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A large screen at the Bithumb exchange office in Seoul shows real-time cryptocurrency prices. (Yonhap News)

In 2021, the world was swept with crypto fever, which burned even hotter than it did in 2017.

What has changed over the past four years, and what remains the same? That’s the topic of this article, the first of a three-part series that will examine the current status of the latest crypto craze, make a diagnosis, and offer predictions for the future.

Cryptocurrencies are sizzling hot in 2021, and there’s a fierce debate about whether they’re the asset of our dreams or a vehicle for speculation. While many investors were disappointed by how prices first soared and then plunged in 2017, during the last round of crypto fever, it’s evident that cryptocurrencies are becoming normalized as an investment asset.

So what’s different now, compared to four years ago? The decisive factor has been fundamental changes in economic conditions since the outbreak of COVID-19 last year.

While governments around the world have been concerned about overheating speculation, they’ve been seeking to weaken cryptocurrencies’ decentralized quality and convert them into a controllable digital asset.

Investors have also naturally focused more on cryptocurrencies’ value as an investment than on their function as currencies.

As of May 2, Bitcoin, the best-known cryptocurrency, was selling for more than 68 million won (US$61,098) per coin. That’s twenty times higher than its low of around 3.6 million won (US$3,235) in December 2018 and more than three times as high as its peak of 21 million won (US$18,868) during the frothy period in late 2017. It’s rare to see an asset appreciating so rapidly.

Investors have been pouring money into cryptocurrency, sending trading volumes soaring. According to data from the office of Democratic Party lawmaker Kim Byungwook and from CoinMarketCap, a website providing data about the crypto market, daily trades at South Korea’s four biggest cryptocurrency exchanges (Bithumb, Upbit, Coinone, and Korbit) were worth 1.7 trillion won (US$1.53 billion) in 2017 and 2.57 trillion won (US$2.31 billion) in 2018, during the first crypto wave, before sliding to 1.34 trillion won (US$1.2 billion) in 2019 and 975.9 billion won (US$876.84 million) in 2020.

But money began to congregate to the sector at the end of 2020 and in early 2021, and as of April 30, daily trades at the exchanges are worth 12.57 trillion won (US$11.29 billion). That’s more than seven times the volume from four years ago.

That sum came to 65% of the money traded on the KOSPI, Korea’s benchmark stock market index, on the same day (19.21 trillion won, US$17.26 billion). It was considerably higher than the volume of trading on the tech-heavy KOSDAQ index (9.53 trillion won, US$8.56 billion).

One of the main factors behind Bitcoin’s dramatic price rise is the expectation that it will become a stable asset in the future. Last year, major American investment banks acquired Bitcoin, and more recently, even ordinary companies such as Tesla and MicroStrategy have been buying up the coin.

In the middle of April, Coinbase, the US’s biggest cryptocurrency exchange, was listed on the Nasdaq, further inflaming crypto fever.

During the crypto craze in 2017, Wall Street investors were generally critical of Bitcoin or took a wait-and-see stance. Jamie Dimon, chairman of JP Morgan, the US’s biggest bank, even called bitcoin “a fraud” in 2017.

But now, JP Morgan is reportedly planning to launch a Bitcoin fund.

Experts say that the COVID-19 pandemic, which began last year, has been a major factor in the change of attitudes. As various governments released large amounts of money in economic stimulus packages, Bitcoin started looking like a reasonable investment to those concerned that the dollar might lose value.

Back in May 2020, Paul Tudor Jones, a major hedge fund manager, said he was buying Bitcoin to hedge against the risk of inflation resulting from COVID-19.

Other major factors are the widespread adoption of remote activities as part of an effort to combat the spread of COVID-19 and the rapid digitalization of the industrial ecosystem.

Investment banks are focusing even more on the role of cryptocurrencies in the digital economy.

“One way the [current] crypto craze is different from the past is that cryptocurrencies have come to be regarded as assets with the potential of future value. That attitude is spreading from financial consultants and large conglomerates to individual [investors],” said Park Seong-jun, director of the Blockchain Research Institute at Dongguk University.

Ironically enough, the reason that big investment banks have recognized the value of cryptocurrencies is because their initial focus on decentralization is fading as they’re seemingly being brought under governmental control.

Cryptocurrencies were originally created to counter central banks’ dominance of national currencies. The fundamental goal of cryptocurrencies was to make it possible for anyone to freely take part in the issuance, distribution, and trading of currencies outside of top-down controls.

That quality was what drew attention to Bitcoin in the first place — the fact that a currency could gain trust simply through the voluntary actions of its participants without the intervention of the state.

But various governments have regulated cryptocurrency exchanges with the goal of preventing money laundering, which has had the effect of gradually weakening crypto’s original orientation on decentralization.

In 2019, the Financial Action Task Force made it mandatory for virtual currency business operators to record the identities of cryptocurrency traders and the details of their transactions.

South Korea also revised the Act on Reporting and Using Specific Financial Transaction Information last month, requiring cryptocurrency purchases and sales to be made through bank accounts registered under users’ real names.

The more cryptocurrencies come under government control, the less salient their original nature becomes. Members of the “cypherpunk” movement — who advocate using cryptography to thwart government censorship — have criticized this change, which they see as a corruption of cryptocurrency.

“Attempts to be ‘regulatory-friendly’ will likely kill the main uses for cryptocurrencies, which are not just ‘another form of PayPal or Visa,’” said the late Timothy May, a cryptologist, in an interview with US-based website Coindesk in 2018.

Interestingly, as far as investment banks are concerned, tougher regulations only make cryptocurrencies more of a stable investment. Crypto investors have gone a step further, asking governments to help create an environment where investing in cryptocurrencies is as safe as it is for other financial products.

That has prompted something of a two-track approach from various central governments. On the one hand, they’ve held to their basic stance that cryptocurrencies have no value as currencies, reflecting concerns about overheated investment in Bitcoin and other cryptocurrencies. On the other hand, they’re working to issue digital currencies based on the blockchain technology that backs cryptocurrencies. The idea is for these digital currencies to be controlled by central banks as states prepare for the advent of the digital economy.

Thus, the crypto craze of 2021 has emerged from the confluence of several trends, including a paradigm shift toward the digital economy, surging market liquidity amid the fight against COVID-19, and the crypto sector’s drifting away from decentralization. That raises the question of how 2021 will be remembered in the history of cryptocurrency.

By Lee Kyung-mi, staff reporter

Please direct comments or questions to [english@hani.co.kr]