[Digital Gold Era]②Korbit "Bitcoin as an Asset That Can Hedge Against Inflation"

Interview with Jeong Seok-moon, Head of Kobit Research Center
"Non-correlated assets to increase expected returns
Institutions likely to include Bitcoin"
Low-fee 'Bitwise ETF' advantageous

Editor's NoteOn the 10th of last month, the U.S. Securities and Exchange Commission (SEC) approved a Bitcoin spot ETF. The SEC stated that this approval does not mean they endorse Bitcoin. Contrary to the SEC's stance, the virtual asset industry views the SEC's approval of the Bitcoin spot ETF as a milestone. It signifies that Bitcoin has effectively entered the institutional framework. We gathered industry voices to understand what the approval of the Bitcoin spot ETF means and how much the market might grow.

Earlier this month, the Bitcoin spot Exchange-Traded Fund (ETF) debuted on the U.S. stock market. The virtual asset industry regards this as the inaugural year of true institutionalization of virtual assets. Previously, individual investors dominated the virtual asset industry, but now it has expanded to institutions. The industry expects new perspectives and investment narratives to emerge.

Asia Economy recently conducted a video interview with Jung Seok-moon, Head of the Research Center at Korbit, to discuss the significance of the Bitcoin spot ETF approval and market outlook. Mr. Jung described Bitcoin as "an asset that can hedge against currency expansion (inflation), similar to gold," and explained, "Institutions can include Bitcoin in their asset management portfolios as a non-correlated asset to reduce risk while increasing expected returns." In this sense, Mr. Jung emphasized that Bitcoin is 'digital gold.'

Seokmoon Jeong, Head of Kobit Research Center

Why is this spot ETF approval important?

▲Until now, Bitcoin existed outside the institutional framework. Traditional finance needed an intermediary infrastructure to recognize Bitcoin as an asset. So far, cryptocurrency exchanges have played that bridging role. The SEC's approval of the Bitcoin spot ETF is significant because it created a product that allows investment in Bitcoin. Institutional finance has rules in asset management. One of these is that trading through cryptocurrency exchanges is prohibited. In Korea, regulations were enforced through administrative guidance, and private institutions like the National Pension Service restricted virtual asset investments via private contracts. With the listing of the Bitcoin spot ETF, it has become possible to invest in products that have tokenized Bitcoin as stocks.

There is also a claim that the Bitcoin spot ETF is effectively a direct investment.

▲Strictly speaking, it is not direct investment. It is closer to Bitcoin futures ETFs. The investment target of the Bitcoin spot ETF is securities. The underlying asset that guarantees value is Bitcoin.

What is the basis for estimating additional inflows of around 20 trillion KRW due to the spot ETF approval?

▲Canada approved a Bitcoin spot ETF in February 2021. Within one year after approval, it grew to about 1.2 to 1.3 billion USD. Since Canada's economy is about one-thirteenth the size of the U.S., we simply multiplied by 13. Therefore, it is estimated that 20 billion USD will flow into the SEC-approved Bitcoin spot ETF over the next year. The prediction from Galaxy Money Tree is more detailed. They estimated the asset management scale in the U.S. at about 30 trillion USD and considered portfolio proportions of stocks, bonds, and alternative investments, projecting a gradual annual increase in funds flowing into Bitcoin spot ETFs.

It seems the inflow could increase rapidly after approval. When spot ETFs enter, prices rise, leading to expanded investment sentiment and further price increases. Are short- and long-term estimates made in this way? Gold has estimation bases, but how is Bitcoin estimated?

▲We can only make rough guesses based on past situations. Looking at Bitcoin cycles, it surged every time there was a halving event. The applicable past situations are 2017 and 2021. In 2017, Bitcoin's market cap rose 20 times from its previous high. In 2021, it rose threefold. Even conservatively, we expect about a threefold price increase. This is because a Bitcoin spot ETF, which did not exist before, has emerged. Demand from institutional funds is now present.

There is an evaluation that Bitcoin is digital gold. Do you think this status will be strengthened?

▲That is a very accurate expression. Recently, the term "non-correlated asset" has been used, which is correct. Institutions managing institutional funds differ from individuals. They follow principles. To achieve high returns, they must take risks. However, it is possible to increase expected returns without taking risks by including assets with low correlation to their portfolio. This reduces risk while maintaining expected returns. Incorporating non-correlated assets is a cost-effective way to increase expected returns. Bitcoin is such an asset.

The U.S. Securities and Exchange Commission (SEC) announced on the 10th (local time) the approval of a Bitcoin spot ETF in a statement (Photo by SEC website).

There are claims that the SEC approved the Bitcoin spot ETF due to the influence of BlackRock, the world's largest asset manager and a major supporter of the U.S. Democratic Party. What do you think about the view that the SEC had no choice but to approve?

▲Since BlackRock is a major supporter of the Democratic Party, it is not an unreasonable claim. However, I do not think it was the decisive reason for the SEC's choice. There was no alternative to approving the Bitcoin spot ETF. The important point is why the SEC lost the lawsuit with Grayscale. The court pointed out the SEC's double standard. The SEC approved Bitcoin futures ETFs but did not approve Bitcoin spot ETFs. This was the biggest reason.

The SEC approved 11 spot ETF products simultaneously. Which products do you see as competitive, and what factors should investors focus on when choosing among the ETFs available in the market?

▲The purpose of an ETF is to track the underlying asset. If the asset manager designs the product well, there is little difference in returns. However, the cost of implementing the underlying asset varies by design method among managers. The biggest difference is the management fee. Bitwise charges the lowest at 0.2%. They say they will not charge fees during the initial promotion period. The most expensive fees are charged by Grayscale.

With ETFs opening, institutional fund inflows are expected, but accessibility for individual investors, who previously had limited access, is also expected to improve. What characteristics of the virtual asset market should novice investors, who lack direct investment experience in virtual assets, be cautious about?

▲People misunderstand. They think predicting gold or crude oil prices is easier than predicting Bitcoin prices because they are more familiar with gold and crude oil assets. Asset prices are generally difficult to predict. Bitcoin actually shares similarities with gold. The value drivers are similar. When concerns about inflation rise, Bitcoin is preferred. Here, inflation refers not to the consumer price index but to currency expansion. The difference is one: gold is a scarce asset recognized for 5,000 years as a means to preserve value as a hedge against currency expansion. Most people have used gold as a store of value, but institutional financial companies have not yet accepted Bitcoin. With the approval of the Bitcoin spot ETF, there is now a rationale for institutional funds to enter.

Bankruptcies of the third-largest exchange in the virtual asset market, the Luna-Terra incident, etc., were major causes of declining trust. What self-regulatory efforts is the industry making?

▲The virtual asset industry worldwide is making efforts. DAXA (Digital Asset Exchange Association) and the enactment of the Virtual Asset Basic Act are part of these efforts. The National Assembly did not create these alone but did so through extensive communication with the virtual asset industry.

It is true that there is a strong negative perception that virtual assets like Bitcoin are highly volatile assets.

▲People misunderstand. About 3-5% of the world's GDP is involved in money laundering. Over 90% of this is done through the banking sector. Concerns that Bitcoin will be used as a money laundering channel are exaggerated. Also, there is a misunderstanding that Bitcoin's volatility is greater than other assets, leading to higher loss potential. Whether stocks or Bitcoin, people do not handle volatility well. Panic selling leads to realized losses. The bigger issue is that ordinary people cannot manage volatility well.

With the enforcement of the Virtual Asset User Protection Act in July this year and the establishment of a dedicated department by financial supervisory authorities, related market systems are being organized. What does the industry hope for as the virtual asset market matures?

▲I think the issue with individual investors is bigger. Financial authorities seem to fear that individuals or companies will suffer large losses investing in Bitcoin. Investment inherently carries the risk of loss. Negative public opinion arises whenever large investment losses occur. The same happened with equity-linked securities (ELS) issues. The public's understanding of investment is low. If many individual investors suffer losses in a particular asset, stakeholders or the industry are blamed. This makes it difficult for the virtual asset industry to develop. Other countries do not treat large losses in specific financial investment products as disruptively as Korea does. Investment is one's own judgment and responsibility. Economic and financial education should be taught separately in formal education curricula.