# Hong Kong Sets a New Benchmark in Asian Cryptocurrency Markets

Hong Kong has introduced standardized indices for Bitcoin and Ethereum, setting a new reference point expected to reduce price discrepancies across national markets.

## Two Key Indicators Introduced

To establish a comprehensive index system, Hong Kong provides both a reference index for real-time trading assessment and a daily benchmark price for financial contract settlements. This dual approach aims to meet the diverse trading and investment needs of investors.

## Foundation for Institutional Investment

Hong Kong’s new indices are designed to meet EU standards, providing highly reliable data to attract institutional investors. This is expected to promote the development of structured cryptocurrency products and accelerate the integration of cryptocurrencies into traditional financial markets.

## Introduction: Firming Up Leadership in the Asia Crypto Market

On October 28, 2023, the Hong Kong Exchange (HKEX) launched a series of virtual asset indices, solidifying its leading position in the Asian cryptocurrency market. The series aims to provide a reliable benchmark for Bitcoin and Ethereum prices across the Asia-Pacific region.

Traditionally, the cryptocurrency market’s indices have been led primarily by private enterprises, resulting in significant price discrepancies among exchanges. Investors were exposed to uncertainties and risks due to the lack of trusted institutional indices, hampering the integration with traditional finance.

In traditional financial markets, indices have been pivotal tools for price discovery, risk management, and performance evaluation. HKEX’s new virtual asset indices are expected to marry the advantages of traditional finance with the cryptocurrency market by offering real-time benchmark prices, facilitating the integration between the two markets.

This report analyzes the specific methodologies of the HKEX index series and examines its impact on market credibility. Furthermore, it explores how trading and investment strategies in the Asian cryptocurrency market might evolve.

## HKEX Virtual Asset Index Series

On November 15, 2024, HKEX officially launched its virtual asset index series. This series introduces two key indicators focused on Bitcoin and Ethereum: the HKEX Bitcoin Reference Index and the HKEX Bitcoin Reference Rate, providing standardized prices aligned with the Asian time zone.

### Reference Index

A chronic issue in the cryptocurrency market has been price discrepancies among exchanges. HKEX addresses this by employing a volume-weighted average index, initially targeting Bitcoin and Ethereum.

This method assigns weights based on trading volumes, effectively preventing price distortions caused by low volume or abnormal trades. By prioritizing heavily traded transactions, the index more accurately reflects the consensus of market participants.

The volume-weighted average also serves as an effective deterrent against market manipulation. Unlike simple averages, which are easily influenced by small trades, the volume-weighted approach assigns greater significance to more liquid exchanges, minimizing the potential for manipulation.

While this method is particularly needed for altcoins with high price volatility among exchanges, HKEX’s initial focus on Bitcoin and Ethereum appears to be a strategic choice to establish credibility and ensure stable implementation. This strategy is anticipated to serve as a proving ground for potential future expansions to altcoins. By validating the methodology through Bitcoin and Ethereum, HKEX aims to build a scalable framework for more volatile assets.

### Reference Rate

The Reference Rate is a daily price index designed for the standardized settlement of financial products such as derivatives and futures.

This index is published at 4 PM Hong Kong time, based on data from the preceding hour (3 PM to 4 PM). By recording reference index values at five-minute intervals and averaging them, the rate minimizes price differences among exchanges and provides a fair, representative market price.

Complying with EU Benchmark Regulation (BMR), the Reference Rate ensures strict management, transparency, and accurate data, addressing long-standing issues of price manipulation and inconsistent benchmarks. This enhances the trustworthiness of the cryptocurrency market and supports the development of sophisticated financial products such as futures and ETFs, encouraging institutional investment in digital assets.

As cryptocurrencies further integrate into traditional finance, the HKEX Reference Rate is expected to play a crucial role in market decision-making and maintaining stability. This will position Hong Kong as a leader in the global digital asset ecosystem.

## Strategic Impact of Index Series on the Cryptocurrency Market

### Impact on the Cryptocurrency Ecosystem

HKEX’s virtual asset index series has brought transparency, standardization, and reliability to the cryptocurrency market. By offering real-time volume-weighted prices for Bitcoin and Ethereum, it has helped alleviate the issue of price discrepancies among exchanges, bolstering institutional investors’ confidence, which had been wavering due to fragmented price data.

This transparent index has contributed to market stability by providing a consistent benchmark. Investors can now make more accurate risk assessments and investment decisions, creating a structured environment for market participants. The defined regulations within regions like Hong Kong suggest that the HKEX index will serve as a catalyst for the development of structured financial products based on stable benchmark prices.

### Financial Product Innovation Through Crypto Indices

Beyond providing price consistency, the HKEX virtual asset index series has laid the groundwork for developing various financial products. ETFs, equity-linked securities (ELS), and deposit-linked securities (DLS) for regional investors can be developed based on these indices. Moreover, the introduction of derivatives, such as futures and options, has broadened opportunities for hedging, speculative trading, and risk management.

This innovation marks significant progress towards integrating the cryptocurrency market with the traditional financial system. As the index evolves, it is expected to support decentralized finance (DeFi) protocols, such as tokenized loans and yield farming products, based on accurate real-time price information.

### Lessons From Traditional Finance: Importance of Benchmarks

In traditional finance, benchmark indices like the S&P 500 and Dow Jones have established consistency and reliability in pricing, performance tracking, and portfolio management. Commodity markets for oil or gold have similarly used indices to stabilize prices. Cryptocurrency indices adopt this proven model, providing institutional investors with dependable frameworks for asset allocation, performance measurement, and portfolio rebalancing.

Beyond traditional use, benchmarks have enabled the adoption of advanced strategies like algorithmic trading based on accurate real-time data. Indices like the HKEX virtual asset series are poised to redefine the integration of digital assets into the financial ecosystem, aligning the principles of traditional finance with blockchain innovation.

## Conclusion and Future Outlook

The HKEX virtual asset index series represents a groundbreaking step towards establishing Hong Kong as a hub for digital finance. By introducing standardized benchmarks for Bitcoin and Ethereum, HKEX has created a more transparent, stable, and investor-friendly cryptocurrency market in Asia. This series addresses the need for consistent pricing in cryptocurrencies, while also suggesting the potential for developing structured products and risk management tools similar to traditional finance.

The HKEX index series is expected to inspire other Asian markets to adopt similar benchmarks, leading to the establishment of an integrated regulatory framework for the regional cryptocurrency market. Such standardization will attract more institutional investors, enhancing market liquidity and stability. For market participants and investors, it’s an opportunity to engage in a more transparent and structured cryptocurrency environment that aligns with traditional financial principles and elevates the ecosystem’s maturity.

The HKEX index series signifies a crucial advancement towards integrating cryptocurrencies into the financial system. By providing valuable insights and tools to both individual and institutional investors, it holds the potential to reshape the cryptocurrency investment landscape. The introduction of reliable benchmarks is anticipated to set a new standard for transparency, security, and growth in Asia’s evolving cryptocurrency economy.

*This article is a comprehensive report from Tiger Research, a global Web3 research institution partnered with Block Media, titled ‘Hong Kong’s Bitcoin Index: Setting a New Standard in the Asian Cryptocurrency Market.’ The full report is available on the Tiger Research official site.*