[New Wave] Beware of the Cryptocurrency Bubble

[Asia Economy] The price of cryptocurrencies is soaring day by day, with Bitcoin surpassing 70 million KRW per coin for the first time ever on domestic exchanges.

Experts cite the following as the background for this rise: ▲Interest as an alternative asset amid overflowing liquidity following the spread of COVID-19 ▲Explosive growth in the NFT (Non-Fungible Token)-based digital art trading market ▲The emergence of various forms of decentralized cryptocurrency financial services called DeFi (Decentralized Finance) operating based on smart contracts.

However, there is also concern that the cryptocurrency and blockchain markets may be irrationally inflating prices faster than the actual intrinsic value of companies is growing. In the first half of last year, amid the economic contraction caused by COVID-19, central banks around the world began a war against deflation by supplying unprecedented amounts of liquidity to the market.

With leftover cash distributed for economic stimulus, this became a driving force that significantly increased the prices of all assets, including stocks, commodities, real estate, and even Bitcoin. However, such liquidity supply is bound to end someday, and policy shifts by central banks may occur sooner than expected.

Recently, NFT-based digital artworks traded at high prices have also had a positive impact on the overall cryptocurrency trading market. According to BNP Paribas in France, global NFT transaction volume increased to $250 million (approximately 284.12 billion KRW) last year, nearly quadrupling compared to 2019.

NFT refers to the ownership (so-called ‘token’) of digital files such as JPG, GIF, and videos being stored on the blockchain, making them permanently preserved in a tamper-proof state, and allowing anyone to verify ownership in a decentralized manner.

Using NFTs enables peer-to-peer direct transactions linked with smart contracts, and by dividing tokens into fractional ownership, digital asset trading can be activated. Also, since tokens are stored on a decentralized blockchain, concerns about ownership loss can be reduced.

However, the fact that ownership cannot be tampered with or lost is distinctly different from the impossibility of illegal copying or damage to the digital original. In fact, due to the nature of digital files being easily copied and indistinguishable from originals, their scarcity may be lower compared to paintings or sculptures where the concept of an original is clearly established.

Moreover, there are also concerns that recent large virtual asset holders are driving auction price increases and inflating a bubble.

Finally, in the case of DeFi, the advantage is that not only information such as interest rates but also financial logic?such as how funds deposited by customers flow, how much profit is generated, and how it is distributed?is transparently disclosed.

However, as attempts to combine various DeFi coins to create synthetic assets or combine two or more DeFi products (so-called ‘money lego’ systems) increase, the complexity of the codes is rapidly rising, and the possibility of security incidents caused by this is growing.

Clearly, the current cryptocurrency and blockchain market has stronger momentum and fundamentals than during the Bitcoin crash at the end of 2017. However, liquidity will soon reach its limit, and NFTs and DeFi also face numerous technical challenges to overcome. This is a time when more rational investment, rather than reacting emotionally to celebrity statements, is needed.

Kim Seung-joo (Head of the Department of Cyber Defense, Korea University)

This content was produced with the assistance of AI translation services.