The ancient Greek mathematician Archimedes said, "Give me a lever and a fulcrum, and I will lift the Earth." He was explaining the principle of the lever, which moves large objects with small force. The financial term "leverage" comes from the same idea. It means producing a large investment effect with a small amount of money. But the longer the lever, the easier it is to lose balance at even the slightest tremor.
When the U.S. asset manager ProShares launched the world's first leveraged exchange-traded fund (ETF) in June 2006, Wall Street embraced it as an innovation. Individuals could easily invest in products tracking twice the returns of the Standard & Poor's (S&P) 500 and the Nasdaq index, marking the beginning of the popularization of derivatives. Twenty years later, leverage has evolved into another form. This is now an era of stacking leverage upon leverage.
Last month, Binance, an overseas cryptocurrency exchange, listed futures with leverage of up to 50 times, using "KORU"—a triple-leveraged KOSPI ETF listed on the New York Stock Exchange—as the underlying asset. Because KORU itself tracks three times the KOSPI's daily return, a product that bets up to 150 times on KOSPI fluctuations has effectively emerged.
The numbers alone are sweet. If the KOSPI rises 1 percent, one can theoretically expect a 150 percent return. But conversely, a decline of just 0.67 percent effectively wipes out the entire principal. Even so, money has swarmed in like moths to a flame. KORU futures surpassed 2 trillion won in trading volume within a week of listing, and SK hynix 20-times futures approached 10 trillion won.
More worrying is the accessibility. Domestic investors can buy the stablecoin Tether (USDT) on Upbit or Bithumb, then simply move it to an overseas exchange and trade with little restriction. Financial authorities have effectively thrown up their hands, saying they lack proper regulatory authority over overseas exchanges. By contrast, the United States, Japan, and the United Kingdom have restricted access to Binance or regulated its operations, citing investor protection and financial oversight. The lever is a tool made to lift heavy rocks. Attach levers endlessly, and one day the lever will break before the rock does. Finance is no different.
