South Korean won a dominant medium of exchange for cryptocurrency transactions

Posted on : 2018-02-18 08:38 KST Modified on : 2019-10-19 20:29 KST
New study suggests suitable regulations needed to address rapid price fluctuations and investor panic
Bitcoin virtual currency. (Hankyoreh Archive)
Bitcoin virtual currency. (Hankyoreh Archive)

The South Korean won is one of the top three currencies used in cryptocurrency transactions, with over half of all non-Bitcoin virtual currency transactions taking place in South Korea, a study shows. The study also noted that the cryptocurrency markets in different countries cannot be accounted for by economic scale or level of financial development, adding that the frequency of rapid price fluctuations and investor panics in new financial markets suggests suitable regulations are needed.

“The South Korean cryptocurrency market is significantly larger in scale than the domestic financial market or virtual currency markets in other countries, while the percentage of Bitcoin transactions is the lowest in the world,” noted Korea Insurance Research Institute senior research fellow Im Joon-hwan in a Feb. 12 report titled “Characteristics of South Korean Virtual Currency Transactions and Their Implications.”

As of Feb. 17, Bitcoin accounted for the largest volume of cryptocurrency transactions at US$6.7 billion, followed by US dollars (US$5.9 billion), South Korean won (US$3.6 billion), and Japanese yen (US$1.6 billion).

“Bitcoin [which is commonly used in cryptocurrency transactions] is the only means of exchange that can be used when buying or selling Ethereum, Ripple, or one of the 50 other major cryptocurrencies, while the dollar is a key currency,” Im observed, adding that it was a “rather bizarre phenomenon” for more virtual currency transactions to be conducted in won – a non-key currency – than in euros or yen.

South Korea is also where a variety of cryptocurrencies are most actively traded. While Bitcoin accounted for 63.4% of cryptocurrency transaction value worldwide, its proportion in the South Korean market was just 32.7%. Indeed, while South Korea’s transactions of US$3.61 billion represented around 30% of the global value of US$12.14 billion, its Bitcoin transaction value of US$1.18 billion accounted for only 15.3% of the US$7.69 billion total worldwide. In contrast, 54.7% of all non-Bitcoin cryptocurrency transactions were conducted in South Korea.

South Korea a center of cryptocurrency trading

Why should South Korea account for such a large volume of cryptocurrency transactions relative to its economic scale, while accounting for over half of transactions involving different cryptocurrencies?

“While one might expect cryptocurrency transaction value to be greater with higher stock market transaction volumes, levels of trade openness, levels of financial openness, and amount of internet usage, an international comparison showed no definite pattern,” Im said.

As overseas examples, Indonesia – which rates low for trade and financial market openness and internet usage – shows a large percentage of cryptocurrency transactions relative to stock market transactions, while the countries of the European Union, which have large stock markets and high levels of trade and financial openness and internet usage, account for a relatively small percentage of the cryptocurrency transaction market.

Instead, some of the factors cited in the overheating and hypergrowth of South Korea’s cryptocurrency market include a high degree of participation by internet-savvy twenty- and thirtysomethings, excess demand stoked by rosy predictions of blockchain technology advancement, an influx of overseas investors from China and elsewhere seeking to evade regulations back home, and speculative activity by domestic investors adopting a “herd mentality.”

Also mentioned in the report was a need to objectively observe the market plunges and investor panics occurring with cryptocurrencies (Bitcoin), which have dropped by more than half this year after spiking in 2017. The overheating and panics seen with cryptocurrency investment are natural financial phenomena, with transaction volumes and increased price volatility frequency observed in the early stages of the gold, stock, and commodities markets due to the combined effects of anticipation of a price increase and supply restrictions in response to growing demand.

“The likelihood of cryptocurrencies being used as legal currencies is currently low, but the possibility of their future potential as currencies being realized cannot be ruled out,” Im said.

“For the sake of healthy development in cryptocurrencies, suitable regulations must be introduced, including stronger security to protect investors vulnerable to hacking,” he suggested.

By Lee Soon-hyuk, staff reporter

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