[Lee Jong-woo's Economic Reading] 'Virtual Currency → Virtual Asset'... Changed Concept of Coin

Bitcoin Price Soars
Falls Over 50% in 6 Months

Global Economy Impact, Currency Role Limitations
Name Changed to Virtual Asset

The term for coins, once called virtual currency or cryptocurrency, is now being unified as virtual assets. This change was not imposed by anyone but was made by the market itself. This shift clearly reflects the current situation of coins. The word "currency" is being dropped from "coin" because people have concluded that coins are unlikely to fulfill the role of currency. While they can serve as minor exchange mediums, it is believed that they are unlikely to become a currency usable anywhere in the world as initially envisioned.

The reasons can be easily understood through examples. The price of Bitcoin, which rose to $67,000 last November, fell to $28,000 in just six months. What if the dollar had dropped 60% in value over six months? The world would have faced tremendous chaos, including the collapse of the international monetary system.

The year 1978 is a relevant case. When the purchasing power of the dollar halved over five years, no one wanted to buy bonds issued in dollars. This was because it was impossible to predict how much further the dollar's value would fall, and buying U.S. government bonds prematurely could have led to losses. From the U.S. government's perspective, which needed to sell bonds, they had to choose between raising interest rates or guaranteeing principal and interest payments in a safe currency other than the dollar. At that time, the U.S. chose the latter. Bonds were issued denominated in Swiss francs because there was no certainty that the fragile U.S. economy could withstand the burden of high interest rates.

If Bitcoin had been a major currency, what would have happened in a few months? Even when the dollar's value halved over five years, the world was in turmoil. If the value had dropped more than 50% in six months, the chaos would have been unimaginable. The international capital and trade settlement systems would have been paralyzed, affecting the global economy as a whole. Due to these limitations, it was judged that virtual currencies could hardly function as currency, and the term changed from virtual currency to virtual asset.

Coin prices have fallen sharply. This is because investment assets such as stocks and bonds were shaken by rising domestic and foreign interest rates, and among them, the price drop of coins was the largest and fastest. The rule that prices are determined not by the asset's inherent value but by people's beliefs during difficult times was applied.

As a result of the price decline, the virtual asset market shrank. The global virtual asset market capitalization, which was $2.97 trillion last November, fell to $1.372 trillion in early May. This is a decrease of about $1.6 trillion, with a decline rate exceeding 50%.

A bigger problem occurred with stablecoins. Contrary to the assurance that their value is pegged 1:1 to fiat currencies like the U.S. dollar or euro, making their prices almost stable and safe, the price of the stablecoin Luna plummeted from $119 to 0.01 cents within 2 to 3 days. As a result, virtual assets, except for Bitcoin and a few major altcoins (coins other than Bitcoin), became entities that could not be trusted. The trustworthiness, which is essential for investment assets, completely disappeared.

Since Bitcoin became an investment target, there have been three major corrections. The first was in 2014. Bitcoin's price fell 83% from $1,055 to $183 within a year. This price drop was triggered by debates about how to view virtual assets. It was a case where disputes about the substance spilled over into price declines. The second drop occurred in 2018. Bitcoin, which had risen to $19,041, fell 90% to $1,865 within a year. The debate over whether virtual currencies could serve as a medium of exchange was the cause of the price drop. The third decline began in mid-2019. Bitcoin, which had been recovering after the second drop, started falling from $12,733 to $3,358. The cause was the asset price decline due to COVID-19. Between these three major drops, there were countless minor declines. These minor drops were not insignificant, sometimes exceeding 30%. The recovery speed differed: minor drops recovered their original prices within a month, while major drops sometimes took up to a year.

This is the fourth major decline. The reason differs from the previous three cases. The past three declines were caused by disputes over the nature of virtual assets, whereas this time it is a matter of trust. The question of whether to invest in something that could suddenly wipe out the entire investment amount pulled prices down.

Last year, institutional investors began to actively include virtual assets in their portfolios. Thanks to this, prices rose significantly, but with this decline, institutional investors lost a substantial portion of their gains. As doubts about virtual assets increased, the probability of structural changes in the market rose. Besides the bubble bursting, many coins with low trustworthiness are likely to be eliminated from the market.

Virtual assets have overcome many skeptical views for over ten years. Even this time, Bitcoin did not fall significantly below $30,000. Considering this resilience, leading virtual currencies are likely to survive under any circumstances. The problem lies with altcoins except for a few major ones. Currently, more than 9,000 altcoins are traded in the market. Since development is ongoing, the number is likely to increase further. In 2017, a boom in virtual currencies occurred when many altcoins released whitepapers stating their issuance purposes. Amid this, coins with unclear purposes also rose and fell, causing significant losses. Even now, many altcoins may disappear as they did then.

Since the price decline of coins occurred due to a new situation of trust collapse, a new rationale is needed for price increases. The first decline, which began with doubts about whether virtual assets could survive, was resolved by introducing the logic that virtual assets would become a medium of exchange. The second decline, caused by the collapse of the illusion that they would be a medium of exchange, was successfully resolved by introducing the concept of digital gold.

This time, a new concept is needed for virtual assets to rise again. If a new concept is introduced, prices will recover quickly; otherwise, unprecedented situations may occur where past highs are not recovered for a long time. The new rationale must reinforce trust in virtual assets. Attaching other factors while trust is low, as now, would be nothing but wordplay.