[Twisting Bitcoin] How Did Soros View Bitcoin?

Soros, Who Shorted the British Pound
Seems to Have Judged Bitcoin as Excessively Undervalued
But Wall Street Can Exit Anytime
"The Appeal of the Cryptocurrency Market Is That There Are No Regulations"

Cryptocurrency is sweeping across the globe. It is even likened to a so-called 'frenzy.' However, the more intense the frenzy, the more necessary it is to pause and observe. If problematic aspects are swept away along with the hype, they are bound to resurface as bigger issues someday. This is a time to calmly review the cryptocurrency market, in a segment called ‘Twisting Bitcoin.’

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Gong Byung-sun] On July 1st (local time), major foreign media reported that the Soros Fund, led by George Soros, approved trading cryptocurrencies such as Bitcoin within its managed funds. Moreover, it is known that they are discussing acquiring unlisted shares of companies growing based on blockchain technology.

The Soros Fund had already indirectly injected capital into cryptocurrencies earlier this year. In March, the Soros Fund invested about $200 million (approximately 231.4 billion KRW) in New York Digital Investment Group (NYDIG), a cryptocurrency investment firm. NYDIG is an influential investment company on Wall Street, cooperating with major U.S. banks such as Wells Fargo and JP Morgan.

Subsequently, Bitcoin prices reversed. According to the domestic cryptocurrency exchange Upbit, after reaching an all-time high of 81.99 million KRW in April, the price fell to 33.9 million KRW in June but has risen about 40% since July. The Soros Fund decided to enter the cryptocurrency market at what is called the bottom price point.

However, the public reaction to Soros’s investment news at the time was not entirely positive. This was due to Soros’s notorious reputation. Soros became famous for a short selling operation that shook the fate of a nation. Short selling refers to an investment method where stocks are borrowed and sold when a price or index decline is expected, then repurchased at a lower price to repay the loan and gain profit.

So, did Soros, a master of short selling, judge that Bitcoin would eventually decline? Experts explain that Soros is not someone who only invests in downturns. The most important point is to understand his investment patterns and what he focuses on.

Soros’s Pound Sterling Short Selling That Led to a Regime Change

[Image source=Reuters Yonhap News]

The most famous episode involving Soros was the short selling of the British pound sterling in September 1992. Soros judged that the pound was overvalued and unleashed $10 billion to start short selling. As Soros moved, other hedge funds aggressively joined the pound short selling.

Soros’s rationale was very reasonable. In 1990, the UK joined the Exchange Rate Mechanism (ERM) to be part of Europe’s single currency zone. ERM was effectively a fixed exchange rate system where the pound could only fluctuate within about 6% of the German mark, and if it showed signs of deviation, central banks had to intervene to adjust the rate.

At that time, Germany had recently unified and faced the challenge of uplifting the underdeveloped East German economy. To do so, they exchanged East German marks for West German marks at a 1:1 rate. Since East German marks had little value, liquidity inevitably surged. To curb inflation, Germany raised interest rates ten times over two years.

With Germany’s high interest rates, European funds began flowing into Germany. Other European countries, except Germany, saw their exchange rates plummet. However, the UK, as an ERM member, had to prevent a sharp decline in its exchange rate. Although it could have abandoned the mark peg like Finland, then-Prime Minister John Major reassured the public that the UK had sufficient foreign reserves to defend the exchange rate.

Soros, seeing the pound as overvalued and noting that the UK’s foreign reserves were only about $40 billion, started short selling. The UK tried to defend the exchange rate by raising short-term interest rates from 10% to 12%, then 15%, but could not withstand market attacks. Eventually, the UK announced its withdrawal from the ERM, and the pound plummeted.

The impact on the UK was enormous. Traumatized by the ERM exit, the UK refused to adopt the European single currency, the euro. While the economy began to recover as the exchange rate fell, the government changed. The Conservative Party, which had held power from 1979 under Margaret Thatcher until 1997, lost support and handed over power to Tony Blair’s Labour Party. Meanwhile, Soros earned $1 billion in one go from the pound short selling, exploiting the flaws in the exchange rate system to reap enormous profits.

Focus on ‘Reflexivity Theory’ Rather Than Short Selling

However, experts say one should not focus solely on his short selling. Professor Hong Ki-hoon of Hongik University’s Business Administration Department explains, “Soros is not a hedge fund manager who only looks for short selling opportunities but someone who seeks any chance to make money,” adding, “If he judged prices would rise, he also aggressively invested.”

Although he failed, in 1998 he decided to invest in Russia’s upward trend. He believed Russia’s economy would revive after transitioning to a capitalist system and invested in Russian government bonds and stocks. However, Russia, hit by the Asian financial crisis, could not withstand a surge in short-term debt and fiscal deficits and declared a moratorium (temporary suspension of debt repayment). Soros lost about $2 billion.

What deserves attention more than his investment targets or scale is the ‘reflexivity theory.’ Reflexivity theory posits that stock market information is always imbalanced, and participants’ errors and biases continuously distort fundamentals. In other words, if people believe prices will rise, the upward trend intensifies, creating a bubble. Conversely, if they hold a bias that prices will fall, the decline continues endlessly, leading to undervaluation. This aligns broadly with behavioral economics, which states economic decisions are never based purely on rational human judgment.

Summarizing this, the Soros Fund likely judged that the sharp Bitcoin decline in April-May was excessive and undervalued. The time when the Soros Fund began handling Bitcoin was when Bitcoin, after reaching an all-time high, had plunged more than 50%. Moreover, Scott Minerd, Chief Investment Officer (CIO) of Guggenheim Partners and a cryptocurrency advocate, also expressed concerns that Bitcoin could fall to the $20,000 level.

But Remember: Do Not Trust Wall Street

[Image source=Yonhap News]

So, did Soros start handling Bitcoin because he saw its value? Experts estimate otherwise. They say that rather than Bitcoin’s technical value, the approval was given simply because it was profitable to trade cryptocurrencies. Professor Hong explains, “Soros is far from a value investor,” adding, “He is a fund manager who must make money, not someone who invests with a special philosophy or goal.”

In fact, the Soros Fund participated in the cryptocurrency market in 2018 as well. At that time, internal approval for cryptocurrency trading was also granted, similar to this July. Additionally, the Soros Fund acquired shares in Overstock.com, an online retailer that adopted Bitcoin as a payment method. However, the Soros Fund did not engage in substantial cryptocurrency investment or activities that would aid blockchain technology thereafter.

Experts emphasize that not only Soros but institutional investors can exit the cryptocurrency market at any time. Professor Lee Byung-wook of Seoul School of Integrated Sciences and Technologies said, “Any institutional investor tries to include high-risk assets in their portfolio to increase returns,” adding, “Bitcoin serves such a role.”

There is also criticism that institutional investor participation does not necessarily mean Bitcoin’s development or institutionalization. Professor Lee explained, “Holding Bitcoin by institutional investors and proving its investment value are separate issues,” adding, “Because the market allows the use of undisclosed information or does not penalize non-disclosure, institutional investors find it attractive.”