Okex Cloud Chain: Web3 Insights / How Can the Hong Kong Crypto Market Improve Liquidity?

Author: Jiang Zhaosheng, Senior Researcher at OKLink Research Institute

Since the second half of 2021, the Hang Seng Index has been on a downward trend, with a cumulative drop of over 10,000 points. The average daily trading volume of the Hong Kong Stock Exchange has decreased from over 160 billion HKD in 2021 to around 100 billion HKD in 2023. The number of IPOs (Initial Public Offerings) and the amount of financing in the Hong Kong stock market have also declined year by year, with the number of cornerstone investments by foreign capital in IPOs dropping to single digits in 2023. Insufficient liquidity has become a widely recognized issue in the Hong Kong stock market over the past three years.

To resolve the liquidity crisis in Hong Kong, institutional reforms and expectation restoration are essential to attract the return of existing global market funds. A series of measures, including lowering the stamp duty rate, optimizing trading mechanisms, expanding market promotion, and implementing GEM reforms, have demonstrated the determination of the Hong Kong SAR government. In addition, Hong Kong is accelerating the promotion of financial technology innovation, hoping to change the stereotype of "having finance but lacking technology" and attract new funds and new assets through innovation, thereby improving or even recreating the liquidity of the Hong Kong market. Virtual assets and Web3 are also areas where Hong Kong has high hopes for generating incremental liquidity.

However, the virtual asset market is also suffering from liquidity issues. Despite Bitcoin reaching a new price high in March, trading volume and turnover rates have remained low, and the growth rate of stablecoins has continued to slow down, leading to a gradual decrease in on-chain liquidity. Coupled with the relatively weak performance of Bitcoin spot ETFs in June, which saw consecutive days of net outflows, Hong Kong's attempts to improve or even recreate market liquidity through virtual assets have not been smooth.

Professor Chen Chun, an academician of the Chinese Academy of Engineering, recently stated at the Hong Kong Legislative Council: "Based on Hong Kong's technological infrastructure and unique advantages, the development of Web3 should primarily serve the real economy and promote application innovation exploration." In my view, the emphasis on using Web3 technology to serve the real economy is not about cost reduction and efficiency improvement through process optimization, but rather about leveraging the unique token system of Web3 to explore and release the potential value of existing assets, enabling free circulation based on blockchain technology. The core lies in releasing more liquidity of real assets through tokenization.

I agree with the long-term value and potential of tokenization, but its status as a "trillion-dollar narrative" largely stems from how far we are from realization, leaving ample room for imagination. Hong Kong may rely on tokenization in the future, but it currently needs more direct answers for liquidity.

At this stage, the focus of liquidity is in the OTC market. Although trading platforms remain the most important infrastructure in the crypto market, recent trends indicate that crypto liquidity is gradually converging towards the OTC (Over-the-Counter) market. According to the latest data from CryptoQuant, the number of Bitcoins in OTC market reserves has significantly increased recently: over the past six weeks, the OTC market has accumulated more than 103,000 Bitcoins, valued at over 6 billion USD at current prices. A large portion of this comes from selling pressure by Bitcoin miners. Due to the sharp reduction in profit margins after the Bitcoin halving, many miners have been forced to sell their Bitcoins. Statistics show that the volume of OTC sales by Bitcoin miners has recently reached the highest level in three months.

Great Development Potential in the OTC Market

It can be expected that in an environment of scarce on-market liquidity, institutional investors and large whales trading Bitcoin will be more inclined to choose the OTC market to avoid the impact of large high-frequency trades on prices.

On the other hand, whether Hong Kong hopes to quickly obtain liquidity from the crypto market or to recreate liquidity through various new assets generated by the tokenization narrative in the future, it needs to start building solid and secure products and channels that can connect the crypto market with traditional financial markets. Hong Kong has now established a licensing system for VATP (Virtual Asset Trading Platforms) and has ended the transition period. This also proves that the Hong Kong SAR government is willing to provide a stable and secure trading venue for virtual assets and more tokenized assets in the future based on relatively clear rules.

Merely having compliant on-market trading is clearly not enough; Hong Kong also needs a safer and freer OTC market to accommodate liquidity. Fortunately, Hong Kong also has a comparative advantage in the OTC field. According to incomplete statistics from OKLink Research Institute, the Hong Kong crypto OTC market handles transaction volumes of nearly 10 billion HKD annually. Additionally, thanks to the unique physical entity of crypto exchange shops in Hong Kong, it not only attracts young investors from around the world but also appeals to participants in the middle and older age groups.

More importantly, the Hong Kong OTC market has recently attracted attention from numerous users and institutions in international trade and cross-border payment sectors, gradually becoming another important vehicle for gathering global funds in Hong Kong. It can be said that the OTC market, represented by crypto exchange shops, has become a unique symbol of crypto culture and regional identity in Hong Kong.

Hong Kong should continue to maintain and strengthen its competitiveness in the OTC field, thereby enhancing its global voice in the virtual asset and Web3 ecosystem. Currently, the Hong Kong SAR government is considering bringing OTC under regulatory oversight. Although this may impact trading activity in the short term, in the long run, it can help Hong Kong attract more compliant funds while also providing another channel for the free flow of funds beyond licensed VATPs. Perhaps in the near future, a safe and compliant OTC market can not only help improve liquidity in the Hong Kong market but also become an important channel connecting the crypto market and Web3 ecosystem with the real liquidity market.