South Korea’s $2.5 Trillion Crash Wipes Out AI Bets as Leveraged Funds Backfire

The Kospi—the benchmark index for companies listed on South Korea’s stock exchange—has been sliding for weeks, but losses have recently accelerated as expectations for massive AI-driven demand sour [227417]. The decline has turned the market, once dubbed the world’s craziest, into what analysts describe as a “fright ride,” marked by sharp drops, brief rebounds, and no clear floor in sight [227417].

The crash has exposed an economic system that encouraged ordinary citizens to pour money into complex, leveraged products they often did not understand [225884]. South Korean retail investors, described by local media as “intoxicated by stocks,” borrowed heavily to join the market frenzy and now face losing their savings—and in some cases, their homes [225884].

Despite the losses, these same investors are doubling down. Following one of the most severe selloffs in the country’s history, traders are flooding into complex structured products that offer coupons as high as 40% [225376]. The high coupons come with a catch: if the market moves against the investor, they can lose a significant portion of their principal [225376].

Leveraged single-stock exchange-traded funds (ETFs) are also drawing billions in new cash even as their value collapses [225838]. These high-risk funds, which amplify daily stock moves, have seen record inflows despite steep losses, suggesting some investors are betting on a sharp rebound in semiconductor shares—a strategy often described as “catching a falling knife” [225838].

The pain is concentrated in the hardest-hit stocks tied to semiconductors and tech hardware, sectors that had surged on hopes of massive AI-driven demand [227417]. Samsung Electronics suffered its worst trading day in three weeks as investors reacted negatively to the company’s new shareholder return strategy, dragging down rival memory-chip makers with it [226204].

The market’s heavy concentration in a few large chipmakers means that when those giants stumble, the entire index feels it [227417]. Investors who borrowed money to bet on continued gains are being forced to sell, adding more downward pressure [227417].

The political fallout is immediate. The crash has weakened President Lee Jae Myung’s administration and raised urgent questions about how such products were sold to the public [225884]. The full impact is still unfolding, but the damage to trust in the country’s financial system is already deep [225884].

For now, there is little sign of a bottom. The $2.5 trillion loss is a stark reminder that even the most promising technological revolutions can produce devastating financial reversals when expectations outpace reality [227417].