As part of the Digital Currency Council’s Continuing Education partnership with Inside Bitcoins, DCC interviewed thought leaders who will be speaking at the Inside Bitcoins Conference in Seoul on December 9-11, 2015. Today, we share an interview with KiHoon Hong, Professor at Hong-ik University.
Tell us about how you got interested in digital currencies and blockchain technology.
In March of 2010, I read an article about an encryption patent, which was approved in the previous month. It directed me to Satoshi’s paper made available online in October 2008. I thought it was quite interesting and I started reading about the development of Bitcoin. However, I regarded Bitcoin as an experiment in computer science, which is less likely to affect our real (financial) lives. Then in late 2010, the first short sale of Bitcoin took place and few months later the first call options were successfully written. Although Bitcoin it had a long way to go, I started thinking Bitcoin could be something significant in the financial industry.
I am not a computer scientist, I did not really understand the details of the technology behind Bitcoin that everyone thought to be innovative. However the one thing that I knew as an economist was that in the long run, Bitcoin will open up a new type of dual currency regime unlike anything we’ve ever seen before. So I got really interested in the use of Bitcoin as an alternative currency and its regulation from a macro perspective.
I investigated the transaction data and studied what was really happening in the Bitcoin industry. In late 2011 and early 2012, a few hedge funds started to investing in Bitcoin. And more investors were attracted throughout 2012. I realized that many Bitcoin users seemed to see Bitcoin as an alternative investment vehicle rather than an alternative currency.
Then in 2014, three researchers at the University of Technology, Sydney, Dirk Bauer, Arian Lee and myself won a SWIFT Institute research grant proposing to empirically investigate whether Bitcoin is a currency or an investment.
What are some of the key issues you’re working on regarding digital currencies at the SWIFT Institute and at Hong-ik University?
I am not a computer scientist. I believe that I am not the right person to study its technology. However as a financial economist, I am interested in Bitcoin’s role in the financial industry and its regulation.
With the SWIFT Institute, I am currently investigating two topics. The first topic is an empirical investigation of Bitcoin transaction data to find whether Bitcoin users are using Bitcoin as a currency or as an alternative investment vehicle. This research analyses the statistical properties of Bitcoin returns and finds that Bitcoin is essentially uncorrelated with traditional asset classes. The analysis of transaction data of Bitcoin accounts shows that Bitcoins are mainly used as a speculative investment and not as an alternative currency.
The second topic with the SWIFT Institute is a theoretical investigation of a potential crowding out effect when market participants are free to use a virtual currency or a fiat currency under a dual currency regime. The research takes advantage of an existing equilibrium model in monetary economics and extends it to incorporate virtual currency.
As an assistant professor of finance at Hongik University, I am very interested in how Bitcoin can benefit investors as an alternative investment vehicle. In an academic paper titled “Potential Benefits and Risks of a Digital Currency to Portfolio Managers: A Case of Bitcoin”, I empirically document time series Bitcoin returns. This research finds persistence in returns for 1 to 8 weeks that partially reverses over longer horizons. The finding is consistent with sentiment theories of initial under-reaction and delayed over-reaction in finance theories. In short, I find that a combined portfolio of S&P 500 and Bitcoin momentum strategy could enhance expected return, skewness, kurtosis and VaR, and therefore could potentially provide benefits to investors.
What do you see as some of the greatest challenges facing the digital currency industry right now?
If Bitcoin is to be used as a true alternative currency, we should have many more participants or active users. However empirical analysis of Bitcoin transaction data reveals that active users are attracted to Bitcoin due to its high return volatility. The problem is that a currency with high volatile value cannot function as a true currency. Therefore, I think Bitcoin and many other digital currencies will face a natural dilemma with respect to value volatility.
What are you most excited about in digital currencies and blockchain technology?
I believe that the availability of world-wide, borderless alternative currencies that can be efficiently exchanged can change our world. I really cannot guarantee that Bitcoin will be the one, although it could be. However I believe that there will be such currencies someday. I am very excited about enhancing our understanding of digital currency that could change our life an economy for good.
What’s ahead for you in 2016?
I will be focusing on my research on Bitcoin as an alternative investment vehicle in 2016. I also plan to develop Bitcoin trading strategies that could benefit various investors.