Kim So-young
The author is a professor of economics at Seoul National University and a former vice chairman of the Financial Services Commission.
Whenever tensions between the United States and Iran have escalated recently, major asset prices, including stock prices, have reacted immediately and shown sharp volatility. Such abrupt price swings had already been common in the virtual asset market long before the Iran war. Bitcoin, which began a bull run after U.S. President Donald Trump returned to office and surged to the 170 million won ($123,000) range in the second half of last year, plunged earlier this year to the 80 million won range — less than half that level — before rebounding to nearly 120 million won as the possibility of an end to the war emerged. In other words, its price halved and then rose 50 percent again within six months.
A display board at the Upbit customer center in Seoul’s Gangnam district on March 14 shows prices of bitcoin and other cryptocurrencies. [YONHAP]
The volatility of virtual assets is far greater than that of stocks. Over the 10 years since 2016, the average standard deviation of daily returns for shares of Samsung Electronics, SK hynix and Hyundai Motor stood at 0.294 percent, 0.414 percent and 0.355 percent, respectively. For Bitcoin, Ethereum and Ripple — with Ethereum and Ripple calculated from Nov. 12, 2017, and converted into Korean won — the figures were much higher, at 0.666 percent, 0.853 percent and 1.065 percent, respectively.
Why do virtual asset prices fluctuate more sharply than stock prices? More basically, how are virtual asset prices determined? The defining characteristic of virtual assets is that the fundamentals that determine their prices are unclear. Owning shares of Samsung Electronics is tantamount to owning a stake in the company, and the price will change depending on how well Samsung Electronics performs in the future. But if one owns Bitcoin, what does that mean beyond the fact of holding Bitcoin itself? A common misunderstanding about owning virtual assets is the belief that ownership of a virtual asset means ownership of the technology embedded in it. The technology embedded in a virtual asset belongs to the person or entity that created it. Simply owning the virtual asset does not mean the underlying technology itself belongs to the holder.
Where does the value of virtual assets come from?
Virtual assets have no intrinsic value, but existing research suggests that value may arise for several reasons. First, although they may be more limited than ordinary currencies, virtual assets can serve as a medium of exchange and may generate utility in that capacity. Second, like other assets, virtual assets can be used as a store of value and as a hedge against inflation. In this sense, they are sometimes called “digital gold.” Third, some argue that virtual asset prices depend on production costs and, in particular, converge toward marginal production costs. Fourth, the value of a virtual asset is said to be proportional to the value of the network that holds and uses it. Fifth, virtual assets can be used for money laundering or to bypass capital controls, and value may arise from that function.
These are various explanations for how virtual assets may acquire value, but it is not easy to reach a clear conclusion on which explanation is correct. As with other assets, bubbles can also emerge regardless of fundamentals, driven simply by the expectation that prices will rise. Some analyses suggest that virtual assets are especially prone to large bubbles because of the uncertainty surrounding their fundamentals, the absence of circuit breakers, the inelasticity of supply and their stronger sensitivity to popularity and investor attention.
In addition to the difficulty of predicting prices and their high volatility due to unclear fundamentals, virtual assets also differ from ordinary financial products in ways that investors should keep in mind.
First, transaction costs are higher than in traditional financial markets, meaning frequent short-term trading can cause costs to accumulate and make it difficult to earn profits. The transaction cost structure of virtual assets differs from that of traditional financial markets. Looking only at explicit trading fees, there may appear to be little difference from the stock market. In reality, however, spreads — the difference between bid and ask prices — and slippage, or the gap between the order price and execution price, tend to be large. The so-called kimchi premium, in which domestic prices are higher than overseas prices, also fluctuates and can become a cost for investors. These costs increase further when volatility rises.
As the saying goes in wagered billiards, if you keep playing, the billiard hall owner ends up taking all the money. Likewise, under high transaction costs, frequent short-term trading can cause costs to snowball, making it difficult even for skilled investors to make a profit. As of the end of 2025, the market capitalization of Korea’s virtual asset market was only about 3 percent of the domestic stock market. But its trading volume has at times reached levels comparable to the stock market, and on a daily average basis in 2025, it stood at around 35 percent of stock market trading. Virtual asset investors trade far more frequently than stock investors. Investors should be fully aware that overall transaction costs are high, and the government should also consider ways to reduce those costs.
Significant uncertainty remains in long-term
Second, because the history of virtual assets is short, there is considerable uncertainty in planning for the distant future based only on past data. Some people analyze past data and argue that major virtual assets such as Bitcoin are better than blue chip stocks. For example, the Sharpe ratio — excess return divided by the standard deviation of returns — calculated using daily data since 2016 was 0.753 for Bitcoin, similar to Samsung Electronics at 0.664 and SK hynix at 0.849. Taking such factors into account, some rational investors have included Bitcoin and other major virtual assets in their portfolios.
But such analyses rely on data from a relatively short period, about 10 years. The first Bitcoin was created in January 2009, and the history of virtual assets is still less than 20 years old. They may move in similar ways for the next several years, but how virtual asset prices will behave over the next 10 years, 20 years or beyond remains uncertain. Long-term investment therefore carries considerable uncertainty. Gold has long maintained its status as a safe asset, so holding gold for a long period can be considered a viable investment strategy. But given the short history of virtual assets, there is significant uncertainty in calling them safe “digital gold” over the long term.
A representation of cryptocurrencies is seen in this illustration created on Jan. 24, 2022. [REUTERS/YONHAP]
Major virtual assets such as Bitcoin are also among the few survivors out of countless virtual assets. Some people may invest in altcoins while thinking of Bitcoin’s high returns, but they should fully consider the possibility that such coins may soon disappear, as most previously issued altcoins have.
In Korea, virtual assets are slowly moving toward institutionalization. In the late 2010s, the government denied the nature of virtual assets as currencies or financial products and even considered shutting down virtual asset exchanges as part of a hard-line response. But in the early 2020s, it introduced regulatory mechanisms to prevent money laundering, including a legal definition of virtual assets, a reporting system for virtual asset exchanges, customer verification requirements, suspicious transaction reports and the travel rule.
An employee watches an electronic signboard displaying the prices of Bitcoin and other cryptocurrencies in the lounge of Bithumb cryptocurrency exchange in Seoul, on Nov. 21, 2024. [AP/YONHAP]
Caution needed against forcing poor regulation
In July 2023, the Act on the Protection of Virtual Asset Users, often referred to as first-stage legislation, was enacted and took effect on July 19, 2024. It includes essential measures for user protection, such as safeguarding users’ deposits and virtual assets, regulating unfair trading practices including market manipulation, granting financial authorities the power to supervise, inspect and sanction virtual asset service providers and giving them authority to investigate and take action against those engaged in unfair trading.
The implementation of the first-stage virtual asset legislation is highly significant as the first step toward the full institutionalization of virtual assets. But second-stage legislation is needed for comprehensive and systematic institutionalization going forward. From the perspective of virtual asset service providers, regulations on market entry and business conduct must be reorganized, including rules on unsound business practices and internal control standards. For virtual asset trading, listing standards and procedures, disclosure of key information and regulations related to stablecoins are also needed.
The virtual asset market is not small in scale. As of the end of 2025, Korea’s virtual asset market capitalization stood at 87.2 trillion won, and the number of user accounts reached 11.13 million. Roughly one in five Koreans already has one foot in the virtual asset market. Beyond basic user protection, sound conduct by virtual asset service providers and the creation of a healthy market are necessary. As the number and scale of virtual asset investors grow and the market becomes more closely linked to the financial market, financial stability issues are also becoming more important. The future institutionalization of virtual assets is therefore essential.
Still, forcing through bad regulation would be worse than doing nothing. Although interest in virtual assets has recently declined amid a booming stock market, this should instead be taken as an opportunity to carefully consider the right direction for institutionalizing virtual assets.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
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