Bitcoin's role expected to expand as investors circumvent capital controls: Bithumb research chief

Lee Mi-seon, chief of Bithumb's Research Center, speaks during an interview with The Korea Times, at its headquarters in Seoul, Aug. 8. Courtesy of Bithumb

Bitcoin will recover to previous high in latter half of 2023

By Lee Min-hyung

More people will have a stronger interest in Bitcoin and other forms of commodity-backed currencies, as the United States has been gesturing that it wishes gradually to lessen its role as "the world's police," a crypto expert based in Seoul said.

"As was shown in the war between Russia and Ukraine, the U.S. has strategically shifted its long-standing position by reducing its involvement in geopolitical conflicts with other countries, which means the probability of more physical conflict occurring across the globe has increased," Lee Mi-seon, chief of Bithumb's Research Center, told The Korea Times in an interview on Aug. 8.

Lee worked as a bond market analyst for more than a decade before moving to the nation's second-largest crypto exchange operator early this year. She decided to take on the new role with the strong belief that cryptocurrencies will be institutionalized in less than three years.

China's recent military threats to Taiwan have come against a similar backdrop, and the heightened geopolitical concerns not just in Asia and Europe may pose a growing threat to the authority of the U.S. dollar, she says.

"Even if the dollar will continue to be used as one of the most reliable key currencies in the world, more people will purchase Bitcoin if such international conflicts escalate, as part of efforts to protect their private assets and circumvent capital controls," she said.

For instance, Russia has been demanding payment in rubles for gas sales, which ended up increasing the valuation of the currency. Taiwanese people will now realize the necessity of protecting their own currency amid the growing political tensions with China, and they will likely have more motivation to secure Bitcoin, she points out.

Next crypto paradigm

The remark came amid the months-long downturn of major and alternative cryptocurrencies after the U.S. Fed started making aggressive moves with its monetary policy in March. Bitcoin prices are hovering at around $23,000 in August after hitting a historic high of more than $60,000 in November last year. Cryptocurrency investment sentiment has in recent months dipped to its lowest ebbs in tandem with U.S. stock price declines amid the Fed's ultra-hawkish gestures.

But the cryptocurrency market will face a major turning point when institutional investors start making crypto investments, Lee said.

"They have not yet made any noteworthy investment in the crypto asset market, but the possible approval of Bitcoin spot exchange-traded funds (ETFs) will be a crucial moment for capital inflow from institutional investors," she said. "They will focus on Bitcoin, Ethereum and stablecoins backed by reserve assets." Bitcoin spot ETFs are designed to invest in the cryptocurrency on the spot, at a spot price.

Ethereum's much-anticipated system upgrade is also expected to pave the way for another major paradigm shift in the global crypto industry from a mid-term viewpoint, she said. The Merge upgrade is slated for mid-September, and Ethereum founder Vitalik Buterin also recently reiterated his ambition for the cryptocurrency to become more widely available to people for making everyday transactions. He said it would take two to three years for this wide availability to manifest.

"This will open a new era of smart contracts, and if the project proceeds smoothly under the estimated timeline, it will create massive ripple effects all across the crypto industry," Lee said. Smart contracts are self-executing contracts with the agreement between seller and buyer written into code and available on a cryptocurrency's blockchain network.

Seen above is Bithumb's customer service center in Seoul. Courtesy of Bithumb

Timeline for crypto rebound

The chief researcher from Bithumb said Bitcoin already bottomed out when its price fell below $20,000 in June. It has since entered a track to rebound. But more liquidity needs to be supplied for its meaningful recovery, according to her.

"Toward the end, the Fed should enter a cycle of rate cuts," she said. "We have reached around 70 percent of the cycle of interest hikes."

"We expect the Fed to start reducing its key rate sometime between March and June 2023. Bitcoin prices will be able to recover to previous highs only after the market liquidity is supplied again, and the timeline will be around the latter half of 2023," she said.

The market consensus is that the Fed will take a giant step by raising the benchmark rate by 75 basis points in September and increase it once more by around 25 to 50 basis points around the end of this year.

"If the Fed delays its pace of rate hikes, this will also affect the timing of Bitcoin's rebound," Lee said. "But if the authority raises key rates faster than expected, chances are that the prices of Bitcoin and risky assets will plunge once again. But as recession risks will also increase under that scenario, the Fed will be under more pressure to reduce its key rate in the first half of next year."

She also raised an alarm bell for stablecoin investors, advising them to shy away from any blind belief in algorithmic stablecoins if they do not have any back-up assets.

"Algorithmic stablecoins adopt a strategy of maintaining their value without any back-up reserve assets, but their loophole was clearly shown from the recent demise of the Terra-Luna coins. My view is that any algorithmic stablecoins without reserve assets will collapse in the end. Investors should pay special attention to this when investing in stablecoins," Lee said.