Crypto means secret. It is said that the crypto currency was conceived as a peer-to-peer electronic cash system i (Secretive within a defined circle?) Here the validation doesn’t happen by mutual trust, but through cryptography instead. As the things stand, the Crypto currency subscribers worldwide are 300 million (as of 2021). There are 5000 cryptos in circulation and over 18,000 business houses accept this digital money.ii Any more proof needed to infer that the ‘secret’ is now out?
What is Cryptocurrency?
A cryptocurrency is a virtual digital currency [4], secured by cryptography and a decentralized ledger based on blockchain technology.
The Indian Context
In the last week of November 2021, the Lok Sabha bulletin [2] listed ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ for discussion in Parliament’s winter session. Even though the Bill intends to promote the technology underlying the cryptocurrency to facilitate the framework that helps the RBI to create its official digital currency [3], it is believed that the bill shall prohibit almost all private cryptocurrencies in India, with a few exceptions, which are being speculated by many.
Why are Cryptos preferred?
- Secure: The distributed ledger through decentralized networks using blockchain makes it literally impossible to counterfeit.
- Deflationary: If a crypto owner loses their private key, he/she can never access their cryptocurrencies. Unlike in the cases of fiat currencies where governments can mint more notes any time, the overall amount of cryptos created is algorithmically programmed and no one can create more. Thus, cryptocurrencies are deflationary by nature [5].
Cryptocurrencies: Rising in volume but fluctuating in value
The number of cryptocurrencies [6] that were 66 in the year 2013 grew up to 7557 in November 2021. The total market cap of cryptocurrencies which was $ 0.14 billion in the first week of 2013 rose to $ 3048.57 billion in the third week of Nov2021.
The number of Cryptocurrencies [6] and their Market capitalization Value [7] at different points of time are given below.
Source: Table composed from different data sources provided by statista.com
From Dec 2013 to Dec 2016, the number of cryptos increased almost 10 times, but the value had not even doubled. From Dec. 2016 to Dec 2017 the cryptos increased by less than 3 times but the value increased by almost 40 times. From Jan 2018 to Dec 2018, in 12 months, cryptos lost 83% of their value. From May 2021 to July 2021, within 3 months, the cryptos lost 48% of their value. From Nov 10, 2021, to Nov 17, 2021, within a week, the cryptos lost 9.7 % of the value.
Why do Cryptos fluctuate?
- Just a Digital Asset: Unlike fiat money [8], cryptocurrencies are purely digital assets. They have no economy or asset to base their value upon. Their value is just a perceived value. As perceptions sway, their values also do.
- Speculation: As the cryptocurrency market thrives on speculation [9], any influx or sudden exit of speculators affects the prices.
- Still Emerging: Both the markets and the technology on which cryptos are based are still emerging. The investors are also immatures who just speculate. Cryptos are still in the price discovery phase [10].
- Absence of any regulatory Body: There is no central bank or government to intervene in the markets and stabilize prices.
How Many of these Cryptos would Survive?
Dr. Raghu Rama Rajan [11], the former governor of the Reserve Bank of India, opined in Nov 2021, that most of the existing cryptocurrencies will soon perish. According to him most of the cryptos carry a value only because ‘there is a greater fool still willing to pay a price for them’. He compared the craze in cryptocurrency with that of the tulip mania in the Netherlands in the 17th century [12]. He predicted that like the 2000 cryptos that had already hit the dust, most of the existing cryptos will meet the same fate and the number of cryptos that survive will be in a single digit.
Why Government had to step in?
Though in March 2020, the Supreme Court had overruled the ban imposed by the Reserve Bank of India on cryptocurrencies [13], the Union Government had to intervene for various reasons.
- No intrinsic value: Cryptos are created by non-sovereigns, have no underlying intrinsic value and lack all the attributes of a currency [14].
- Illegal activities: Lack of governmental control over cryptos would let them be used to finance illegal activities like terrorism, drug trafficking, etc.
- Huge investments with no regulation: The Government couldn’t leave a ₹ 40,000 crore market [15] of cryptos in India without regulation or control.
- Creating its own Crypto: India’s digital currency market which was worth $ 923 million in April 2020 increased to $6.6 billion in May 2021 [16]. The government wants to make the best out of the opportunity by creating its own crypto and having complete control to regulate it.
Conclusion
Though some criticize the governments banning cryptos as ‘regressive’ it is too early to conclude as the game has just begun.
Learners’ Opportunity
Investment banking opens up opportunities both for job seekers and job creators. For more details check our program @https://online.ifheindia.org/
Discussion Question
Should You Invest in Cryptocurrency? Why?
Key Words
#FoundationsOfAccountingAndFinance #ITForManagers #BusinessEnvironment #onlinembacourse #mbabestcourses #onlinembaprograms #elearning #learningsimplified #onlinembaforworkingprofessionals #entrepreneurshiponlinemba
Source Articles
[4] J. Frankenfield, “Cryptocurrency,” Investopedia, October 30, 2021.
[5] A. Powell, “Taking the crypto out of digital currency,” The Harvard Gazette, June 2, 2021.
[8] N. Reiff, “Why Bitcoin Has a Volatile Value,” Investopedia, June 16, 2020.
[9] N. B. Desk, “What Makes The Cryptocurrency Market So Volatile? Find Out,” NDTV, August 14, 2021.
(i) Kate Ashford & John Schmidt- What Is Cryptocurrency?-Forbes Advisor- Jan 25, 2022