[The Editors' Verdict] Virtual Currencies Await the 'Greater Fool'

Kim Kyung-soo, Professor Emeritus at Sungkyunkwan University

In August 2008, when the global financial crisis was intensifying, a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" was published under the pseudonym Satoshi Nakamoto. It proposed an innovative algorithm where a user community shares transaction information to replace the existing monetary system. The following year, Bitcoin was born.

Simply put, Bitcoin was created to enable small online payments as a substitute for money in everyday life. However, it also embodies a grand ambition to realize global financial democratization through the implementation of crypto-anarchism.

As a transnational currency that can be sent and received anytime and anywhere via the internet, Bitcoin denies the monopoly of minting rights by states. Unlike Modern Monetary Theory (MMT), which criticizes states for not exercising minting rights sufficiently, Bitcoin limits its issuance scale, contrasting with fiat currencies whose value is eroded by inflation caused by the abuse of minting rights.

While fiat currencies and banks’ digital currencies (deposits) rely on trust in state power and public credibility, Bitcoin is based on trust in the technology that enables smooth operation of transaction and payment systems. This technology protects personal information from centralized financial systems, reduces transaction costs, and pursues stable value.

Twelve years after the launch of the first virtual currency Bitcoin, virtual currencies resemble the “Mogwai” monster from the 1980s comic horror movie "Gremlins." One virtual currency soared more than 1,000 times within 30 minutes of listing. When Elon Musk tweeted that he liked it, Dogecoin jumped eightfold in a single day.

Not only young people in their 20s and 30s but also teenagers are swept up in the virtual currency investment frenzy, and the media reported that the average daily usage time of investors on virtual currency exchanges approaches 22 hours. Another media outlet included an interview with a young person saying that the reason young people jump into the coin market is that it is the only way to make money, and now the meaning of having a job is fading. When the head of the financial authorities took strong measures, investors strongly opposed them.

Now, people buy coins (virtual currencies) only as assets expected to increase in value, not to use them for payment. Last year, with the election of a Democratic U.S. presidential candidate supported by MMT proponents and rising concerns about inflation, the virtual currency market, which had soared in 2018, saw its market capitalization nearly triple and trading volume increase more than fivefold at one point.

There are about 9,500 types of virtual currencies and nearly 400 exchanges. Because blockchain is open source, methods to create virtual currencies can be easily found on the internet. Although Bitcoin’s supply is limited, the supply of virtual currencies can increase indefinitely.

Last year, investors were enthusiastic about so-called “story stocks” that relied on hopes for future innovation rather than evaluating the fundamental value of companies. However, most of that upward momentum weakened early this year. Stock prices are constrained by fundamentals such as dividend flows, bond yields, and risk premiums.

However, virtual currencies lack fundamentals to curb the frenzy and maintain balance. Therefore, explaining the virtual currency craze as a speculative asset market using the “Greater Fool Theory (GFT)” is quite persuasive. According to GFT, prices rise because one can sell to a “greater fool” at a higher price regardless of whether the value is overestimated. Thus, the instinct for gambling can sustain asset value increases for a long time?until the “greater fool” disappears.

Kyungsoo Kim, Professor Emeritus, Sungkyunkwan University

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