Bitcoin fall unnerves investors in Korean stock market

Seen above is the price fall of Bitcoin at an office of Bithumb in Seoul, Friday. Yonhap

Growing fears of Fed’s tightening, rate hikes to boost selloff of risky assets

By Lee Min-hyung

The abrupt meltdown of major cryptocurrencies ― such as Bitcoin and Ethereum ― escalates uncertainties on the Korean stock market, as investors are feared to engage in a mass sell-off of risky assets amid stronger preference for safer assets.

Bitcoin extended losses over the weekend, plunging to around 43 million won ($36,000) as of 2:40 p.m. Sunday, according to data from the local crypto exchange operator Upbit. This is a drop of around 50 percent, compared to its previous high of 82.7 million won in early November. The price of Ethereum, the world’s second-largest cryptocurrency by market capitalization, also dropped to 3 million won from a previous high of 5.9 million won over the same period.

Of particular concern is that the benchmark KOSPI is expected to fall victim to the crypto downfall at a time when the U.S. Federal Reserve is delivering ever-stronger signals for its initiation of monetary tightening.

Chances are the Fed may send a signal to alleviate investors’ worries during the upcoming Federal Open Market Committee meeting slated for Jan. 25 and 26. Under the scenario, stocks from emerging countries ― including Korea ― are expected to minimize losses on a near-term viewpoint, but market analysts said local stocks will be exposed to widened volatilities throughout 2022 due to rapid shifts in monetary policies here and abroad.

“Investor sentiment on stocks from emerging countries is unlikely to shift to optimism in the near future amid escalating uncertainties on factors such as the possibility of the outbreak of new COVID-19 variants and the Fed’s exit strategies,” Daishin Securities analyst Moon Nam-joong said.

The benchmark KOSPI is feared to expand volatilities from time to time at least in the first half of 2022 amid possible outflow of foreign capital and weakening valuation of the country’s local currency, according to Moon.

The crypto plunge also came after an overnight fall of Wall Street on Friday. The S&P 500 closed at 4,397.94, down by 1.89 percent from the previous trading day. This was the biggest plunge since September 2020. Nasdaq also closed with a drop of 2.72 percent during the same day, the largest fall since the early phase of the pandemic outbreak in March 2020.

A prevalent outlook is that the Korean stock market will also be under downward pressure this week in tandem with the U.S. stock fall. The Bank of Korea (BOK) recently increased its key rate to 1.25 percent, which is on par with the figure during the pre-pandemic period.

The widening volatility here and abroad was sparked by the Fed’s imminent move for quantitative tightening, another economist from SK Securities said.

“The monetary normalization was already widely expected, but the point is that the Fed is considering carrying out its quantitative tightening at a much more rapid pace,” said An Young-jin from the brokerage house.

Another factor that fluctuates the global asset market is the Fed’s stronger push for rate hikes, An points out.

“The Fed’s movement is getting much more hawkish, with the market predicting the authority to raise the benchmark rate by more than 100 basis points by the end of 2022,” he said.

Bloomberg quoted Jason Deane, an analyst at Quantum Economics, as saying that: “The effects of tapering programs and ongoing regulatory concerns in certain jurisdictions are currently taking more weight in trading and investment decisions that the underlying long-term fundamentals.”