Dialogue with TokenInsight Founder Hu Tao: The sentiment in the cryptocurrency market remains fearful, waiting for the regulatory shoe to drop

This article was published on Phoenix Finance, Reporter: Lu Jinghan

On May 27, Sichuan issued a notice regarding the investigation of cryptocurrency "mining," marking the beginning of the rectification of "mining cities."

Previously, on May 21, the Financial Stability Development Committee of the State Council (hereinafter referred to as the "Financial Committee") held a meeting to study and deploy key work in the financial sector for the next stage. The meeting pointed out the need to strengthen the regulation of financial activities of platform enterprises, crack down on Bitcoin mining and trading activities, and resolutely prevent individual risks from spreading to the social field.

Due to the intensive regulatory statements, the cryptocurrency market has experienced the largest adjustment of the year in the past three weeks, with Bitcoin prices nearly halved. The tone set by the Financial Committee has also made the "crypto circle" and "mining circle" silent.

Under the official statements, will China's Bitcoin mining industry repeat the situation of 2017-2018 when cryptocurrency exchanges collectively went overseas after the ICO crackdown? What impacts will the cryptocurrency market face? How do professional institutional investors participate in cryptocurrency investments? What disruptive applications will the blockchain technology supporting cryptocurrencies produce? Phoenix Finance dialogues with Hu Tao, founder of digital asset rating company TokenInsight and CEO of Blofin.

Hu Tao pointed out that a direct result of the regulation is the continuous rise in the custody fees and electricity prices of overseas mining farms, but the current price of Bitcoin can still cover the rising costs of "mining." In addition, China's Bitcoin mining industry has already shown signs of going overseas, seeking compliant operational locations globally.

Regarding the current market situation of Bitcoin and other cryptocurrencies, Hu Tao believes that market sentiment remains fearful. "Although prices have plummeted, the market volatility data shows that investors' panic sentiment remains high, and everyone is still waiting for the regulatory shoe to drop."

As trading in the cryptocurrency market continues to heat up, financial institutions such as Goldman Sachs and JPMorgan have already begun to lay out their cryptocurrency strategies and launch related financial products. Hu Tao shared with Phoenix Finance that mainstream institutions' investment methods are still focused on primary market investments, secondary market trading (including proprietary trading and quantitative trading), and mining. This year, liquidity mining based on Decentralized Finance (DeFi) has also become a new investment target for institutions.

Regarding blockchain technology itself, Hu Tao's most favored application direction is finance.

The following is an excerpt from the interview:

Phoenix Finance: How do you interpret the Financial Committee's policy this time? What is the reaction of people in the "mining circle" and "crypto circle" to the Financial Committee's statement?

Hu Tao: First, it must be emphasized that practitioners must respect national regulation. We have recently attended many mining industry conferences and found that most large computing power companies are already searching globally for countries and regions where they can operate in compliance. This includes the United States (such as Texas), Norway, Canada, and Central Asian countries. Developed countries and regions generally have relatively compliant systems, although costs are also higher.

One result of this regulation is that the custody fees and electricity prices of overseas mining farms have continued to rise recently. (Some Central Asian mining farms raised prices for miners by 40% overnight.) Operators of overseas mining farms are also very clear that Chinese miners must start seriously considering relocating their mining machines to operate overseas.

Phoenix Finance: Is there already a trend of Chinese Bitcoin mining going overseas?

Hu Tao: There are not just signs. Before the Financial Committee's statement, Inner Mongolia had already proposed to comprehensively clean up cryptocurrency "mining" projects in February this year. The market itself has generated strong expectations for regulation. Some forward-looking companies and practitioners have realized that "mining" cannot be sustained under China's carbon neutrality policy framework. Therefore, these companies and teams have already made many arrangements in advance, seeking overseas mining farms. Even though electricity prices and operating costs are high in the U.S., the current price of Bitcoin can still cover their mining costs.

Since the end of last year, mining machines have been in very high demand. It is said that Bitmain's mining machines are already sold out. Due to the current chip shortage, the futures of Bitmain mining machines have even been sold out until the end of next year. The main purchasers of mining machines are no longer retail investors and small miners, but companies with substantial funds, especially American companies.

Phoenix Finance: What do you think of the current cryptocurrency market situation?

Hu Tao: Regulatory policies will definitely have a huge impact on the market. In this industry, whether it is Bitcoin mining or trading, China is a very important player. Therefore, this regulatory policy directly triggered a market crash, with Bitcoin's maximum drop approaching 50%, and some smaller coins dropping even more, reflecting China's significant influence in this market.

The market is still very fearful. Although prices have plummeted, market volatility data shows that investors' panic sentiment remains high, and everyone is still waiting for the regulatory shoe to drop. The Financial Committee meeting clearly stated that it would crack down on Bitcoin mining and trading activities, but there has not yet been a clear conclusion on how to crack down and how to implement it.

In fact, many practitioners in China hope that the government will enforce regulation thoroughly and clear it all at once. This way, everyone will have clear expectations and bottom lines. It must be noted that using cryptocurrencies to package, issue air coins, and engage in pyramid schemes still exists in large numbers. Our government's regulatory actions to protect the interests of ordinary investors are a responsible and accountable performance. I believe that rational and conscientious people will firmly support the crackdown on these projects and teams that deceive ordinary investors by manipulating the market under the guise of concepts.

Of course, the cryptocurrency industry is definitely not without value. If you look closely, this industry also has many truly valuable technologies and product innovations that can improve the efficiency of the current financial system.

On the other hand, the cryptocurrency industry will not perish due to the regulation of a single country, as it is a global industry. The charm of cryptocurrency lies precisely in its emergence from technological innovation, and it is gradually penetrating and changing the global paths of value storage and transmission. Of course, cryptocurrencies will also encounter varying degrees of regulation globally. Some countries have strict regulatory policies, while others are relatively lenient or even actively embrace them to gain new market dividends. Some countries have very strong enforcement of regulations, while others are relatively weak. The U.S. is currently gradually establishing its own regulatory system. Some developed countries, such as Switzerland and Singapore, are relatively tolerant of cryptocurrencies, and their regulatory systems are quite friendly. Previously, India enacted laws defining the holding of cryptocurrencies as a crime. Recently, India adjusted this policy, and the government ultimately realized that regulation is necessary.

Phoenix Finance: You have conducted very in-depth research on the cryptocurrency asset management industry. What stage is this industry currently in?

Hu Tao: The cryptocurrency asset management industry is actually still in a very early stage. At the end of the last bull market (in 2018), the cryptocurrency industry generally did not have the concept of asset management. At that time, the cryptocurrency market did not have third-party custody, and many investors needed to transfer their assets to others for management, leading to many investors losing all their money.

After more than two years of development, such problems have become less frequent. The cryptocurrency asset management industry is becoming increasingly compliant. Many industry-leading institutions, including our Blofin as a Cayman institution, pay great attention to compliance, providing compliant services to overseas institutional clients who have passed strict KYC and AML in legally regulated areas.

Phoenix Finance: Is there significant competitive pressure in the digital asset management industry now?

Hu Tao: The competition is already very fierce. Among the top 15 hedge funds in the U.S., 10 are already engaging in large-scale trading in this industry.

Phoenix Finance: Are mainstream investment targets still in the quantitative trading field?

Hu Tao: Before the end of 2020, most funds in the cryptocurrency industry had to either mine, engage in quantitative trading, or do trend trading to make money. Mining can accommodate the largest amount of funds, but it is capital-intensive and operationally heavy. Trend trading carries extremely high risks, and most people may not make money. Additionally, I would like to remind everyone not to engage in any contract trading lightly. According to trading data from TokenInsight, 94% of contract traders are losing money, so retail investors should not participate in such trading.

Currently, for institutional investors, in addition to primary market investments, secondary market trading (quantitative and discretionary trading), and mining, new targets have emerged in the DeFi field, including fixed income and liquidity mining. DeFi is an emerging field that constructs new models and paths. The total value locked (TVL) in DeFi had reached $140 billion before the significant drop on May 19 (referred to as 519).

Of course, the 519 drop also exposed the potential risks of DeFi. The risks of DeFi mainly come from technical and product mechanism design. The technical risk refers to the fact that DeFi itself is a protocol, and interactions between people and funds are realized through protocols and code; therefore, once a hacker attack occurs, the loss of funds cannot be recovered. Moreover, some DeFi products have logical design issues, and some people may exploit product vulnerabilities for malicious attacks. Since DeFi operates under a decentralized mechanism without regulation, once the inherent flaws of the mechanism are maliciously exploited, it will be very troublesome to handle.

Phoenix Finance: The underlying technology of cryptocurrencies is blockchain technology, and the development of blockchain technology has become a national strategy. In which areas do you think the disruptive applications of blockchain technology will occur?

Hu Tao: The direction I am most optimistic about is finance, but there will also be significant value in other areas. The application of blockchain technology in finance will definitely bring about tremendous innovation and will give rise to very large companies or organizations similar to Google. Blockchain technology also has vast application space in other fields. For example, in terms of privacy and information, in the Web 3.0 era, it can support the storage of user behavior information and value exchange, ultimately forming a new internet and value network. Currently, NFTs (non-fungible tokens) are just a part of this.

At the intersection of blockchain technology and the real, enormous demand in the world, there will definitely be very large opportunities.