How to invest in the digital currency era?

Apple Pay, a new generation payment system developed by Apple, has entered the Chinese market with its brand advantage. On the first day of its entry into China, more than 30 million cards were bound, which is equivalent to one-third of Apple devices in China. China is the fifth country in the world and the first in Asia to open Apple Pay services after the United States, the United Kingdom, Canada and Australia.

Of course, the focus of this article is not to introduce the popular Apple Pay, but to explore the changes behind it. Not only Apple Pay, the rise of WeChat Pay, Alipay and Paypal means that the era of mobile payment and even digital currency is coming.

In January 2016, the IMF said that digital currency, especially technology, is crucial to the improvement of efficiency and inclusiveness in the financial industry. The People's Bank of China also stated that it had set up a research team in 2014 to conduct in-depth research on digital currency issuance and business operation framework, key technologies of digital currency, issuance and circulation environment, and legal issues faced, and achieved phased results. This is the first time that the central bank and five other ministries and commissions have made a clear statement on digital currency since the notice on preventing Bitcoin risks was issued in December 2014.

Zhou Xiaochuan pointed out in an interview with Caixin.com that paper money has low technical content, and it is inevitable that it will be replaced by new technologies and products from the perspective of security and cost. Although it will take a long time for digital currency to be launched, as the cost of cash transactions gradually increases in the later period, digital currency will eventually break away from paper money and complete the replacement process after a long-term coexistence.

It is worth noting that the digital currency mentioned by the central bank is not completely consistent with the Bitcoin we currently know. Both the central bank's digital currency and Bitcoin are new things that have emerged under the development of Internet technology. They will replace the backward old things, paper money. They have similar advantages in saving transaction costs and combating illegal and criminal activities, especially money laundering and terrorism. However, they are completely different in the way they are issued. Bitcoin is a self-organized, decentralized virtual currency, while the digital currency mentioned by the central bank is a currency substitute based on the central bank's absolute control over monetary sovereignty. The former is a virtual currency based on the market's common trust in its algorithm, while the latter is still a real currency backed by national sovereignty.

In addition, the central bank's digital currency may use Bitcoin's blockchain technology in the future, with distributed bookkeeping, no accounts and no possibility of tampering. Blockchain technology is very complex. Although we cannot fully understand how it works, we can never go wrong by following the steps of the industry's top investors: "JPMorgan Chase announced an investment in Blythe Masters blockchain startup Digital Asset Holdings, and teamed up with Wall Street Queen Masters to launch a pilot project for the application of blockchain technology", "Bank of America is trying to explore digital currency technology by applying for blockchain-related patents", "Nasdaq uses blockchain technology for the first time in individual stock trading", "Goldman Sachs said blockchain technology will completely change the traditional payment system", "The Australian Stock Exchange has chosen to use blockchain technology as a replacement for its clearing and settlement system".

There are signs that the era of digital currency is coming, and 2016 will be the first year of digital currency! Not only is the key technology of digital currency, blockchain, popular, but the management of various countries are also actively cooperating in promoting digital currency. In January 2016, DNB, the largest bank in Norway, called for a complete cessation of the use of cash. It can be said that Norway has almost completed the promotion of digital currency. Data shows that only 6% of the country's people (mostly the elderly) are still using cash; the European Central Bank has formed a team to study the technical details of abolishing the 500-yuan banknote, but Draghi claimed that this is mainly to combat criminal activities rather than curb the use of banknotes; former US Treasury Secretary Summers said that countries around the world should stop using high-value banknotes.

Although the main purpose of promoting digital currency is to reduce transaction costs and crack down on illegal and criminal activities, it also has a more implicit meaning. The following figure shows the interest rate levels of various countries, China (red), the United States (orange), the eurozone (blue), Japan (green), Norway (purple), and Sweden (yellow). In the near future, the Federal Reserve was forced to discuss the possibility of negative interest rates after starting the interest rate hike cycle. Japan unexpectedly implemented negative interest rates. The eurozone became the first large central bank to adopt negative interest rates in 2015. Sweden, a pioneer in negative interest rates, continued to lower interest rates. China's management has begun to use interest rate cuts cautiously to prevent falling into the quagmire of negative interest rates. The globalization of negative interest rates has already arrived.

What is the relationship between the withdrawal of negative interest rates and digital currency? As we all know, once systemic financial risks occur, bank cash runs will further worsen the risks. As negative interest rates intensify, once there are signs of transmission to savings accounts in the future, it will inevitably trigger a large-scale cash run, which will lead to bank closures and increased systemic risks. Based on the current development of the Internet, the introduction of digital currency will pave the way for deepening negative interest rates in the future. The deeper the country is in negative interest rates, the more actively it will promote digital currency, which in turn will greatly increase the speed of digital currency promotion.

Therefore, we have concluded that the future global growth will remain weak, and the economic stimulus measures of various countries will promote the evolution of negative interest rates, forcing the rapid promotion of digital currency. Judging from China's official statements, China will not lag behind other countries in the speed of digital currency research and development, and 2016 will be the first year of digital currency.

Author: Panhe Capital