Why South Korea’s stock index is more volatile than Bitcoin

South Korea's stock market has experienced extreme volatility this year, with the Kospi index showing returns up to 60% higher than Japan's Nikkei 225. This erratic performance has outpaced even the notoriously unstable cryptocurrency Bitcoin. The main drivers of this turbulence are two local companies: Samsung Electronics and SK Hynix.

The AI boom and exploding profits of these firms account for over 50% of the Kospi's performance. Investors are pouring billions into AI-related stocks, but many are highly sensitive to investor sentiment and recent concerns about overbuilding by US tech giants have contributed to a share price slump. South Korea's leveraged exchange-traded funds (ETFs), popular among retail investors, have also amplified market movements.

These funds, which use derivatives and debt to magnify daily returns, have been heavily influenced by the fortunes of Samsung and SK Hynix shares. Foreign investors have been selling their positions in these ETFs, particularly in SK Hynix, leading to significant capital outflows. While local investors have injected more than 110 trillion won into shares this year, boosting the companies' cost of capital and expansion plans, the volatility has also increased.

The boom in leveraged ETFs has made the situation worse, with assets invested in them soaring to over $40 billion. After recent stock losses, hedge funds have been unwinding their leveraged positions, but the impact on the overall market appears to be waning.