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Crypto crash dashes dreams of South Korea's lost generation

Young adults turn to virtual currencies as only chance for 'happiness'

The recent plunge in the value of bitcoin and other cryptocurrencies has hurt many new investors in South Korea.   © Reuters

SEOUL -- For one young woman attending university in South Korea's capital, the recent roller coaster ride of cryptocurrency values -- dubbed a week of hell from market watchers -- has left her in a constant state of panic.

"I can't think of anything... It's completely unbearable," she said.

Like many South Koreans her age, she threw a considerable amount of her savings, 1 million won ($900), into the virtual currency as a way to build a nest egg in a country where saving for the future has become harder for young people than in previous generations. As cryptocurrencies surged in April, she attained 5 million won in unrealized profits, only to see the value plunge 40%.

Although her initial investment remains intact, she knows friends who are now underwater.

"I'll have to hold until the price goes up again," she said. "I'm not sure how many years that will take, though."

South Korea has become a hot bed of speculative investment into cryptocurrencies, accounting for 10% of trades, according to industry estimates. The feverish trading led to the term "kimchi premium" -- which refers to the extra value a leading cryptocurrency can fetch in the South Korean market, exceeding 20% at one point.

While Bitcoin may be the most popular cryptocurrency, it occupies less than 10% of the virtual trade South Korea. The other 90%-plus go to altcoins -- currencies other than Bitcoin -- including offerings with murky origins.

People in their 20s and 30s do the lion's share of trading. During the first quarter, 2.5 million new accounts opened on the four biggest cryptocurrency platforms in the country, according to Kwon Eun-hee, representative for the conservative opposition People Power Party. Out of that contingent, 33% are in their 20s while another 31% are in their 30s.

According to a survey of 1,750 university students released Monday by Alba Heaven, a job search portal, 53% expressed a positive opinion about investing into cryptocurrency. Those who invested in cryptos themselves numbered 24%.

Among those who were supportive of crypto trading, 33% cited a high rate of return as a reason for their interest. More worrisome, 15% said cryptocurrencies serve as the "last chance of escape" from their current social status.

Today's youth in South Korea are growing increasingly impatient with a lack of opportunities afforded to generations before them. Even those who win the grueling race for a salaried position in one of the country's top corporations are unable to buy a home on that income alone due to the housing bubble.

An investor checks cryptocurrency prices at an exchange in Seoul. (Photo Sotaro Suzuki)

This crunch has led many young adults to believe the conventional path to happiness their parents took -- getting married, buying a home and having kids -- is now largely unattainable. Investments in cryptocurrencies and stocks present the few options for reversing their fortunes.

It was against this backdrop that Eun Sung-soo, chairman of the Financial Services Commission, touched off a firestorm of criticism from young people after airing dismissive comments about cryptocurrencies and their traders during a legislative hearing last month.

His comments came after a lawmaker expressed concern at how cryptocurrency trades are not subject to measures safeguarding investors despite the daily trading volume being double that of the benchmark Korea Composite Stock Price Index.

Cryptocurrencies "are not securities bound by the Capital Market Acts, but are instead virtual assets with no known substance," Eun replied. He pointedly refused to call people who purchase cryptocurrencies "investors."

"The government has no duty to protect them," said Eun, chastising young people for taking part in the trades. "If they are walking down the wrong path, adults must warn them that they are making a mistake."

Those words unleashed a furious response the next day. One company worker in his 30s posted a message on the presidential Blue House's website calling for Eun's resignation.

"You have people in their 40s and 50s speculating on housing upon which our citizens livelihood depends, yet it is inappropriate for people in their 20s and 30s to invest in coins?" reads the entry. "There's a whole lot we can learn from The Grown-Ups."

The sarcastic post immediately received 200,000 likes, clearing a threshold that obligates the Blue House to formally respond.

South Korean authorities have been clamping down on virtual currencies. Revised legislation implemented in March will require crypto trading platforms to partner with banks to ensure they are trading under real names by late September. Platforms that fail to comply will be forced to cease trades.

These measures were put in place to prevent money laundering and other illicit acts, though it appears that the other unstated aim is to force smaller trading platforms to close up shop.

Only the country's top four platforms -- Bithumb, Upbit, Coinone and Korbit -- have tie-ups with banks, namely Shinhan Bank, Nonghyup Bank and online lender K Bank.

Most big name banks in South Korea are hesitant to strike partnerships with virtual currency trading platforms. This is because of fears of being involved in criminal activity, along with the negative stance against cryptos by financial authorities.

The South Korean market is saturated with over 200 crypto platforms. Although some small to midsized banks are willing to enter partnerships, most platforms have no ties to a bank.

There is a considerable likelihood that a large number of trading platforms will shut down by the September date. Even financial authorities have acknowledged the potential closures by warning consumers to "check and go at your own risk."

A portion of crypto investments by young people have been financed by debt. The Bank of Korea, country's central bank, says household debt grew 8% at the end of 2020 from a year earlier, but the debt by those between 20-39 jumped 17%. It seems young people are desperate to build up assets even if it means taking out loans.

"The level of borrowing by young people is not that great, so a series of personal bankruptcies by that contingent will only have a minor effect on the financial system," said Kim So-young, professor of economics at Seoul National University. "However, young people who are about to enter the labor market are going bankrupt and being left unable to plan for the future, which will result in a loss for the economy as a whole."

Meanwhile, countless altcoins are circulating in the crypto market, which has overwhelmed vulnerable trading platforms and data systems causing suspensions in transaction orders. There are also numerous fraudsters who promise fortunes then make off with funds entrusted to them.

"Whether to invest is one's own responsibility, but from the perspective of investor security, authorities should improve the transparency of the market through rules forbidding insider trading and market manipulation, and by restricting trades in highly speculative altcoins," said Kim Kab-lae, research fellow at the Korea Capital Market Institute.

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