Cryptocurrency Market in South Korea Experiences Significant Contraction Following Terra/FTX Crisis, with 80% Drop in Operating Profit in 6 Months

It was revealed that the domestic crypto asset market in South Korea shrank significantly in the second half of last year as events that shook investor confidence continued, such as the Terra Luna crisis and FTX bankruptcy.

On the 19th of March, the Financial Intelligence Unit (FIU) under the Financial Services Commission announced that it had conducted a fact-finding survey in the second half of 2022 on 36 reported operators to understand the current status of the domestic cryptocurrency market.

The survey aimed to understand the current state of the market by analyzing several key metrics such as market capitalization, transaction size, operating profit, and user accounts.

According to the FIU, in the second half of last year, compared to the first half of the domestic crypto asset market, the market capitalization, transaction size, and operating profit decreased significantly.

Looking at each item, the average daily transaction volume of crypto assets as of the second half of last year was 3 trillion won (2.3 billion USD), down 43% from the first half (4 billion USD). The amount of deposits in USD was 2.75 billion, down 38% from the first half (4.5 billion USD).

The photo shows trends in crypto asset transaction volume and market capitalization in 2022, according to the Financial Services Commission.

The number of crypto asset items also decreased. As of the first half of last year, the number of items listed on the crypto asset market was 1371, but in the second half it decreased by 9 to 1362, and even excluding duplicate listings, the number decreased from the second half of the previous year (638) to 625.

The Financial Services Commission cited a drop in investor confidence as the cause of the market contraction. An official from the Financial Services Commission said, “The decline in prices due to the contraction of the real economy, the Terra Luna crisis, and negative events such as FTX bankruptcy has led to a decline in trust and continued weakness in the market. There was also a problem of investor confidence due to problems, etc.”

On the other hand, price volatility decreased. Price volatility in the second half of last year recorded 65%, down 6%p from the first half, which was 73%.

The number of registered user accounts was 11.78 million, down 1.32 million (10%) from the second half of the previous year (13.1 million). Deposits in USD and the number of users, which are considered potential future investment demand, also decreased.

In the second half of last year, the deposit in won in the crypto asset market recorded 260 million won (200,000 USD), down 38% from the first half (450,000 USD), and the number of transactions users was also counted at 6.27 million, a decrease of 630,000 from the first half.

Average daily virtual asset market deposits in Korean won for each month of 2022, provided by the Financial Services Commission.

The Financial Services Commission pointed out the contraction of the real economy due to interest rates and inflation, and the decline in trust due to negative events such as the Luna crisis and FTX bankruptcy as the causes of the cryptocurrency market decline.

However, price volatility decreased during this period, and conservative fund management emerged as the preferred investment strategy. The proportion of investment in major crypto assets such as Bitcoin increased, compared to non-mainstream crypto assets called ‘Jobcoin,’ and the total operating profit of crypto asset operators decreased by about 662% compared to the second half of the previous year.

The implementation of the ‘Travel Rule,’ which transmits sender and receiver information when more than 1 million won (765 USD) is shipped, was also analyzed in the survey. The amount of transactions between domestic exchanges subject to the travel rule was only about 25% of the total amount of shipments, indicating that more needs to be done to combat money laundering.

The findings of the survey are a cause for concern, and the Financial Services Commission has said it will work with an autonomous consultative body between operators to respond to the market’s crises. The cryptocurrency market’s contraction highlights the need for stronger regulation and oversight to ensure investor protection and prevent market instability.

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