In my posting a month ago, I wrote a piece centered on the following gist: “I do not understand the logic that a virtual currency, whose value is linked to fiat currency to form an equilibrium, can replace that very fiat currency." My primary reasoning was a skepticism toward the “autonomy” of cryptocurrencies—which serves as both their greatest strength and weakness—in contrast to fiat currencies, where the issuer (the central bank) and the guarantor of value (the state) are clearly defined. If supply and demand are left entirely unchecked, there is no way to restrain the market when it deviates from equilibrium and descends into extraordinary madness, resulting in damages that exceed all conventional standards.
"Therefore, money and currency possess no absolute value of their own; their relative value as exchange media stems from the intrinsic value of the goods being exchanged. Just as derivatives cannot exist without a stock/bond market, and those cannot exist without a functioning economy, all value is only possible when the trust between contracting parties is maintained ... virtual currencies can be created by anyone with programming knowledge, leading to over 800 varieties. It is unclear who the contracting parties are or who guarantees their value. While some argue that consensus among parties is an agreement, I am skeptical of transactions without third-party guarantees, especially in a reality where guarantors often bear the burden when parties disappear."An intriguing news article emerged today regarding this very issue:
“가상화폐 이더리움 319달러에서 10센트로 ‘순간폭락’”
"According to CNBC on the 22nd (local time), the price of Ethereum was trading at approximately $319 on a virtual currency exchange called GDAX before plummeting to 10 cents within seconds. Such a sharp price drop in a short period is called a 'flash crash.' The price of Ethereum rebounded to its original level almost instantaneously...This has occurred in the actual stock market as well. During the flash crash of May 2010, there were similar issues with stop-loss orders. At that time, the Dow Jones Industrial Average dropped nearly 1,000 points in an instant before recovering within minutes. Subsequently, the U.S. Securities and Exchange Commission (SEC) introduced a system to halt trading when a stock moves suddenly by more than 5%. CNBC pointed out that this flash crash revealed that virtual currency market infrastructure is still inadequate to handle large-scale transactions.”
In the case of traditional securities markets, when such a crash occurs, the government intervenes to minimize the damage inflicted by the financial market upon the real economy. This is achieved through mechanisms such as circuit breakers (or sidecars), the legislative implementation of regulations like the Volcker Rule in the United States, or the mobilization of national pension funds in South Korea. In contrast, when problems arise with virtual currencies, there is neither a clear entity responsible for the crisis nor an appropriate method for recovery.
The relative value (purchasing power) of the currency plummeted by 99.69% in an instant. This is equivalent to 1,000,000 KRW becoming 31 KRW. Can this truly be seen as fulfilling the function of a currency?
Of course, conversely, if one had purchased one million won worth of Ethereum immediately after the flash crash, they would have realized a profit of 3,190 times their investment within a few hours, turning one million won into 3.2 billion won.
While the technology of blockchain is undeniably attractive, I remain skeptical as to whether the fact that blockchain is the core of cryptocurrency technology constitutes a valid reason to invest in virtual currencies themselves.