[What Do You Think?] Explicit and Implicit Risks of Virtual Asset Investment

[濁流淸論(Takryu Cheongron)] "Volatility influenced by a few individuals... May stimulate speculative gambling psychology"

Takryu Cheongron is a column featuring in-depth analysis and diagnosis by experts in the relevant fields on socially contentious topics. This week's topic is virtual currencies (cryptocurrencies) such as Bitcoin, whose investment fever has recently been reignited.

Hong Ki-hoon, Professor of Business Administration, Hongik University

Within a month, Bitcoin rose from 40 million KRW to 60 million KRW and then fell back to around 50 million KRW. There is probably no other asset outside virtual assets that moves about 5% on average per day. Virtual assets are high-risk, high-return investments with high price volatility.

Investing in assets with high price volatility often aims for a 'big win.' Because of the high volatility, prices can surge or plunge rapidly. This creates the risk of mistakenly thinking one has made a large profit but actually suffering significant losses. As many investors know well, the explicit risk of investing in virtual assets lies in the potential losses of such investments.

For high-risk, high-return investments to succeed, one must continuously succeed in betting. The problem is that the asymmetric return structure of investments makes continuous success difficult. If you invest 1 million KRW and gain 10% and then lose 10%, your investment becomes 990,000 KRW, resulting in a 1% loss. Investments have a structure where downside risk is greater. That is why numerous leading rooms exist that only advise on others' investments. If someone truly found a way to continuously succeed in betting, why would they share that information with others?

Moreover, virtual assets have no intrinsic value, so to know the price direction, one must predict market supply and demand. The problem is that the Bitcoin market can be swayed by a few individuals. For example, the market fluctuated with positive and negative comments from Elon Musk, CEO of Tesla. Predicting supply and demand in a market where a few individuals have a large influence on price movements is practically impossible unless one is a fortune teller or has divine inspiration.

When discussing the risks of investing in virtual assets, factors such as price volatility, lack of intrinsic value, and excessive influence by a few individuals are most often mentioned, but I believe there is an even greater implicit risk.

Investing in virtual assets with large price movements carries an implicit risk of gambling tendencies and stimulates gambling psychology. Simply put, it is thrilling and highly addictive. Furthermore, because it stimulates gambling psychology, many invest with borrowed money. This increases the volatility of investment gains and losses beyond the already high price volatility of virtual assets, exacerbating the problem of high price volatility.

Therefore, nowadays, internet BJs also exploit this gambling psychology to make their broadcasts more sensational and profit from it. Of course, this problem can also apply to stock investments with very high volatility, but isn't it time to acknowledge that no asset has as high price volatility as virtual assets?

Thus, the fact that price volatility is large implies not only the risk of potential large losses but also a much more serious risk of gambling addiction. Moreover, since virtual asset trading is open 24 hours a day, allowing continuous trading, it can worsen the problem of gambling addiction and practically make normal daily life impossible.