding, with potential applications in trading financial assets like stocks and bonds in the future.

Type of Cryptocurrency

Cryptocurrencies can be broadly classified into four main types: Payment Cryptocurrencies, Utility Tokens, Stablecoins, and Central Bank Digital Currencies (CBDCs). 

1. Payment Cryptocurrencies

Payment cryptocurrencies are the original form of digital currency, designed primarily as a medium of exchange. These currencies facilitate peer-to-peer transactions without the need for intermediaries like banks. Payment cryptocurrencies typically have their own dedicated blockchain and are often deflationary, meaning there is a limited supply of coins, which can increase in value over time.

2. Utility Tokens

Utility tokens are digital assets that operate on existing blockchains and serve specific functions within that network. Unlike payment cryptocurrencies, utility tokens are used to access services, execute smart contracts, or participate in decentralized applications (Dapps). Utility tokens can be further categorized into several types:

• Service Tokens provide access to specific services within a blockchain network. For example, Storj is a service token used to pay for decentralized cloud storage services.
• Finance tokens are used within financial platforms, often providing benefits like reduced transaction fees or access to financial products. Binance Coin (BNB) is a well-known finance token that offers discounts on trading fees within the Binance exchange.
  
• Governance tokens grant holders the right to vote on important decisions within a blockchain network or decentralized organization. For example, MakerDAO's MKR token allows holders to vote on decisions related to the MakerDAO platform and its stablecoin, Dai.
• Media and Entertainment Tokens are used within the media, gaming, and entertainment sectors. Basic Attention Token (BAT) is a media token that rewards users for viewing ads on the Brave browser, which can then be used to tip content creators.
• Non-Fungible Tokens (NFTs) are unique digital assets that represent ownership of a specific item, such as digital art or virtual real estate. Unlike other tokens, NFTs are non-fungible, meaning each one is unique and cannot be exchanged on a one-to-one basis.
  

3. Stablecoins

Stablecoins are designed to minimize the volatility often seen in cryptocurrencies by being pegged to a stable asset, such as a fiat currency like the U.S. dollar. This peg helps maintain a consistent value, making stablecoins a popular choice for those looking to use cryptocurrency as a medium of exchange or a store of value without the risk of significant price fluctuations. Tether (USDT) is one of the most widely used stablecoins, pegged to the U.S. dollar, ensuring its value remains stable at around 1 USD per coin.

4. Central Bank Digital Currencies (CBDCs)

CBDCs are digital currencies issued and regulated by central banks. Unlike decentralized cryptocurrencies, CBDCs are fully controlled by the issuing government and are typically pegged to the national currency of the issuing country. While still in the early stages of development, CBDCs aim to enhance payment efficiency and reduce transaction costs while maintaining the stability and trust associated with traditional fiat currencies. 

HOW TO INVEST IN CRYPTOCURRENCY IN HONG KONG

In Hong Kong, there are four methods to purchase cryptocurrency: through Virtual Asset Trading Platforms (VATPs), Virtual Asset Over-the-Counter (VA OTC) dealers, SFC-licensed brokers, and Crypto ETFs.

VATPs are regulated and approved platforms for cryptocurrency trading in Hong Kong. These platforms are licensed and supervised by the Securities and Futures Commission (SFC) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. Currently, there are two VATPs operating in Hong Kong: OSL Digital Securities Limited and Hashkey Digital Asset Group Limited. VATPs are required to comply with stringent regulations, including conducting robust customer due diligence (CDD) checks, implementing comprehensive anti-money laundering (AML) and counter-terrorist financing (CTF) measures, maintaining robust cybersecurity and operational controls, and providing transparent and fair trading environments. Investing through VATPs is considered the safest option for retail and institutional investors, as the platforms are subject to close regulatory oversight by the SFC.

In contrast, VAOTC dealers, which include brokers, VA ATMs, and other digital platforms that facilitate cryptocurrency transactions, are unregulated and unapproved by the SFC. These dealers operate in a "grey area," as they have applied to become VATPs but have not yet obtained the necessary approvals. Due to the lack of regulatory oversight, VAOTC dealers are not required to adhere to the same stringent standards as VATPs in terms of CDD, AML, cybersecurity, and other operational controls. This lack of regulation poses a higher risk to consumers, as their funds may be at risk if the SFC ultimately disapproves the dealer's application to become a VATP.

In addition to VATPs, investors in Hong Kong can also consider investing through SFC-licensed brokers. These traditional financial institutions, such as banks and securities firms, have obtained licenses from the Securities and Futures Commission (SFC) to offer cryptocurrency-related services to their clients. As these brokers are subject to the SFC's regulations and oversight, this provides a certain degree of protection for investors. However, the range of cryptocurrency-related products and services offered by SFC-licensed brokers may be more limited compared to the fully regulated VATPs. SFC-licensed brokers may offer exposure to cryptocurrencies or crypto-related companies through investment vehicles like managed funds or structured notes, but the selection and customization options could be more restricted than what's available on VATPs.

Another option for investors in Hong Kong is to gain exposure to the cryptocurrency market through crypto spot ETFs.  Crypto spot ETFs allow investors to gain exposure to the cryptocurrency market without the need for direct ownership and custody of digital assets. These investment vehicles are subject to the same regulatory requirements as traditional ETFs in Hong Kong, which are overseen by the SFC. Crypto ETFs provide a regulated and liquid way for investors to participate in the growth of the crypto industry, while potentially offering more diversification and risk management compared to direct cryptocurrency investments. Currently, Hong Kong provides Bitcoin and Etherium ETFs.

Licensed Virtual Asset Trading Platforms

Storing Your Cryptocurrency

With the rise in cryptocurrency adoption, stories of lost or stolen crypto are unfortunately common. On top of that, it's estimated that millions of Bitcoin have been lost forever due to improper storage or forgotten access information. Therefore, understanding your storage options and choosing the right one for your needs is crucial to protecting your investment.

There are several methods available to store cryptocurrency, ranging from highly secure hardware devices to more convenient online applications and even simple physical solutions like paper wallets. Each method has its own set of advantages and disadvantages, and the best choice often depends on the amount of cryptocurrency you hold, how often you need to access it, and your level of comfort with technology. Here's a detailed look at the different types of cryptocurrency storage options available:

Final Remarks

Deciding whether to invest in cryptocurrency depends on your risk tolerance and understanding of the market. While Hong Kong's regulations provide more safety, the volatility of crypto prices remains high. Never invest in something you don't fully understand, and always be aware of the risks involved. The potential for both gains and losses is significant, so approach cryptocurrency investments with caution and only invest what you can afford to lose.