A single day of trading between South Korean semiconductor giant SK Hynix sent shockwaves along the stock markets beyond the stock market and triggered $60 million of liquidations of bitcoins and cryptocurrency prices and underlined the intertwining of the traditional financial markets and digital assets in the market and how closely digital money and financial markets are inextricably linked.
The episode has reignited concerns about excessive leverage in the stock market, algorithmic trading, and the increasing impact of AI-related stocks in general on global stock markets.
SK Hynix, one of the world’s top producers of high bandwidth memory (HBM) chips used in AI applications, has been at the center of the AI investment boom. Its shares have soared through the past year thanks to growing demand for AI hardware.
But turbulence in the stock market lately has halted much of that rally and the company’s poor performance in the stock market has started spreading to other asset classes.
People involved in SK Hynix stock trade say the recent selloff was exacerbated in this selloff by the heavy use of leveraged investment products in SK Hynix shares. Investors holding leveraged positions in SK Hynix shares fell out of balance, and the stock tanked and leveraged investors who had held those positions had to unwind the trades and caused a chain reaction in the stock.
And the effect was felt well beyond the stock market as the exposure to leveraged options and stocks of crypto traders who were leveraged in the stock market also automatically liquidated when the risk sentiment turned to bearish when the equity market lost its momentum.
According to market reports, the quick decline wiped out around $60 million of leveraged cryptocurrency positions in a matter of hours. Bitcoin and Ethereum are not directly related to SK Hynix’s profits or business operations, but investors are now viewing technologies and cryptocurrencies as high-risk growth assets. Capital often exits other speculative markets at the same time when confidence falls in one sector, when one side has lost confidence.
The incident shows how closely AI stocks and digital assets are tied. When the investor mood is favorable, both industries have attracted large flows from traders who want to invest in them. But when semiconductor stocks fail to keep up in a very short time, the crypto exchanges get very depressed and investors are borrowed to add more shares to their positions.
Among the causes of market turbulence were the widespread use of single-stock leveraged exchange-traded funds (ETFs) linked to SK Hynix. These products magnify daily price movements and are more profitable and thus offer the opportunity to invest more money in a relatively small amount of capital. However not only would they be profitable during rallies but they could add to market stress when prices drop a lot and increase the selling pressure, driving up the volatility even further.
Financial experts say highly leveraged strategies lead to systemic risks, which liquidations can occur automatically when prices fall below predetermined levels. In today’s interconnected markets, they are no longer limited to a particular asset class. Instead, they can ripple through equity, derivatives, ETFs and cryptocurrencies almost simultaneously and add to the instability of the whole market.
The broader South Korean stock market came under significant pressure after the selloff and semiconductor stocks fell sharply. A recent report also quoted the government as saying that leveraged financial products were being assessed because they could have led to more market swings in recent trading sessions.
For cryptocurrency investors that event is a reminder how high leverage is dangerous. With leverage trading, profits are even more significant but, because of the long-term volatility, positions can be removed in minutes. Most exchanges automatically liquidate positions once maintenance margin is depleted, leaving traders with huge losses.
Investors will closely monitor earnings reports from big semiconductor companies, changes in the AI industry or the macro economy in the upcoming weeks. And these are likely to be reflected in the equity market of the future and cryptocurrency markets of the future.
Finally, the SK Hynix episode is evidence that today’s financial markets are now more interconnected than ever. A big drop in the stock of a leading AI chipmaker can quickly cascade into leveraged ETFs, derivatives and cryptocurrency markets, which reminds investors that risk management is as important as returns in an increasingly interlinked global financial system.
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