Bitcoin Seen by Macro Experts: "Inflated by Hwapyehwa Expectations, Value Will Emerge During Tightening"

Bitcoin Frenzy, Experts' In-Depth Analysis

Volatility is excessively high

and there are almost no places where it can actually be used for payment

Agreement with the view that it cannot be used as currency

Diverging opinions on asset value once the possibility as currency disappears

'Digital gold' VS 'Tulip bubble' opinions are divided

[Asia Economy Reporter Kim Eun-byeol] Experts view the Bitcoin frenzy, the 'leader of virtual currencies,' as a case that vividly reflects a facet of modern society, emphasizing that the relentless upward trend is unlikely to last long. They explain that in a situation overflowing with liquidity, growth without employment and relatively low wage income growth compared to assets have encouraged investment in virtual currencies. Bitcoin surpassed $50,000 per coin for the first time in history, but this week showed instability, dropping below $50,000 overnight.

"The currency value based on a 'one-in-a-million' probability is excessively inflated... no asset value"

Interest in Bitcoin started from its potential as a currency. Currency is issued and circulated by central banks of each country, while Bitcoin was a kind of experiment attempted in the private sector.

The recent sharp rise in Bitcoin prices is interpreted as a result of an overly inflated expectation that, although the probability is very low, it could serve as a currency. Professor Kim Jin-il of Korea University’s Department of Economics explained the Bitcoin frenzy as driven by the 'future value that is uncertain but the currency value that could exist even if only one in a million.' In other words, people are investing in the slight possibility that privately issued virtual currencies could really become currency in the future.

However, the consensus is that Bitcoin is unlikely to fulfill the role of currency. This is because its volatility is excessively high and there are almost no places where it can actually be used for payment. The Bank of Korea also refrains from making statements due to concerns about market impact but holds the view that Bitcoin cannot become currency. To have legal status as currency, it must be issued by a central bank, i.e., the Bank of Korea.

Professor Kim said, "It is true that virtual currencies have high volatility," but added, "Considering that liquidity has surged and existing currencies have also become volatile, and that existing currencies can sometimes act as risky assets, it cannot be said that only virtual currencies have high volatility." Examples include the hyperinflation in the Weimar Republic of Germany after World War I, and the hyperinflation in Venezuela and Zimbabwe.

He believes that if the possibility of virtual currencies becoming 'currency' completely disappears, it will be difficult for them to be used as investment assets like 'digital gold.' This is because gold has a physical form and is believed to be usable as precious metal or for industrial purposes, whereas Bitcoin does not.

Professor Kim also said it is difficult to guarantee that the issuance of CBDCs will cause the prices of virtual currencies such as Bitcoin to plummet. Although government-issued CBDCs have legal currency status, it is uncertain whether they can perfectly fulfill the role of virtual currencies that people found attractive, namely anonymous digital currencies.

"Currently, virtual currencies are speculative"

Researcher Lee Seung-ho of the Korea Capital Market Institute argued that Bitcoin is a 'speculative asset,' not an investment asset. He said, "Currently, existing currencies are functioning properly, so assigning the value of 'currency' and inflating the price by tens of thousands of times is close to speculation," and pointed out, "The problem is that the more volatile the value, the more interest speculators show, creating a vicious cycle."

Additionally, Researcher Lee criticized, "If the liquidity released during COVID-19 is withdrawn, the prices of Bitcoin and others could fall," adding, "Currently, investments are like a game of hot potato."

Researcher Lee also stated that Bitcoin cannot be seen as currency. It is not used as a means of payment and does not serve as a store of value. He analyzed, "It seems to reflect the tendency of investors who can endure hunger but cannot endure envy. With an enormous amount of money released during COVID-19 and nowhere to go, while funds were flowing into stocks and real estate, Bitcoin, which rose tens of thousands of times, appeared and attracted capital."

"True value of Bitcoin will be revealed when CBDCs are issued and liquidity tightens"

There is also a view interpreting the virtual currency frenzy as a result of the gap between the real economy and finance. Professor Ji In-yeop of Dongguk University’s Department of Economics evaluated it as "a facet of the modern economy era where wage income no longer matters." Professor Ji also firmly stated that cryptocurrencies such as Bitcoin cannot be considered 'currency.' He said, "For something to function as currency, there must be people using it, but there is no one around using it." He also believed that virtual currencies, especially Bitcoin, have clearly become a bubble due to their excessively rapid price rise, making it difficult to see them as a component of an investment portfolio. He expects that when the unprecedented liquidity released to respond to COVID-19 is withdrawn and legally effective digital currencies such as CBDCs are introduced, the true asset value of Bitcoin will be revealed.

He explained, "If CBDCs and others push virtual currencies out and their prices fall, the amount of the decline will be the value people originally assessed as Bitcoin’s currency value," adding, "The remaining price will be the value as an investment asset."

However, he also said, "Most people already know that digital currencies like Bitcoin do not function as 'currency,' yet the price has risen this much," and suggested that since few people invested expecting currency characteristics, the price drop after the introduction of CBDCs might be smaller than expected. He also said that if virtual currency prices plummet when liquidity is withdrawn, it can be interpreted that virtual currencies had significant value as assets.