Global turmoil in financial markets is leading to some touting Bitcoin as a possible alternative investment, eleven years after the pioneer was developed.
But South Korean academics remain unconvinced — they recognize Bitcoin turning into a hedge, but say it remains “dangerous” if volatility reappears.
Bitcoin good, but risky
Professor Hong Ki-hoon of Hongik University, a top university in Seoul, believes asset hedges should meet two conditions; One, low overall volatility, and two, must increase in value as broader markets move out-of-sync with fundamentals.
Ki-hoon says Bitcoin does not meet the first criteria. The second factor seemingly holds true, he notes, but could be accounted to psychological instead of Bitcoin’s inherent feature.
Ki-hoon told The Scoop, a local Korean publication:
“The reason for the fundraising after the market crashed was that the spirit of investing in higher volatility worked to compensate for the depreciated asset value.”
The above isn’t necessarily bad. Asian investors are known for seeking high-risk, high-reward trades, compared to Western markets seeking stability and low-returns.
But risk management remains a huge concern in the cryptocurrency markets, Ki-hoon explains.
The professor said Korea’s “Act on Reporting and Utilization of Specific Financial Transaction Information (Special Act)” is still under consideration, and investors are minimally protected.
Additionally, as cryptocurrency is still outside the capital market law in Korea, crypto-focused products are not free from market manipulation concerns.
Equity markets look like crypto
Another anonymous academic said individual investors are often unable to properly manage the risks of stocks, but it is “virtually impossible” to verify the risk factors of cryptocurrencies.
The Korean economists are not wrong. In March, Bitcoin fell 40 percent over two trading sessions — causing hundreds of millions in losses and many crypto-funds shutting up shop.
What we expected: cryptocurrency would normalize and become more like the stock market
What happened: the outside world went crazy and the stock market became more like cryptocurrency
Bond yields have turned negative in popular U.S. and European products, while zero-interest loans have led to “free” money pumping up equity markets with no fundamental explanation explaining the rise.
Take Hertz, the American car rental company, that declared bankruptcy last month. The firm’s stock prices, after an initial plunge, rose over 40 percent last week as retail traders spent stimulus checks and cashed in on casino-esque markets.
Hertz says, hey if there’s this much dumb money buying our bankrupt shares, maybe we can dump a secondary on them. https://t.co/gSsuQHf7JD
— Dennis Dick (@TripleDTrader) June 12, 2020
Bitcoin has remained relatively stable. BTC prices have fluctuated between $9,200-$9,800 since early-May, making it a “safer” store-of-value compared to index funds or “blue chip” stocks.