1 Cryptocurrency

Cryptocurrency

By: Ankita Agrawal (Jamnalal Bajaj Institute of Management Studies)

What is Cryptocurrency?

Cryptocurrency came into existence in the aftermath of the 2008 crisis when an unknown person or group of people or organizations under the pseudo name of Satoshi Nakamoto published a paper on this topic. Cryptocurrency, built on a technology named Blockchain, is a digital currency not having legal backing by any government authority. It makes use of a computational algorithm, a private key, and a public key. The transactions are stored on a distributed public ledger which can only be accessed by the users making the transfer and does not reveal details of the transactions to any person on the platform.

Which are the major cryptos?

The major cryptos being traded around the world are Bitcoin, Ethereum, Ripple, Binance Coin & Dogecoin to name a few. Out of the total cryptocurrencies in circulation, almost 80% are bitcoins. As of November 2021, there are 18.8 million bitcoins in circulation with a market capitalization of $1.2 trillion. As per another report by Reuters, the Indian cryptocurrency market has around 20 million crypto investors, with a total investment value of INR 400 billion.

What are the Opportunities & Advantages of cryptocurrencies?

The major advantage in dealing with cryptocurrency is the lower transaction costs as compared to normal banking & trading transactions. In addition to this, since the cryptocurrency mechanism uses blockchain technology, it comes with higher efficiencies as compared to the traditional models. Cryptocurrency also secures the whole transaction & protects the privacy of the users, who get diversification benefits when investing in crypto securities & assets. Apart from this, the users also get the benefit of direct transfer without the involvement of 3rd party or bank regulators, so there is no risk of the bank failure & the domino effect resulting from the same. The majority of the crypto transactions can be completed within seconds, saving on the time & energy of the transactors. For Bitcoin, the transactions are concluded manually and it takes 10 minutes on average as compared to Ethereum where the transactions are automated and take 20 seconds. The users also feel a sense of financial inclusion while investing in Cryptos.

What are the Challenges & Disadvantages while dealing with Cryptos?

The major challenge that the cryptocurrency market is facing is that it is not regulated at present, making it difficult for users to trust the same. Owing to the same, it is a well-known fact that this market is used for illegal & immoral transactions such as trading weapons, evading taxes & hiding black money. Even though it has greater security, the security & privacy attack possibility cannot be totally ruled out. In addition to this, crypto markets are infamous for the volatility of their securities & many people have made extreme losses or extreme profits depending on their volatile nature. Although the cryptocurrency transactions do not leave any trail, The Federal Bureau of Investigation (FBI) has the authority & resources to go after the digital trail of these transactions. Also, a particular cryptocurrency i.e, Bitcoin has concentrated ownership. Almost 45% of the total bitcoins in circulation are held by only a handful of 11,000 investors as per an MIT study on this issue. Cryptocurrencies also come with additional & significant data mining costs.

How is Cryptocurrency viewed in the Indian Scenario?

The Indian government’s stand on cryptos has changed significantly in the past few years. In April 2018, the RBI issued a circular preventing the banks from dealing in digital currencies and providing any services related to them. This was followed by a writ petition in the Supreme court by several exchanges. In March 2020, the Supreme Court quashed the ban on cryptos citing the absence of laws regulating cryptos. This came as a breath of fresh air for crypto traders with the price of Bitcoin jumping leaps and bounds from April 2020 to February 2021.A crypto-research firm named Chainalysis reported that the Indian Crypto market grew by a whopping 641% from July,2020 to July,2021. In the month of December 2021 itself, the Bitcoin investors made a profit of around $862 billion!

Recent happenings:

In the current scenario, there is a lot of speculation on the regulatory framework for crypto in the country. The proposed bill titled “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” states that it “seeks to prohibit all private cryptocurrencies in India except for certain exceptions to promote the underlying technology”. It also hints at the issuance of an official digital currency by the banking regulatory watchdog which could be named ‘Laxmi’ after the Indian Goddess of wealth. While there is no consensus on what constitutes private crypto, any cryptocurrency managed by a specific set of people outside the purview of central authority can be referred to as private.

One thing that is coming into talk nowadays when discussing cryptocurrencies is the appointment of a grievance officer that will be a single point of contact for the Government with respect to the matters relating to cryptocurrency. Already, a precedent has been set for this by Meta (previously known as Facebook) by appointing Ms. Spoorthi Priya as their grievance officer & by WhatsApp by appointing Mr. Paresh B Lal in the same position.

At the time when India is poised for Fourth Industrial Revolution, a right policy needs to be formulated which recognizes the impact of crypto on the markets and at the same time does not hamper the growth of new technology in the Indian economy. Regulation could protect from volatility and scams, at the same time create a plethora of job opportunities for blockchain developers, project managers, analysts, etc.

Conclusion

Though cryptocurrency has gained a lot of investor traction, it is still a relatively novel instrument and thus it is subject to a higher degree of volatility in its value. The industry is only in its infancy and constantly evolving. That’s a big part of why every new Bitcoin high can be easily followed by big drops. For instance, in the month of December 2021, there is a drop of $260 billion in the total market value of total cryptocurrencies as per a report by tracker Coin Gecko. So, it is for the investor to decide whether to take a risk & bet on cryptos or to invest in other relatively safer assets.