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presents
June 2021 Vol 5 Issue 2
Our best read – Litigation Financing
Special Mention: China’s Digital Yuan: ruffling a lot of feathers?
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INDEX
S.No.
Article
Page No.
1
Litigation Financing
3
2
China’s Digital Yuan: ruffling a lot of feathers?
8
3
Cryptocurrency: The New Futuristic Online Currency?
10
4
Shocks That Shook Economies
14
5
17
6
Cryptocurrency: “Technological tour-de-force” or “Fraud, worse than tulip bombs” Fluctuation in Crude Oil Price, 2021
7
Celebrities and stock market fluctuations: correlation or causation?
29
8
Bitcoin & Energy
31
24
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Litigation Financing By: Anant Maske and Utkarsha Mehrotra (K J Somaiya Institute of Management)
Introduction We want to live in a world where peace, equality, and justice prevails. But, these come with a price which is not affordable for all. Martin Luther King Junior has rightly said that “Injustice anywhere is a threat to justice everywhere”. Today, the global population has access to justice irrespective of the region or area. However, the availability of a sufficient amount of funds to gain access to that justice is still a major barrier for a significant percentage of the global population. To address this money problem, litigation financing or third-party financing came into existence. Litigation financing is based on a non-recourse type of funding wherein the funding entity provides funds to the party for the litigation. In return, it expects a monetary reward if the litigation is successful. Litigation financing covers costs pertaining to litigations in courts, commercial contracts, personal injury claims, international commercial arbitrage, insolvency proceedings, and anti-trust proceedings.
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Process of Litigation Financing The process of litigation financing is very simple and clear to understand. The claimant who is not capable of funding his/her litigation is funded by a third-party financer. The third-party financers include hedge funds, insurance companies, pension funds, and investment banks, among others. If the litigation is successful, the third party financer recovers his/her costs incurred during the litigation and charges some additional money as its fee. If the claimant fails to win the litigation, the third-party financer walks with no reward, and this is the risk the financer has to take in the litigation financing. Return on investments in litigation financing can be around 4-5 times and even more in some cases. Additionally, returns on these investments are not significantly affected by external factors such as fluctuations in stock markets or other economic factors. Of the key litigation financers, which include IMF Bentham, Burdford Capital LLC, Vannin Capital, and Longford Capital Management, among others, Burdford has a market capitalization of around US$ 4 billion. Evolution of Litigation Financing Since its early days, litigation financing has been used to fund the claim holders and gain monetary rewards out of the litigation. However, like any other market, the litigation financing market is also expanding its range to expand its global footprint. Apart from the non-recourse funding and single case finance, litigation financiers are also involved in cases such as portfolio financing, defense side funding, and monetization of claims, among others.
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Comparison of returns from Litigation Financing with returns from other investments The defense side financing involves financing the defendant where the defendant is sued for breach of contracts or agreement, disputes pertaining to ownership of companies, real estate, or other liquid assets. The recovery of the money for the financers in such cases comes from the profits that the defendant earns from the assets for which the defendant was sued initially. Portfolio financing is another segment where the litigation financers have their eyes on. In this type of funding, the fund providers invest in a set of claims which are litigated by a law firm or some individual. There is a lower risk involved in portfolio financing as compared to a single claim financing as in portfolio financing, and the risk is distributed amongst a set of claims which is not possible in the single claim which has just two outputs. Monetization of claims is another evolving type of litigation financing applicable in timeconsuming cases where the financer provides funds to the claim holder in order to cover the claim holder's servicing debt, operating expense, and R&D, among others. So for the claim holder who has scarce resources to run the business, this type of funding will aid in keeping the operations of its business running till the settlement is done. Indian Scenario for Litigation Financing As rightly said by the honorable President of India, Shri. Ram Nath Kovind “India has acquired a reputation of an expensive legal system. In part, this is because of delays, but there is also a question of affordability of fees.”
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According to a 2015-16 survey, it was found that litigants spend on legal costs in lower courts alone was up to ₹ 30,000 crores. Studies conducted by DAKSH, a civil society organization, revealed that the average cost (other than fees of lawyers) incurred by a litigant is ₹1,039 per case per day, and the average cost incurred per day due to loss of pay/business is ₹1,746 per case. Moreover, the number of hearings in a case also adds to the cost of litigation. In such a situation, what options lay before people who cannot afford the triune expense of advocate fees, daily costs, loss of pay, and a possible additional pay-out in the event they lose their case? In 1876, in Privy Council in Ram Coomar Coondoo v. Chando Canto Mookerjee (1876-77) 4 IA 23, Litigation Financing was permitted on the grounds of promoting access to justice. Though, it had been in India from way back in the 18th century and has always been allowed. As per Bloomberg reports, in a recent gathering of Indian legal professionals, more than 70% of the audience believed that litigation finance is prohibited under Indian Law, and this is when its popularity has skyrocketed globally to the extent that litigation finance, as an asset class, has outperformed private equity, real estate, credit, and hedge funds. This is an alarming number and depicting the lack of development in this area of finance, litigation risk management, and class action suits in India.
Challenges for Litigation Financing in India A quick return on investment is what every investor seeks before investing in any product or asset. However, in the Indian litigation system, there is a huge time-lapse that is incurred to resolve litigation. Other proceedings such as arbitration which are completed in a short duration, are also stretched as the claimant has to approach courts and face bureaucratic red tapes before the execution. Investors also prefer lawyers to have a stake in the rewards from the claim so that they make more efforts to win the case. However, acting on a contingency basis is prohibited for lawyers in India; it restricts them from working for monetary rewards. Owing to this, there is a blurry image of the future of litigation financing in India. Future of Litigation Financing Litigation finance has witnessed appreciable growth in the recent past but, there is a significant number of entities who possess the knowledge and awareness related to litigation funding but have not utilized it yet. Among various factors that are expected to drive litigation financing in the coming years, one factor is huge capital entering markets which will ultimately provide more opportunities for fund providers to invest in litigation portfolios and complex cases. Countries like Hong Kong and Singapore have also opened their doors for funders to expand their operations pertaining to litigation financing. In developed countries like the U.S, court decisions and regulations are now alleviating the concerns and fears related to ethics of causes related to litigation financing, which is a positive sign for the players involved in the litigation financing market.
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Additionally, the Covid-19 pandemic has affected various economies severely. Owing to this, the growth of many economies across the globe has slowed down. As the economies slow down, the sources of capital in the country get affected significantly, and this is expected to fuel the growth of litigation financing in the coming years.
REFERENCES
1. 2. 3. 4. 5. 6. 7.
http://www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-inIndia.pdf https://westfleetadvisors.com/wp-content/uploads/2018/11/WA-Guide-to-LitigationFinancing.pdf https://www.aspen.co/globalassets/documents/reinsurance/whitepapers/litigationfunding.pdf https://finshots.in/archive/rise-of-litigationfinancing/?utm_medium=Share&utm_source=Finshots_App_User https://lakewhillans.com/articles/litigation-finance-2020-flavors-of-litigation-finance/ https://dakshindia.org/litigation-funding/ http://third-party-funding.org/chambers-ranks-third-partyfunders/#:~:text=In%20Band%201%2C%20Bentham%20IMF,according%20to%20Cha mbers%20and%20Partners)
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CHINA’S DIGITAL YUAN: RUFFLING A LOT OF FEATHERS? By: Hitesh Jajoo (K J Somaiya Institute of Management)
China is in the process of launching the most revolutionary financial project in the world. The Chinese economy has already adopted cashless payment quite smoothly, and this would be a step to speed up even more it’s turning its physical points and banknotes digital, unlike most cryptocurrency‘s like bitcoins, which work outside the control of a countries central authority. The digital one will be the world's first digital currency that is state owned and issued by the central bank. It can be used anywhere as it would be a total substitute for cash the only difference being that it is on one smartphone.In the smartphone the digital one would be stored in a digital wallet. It will not require a data connection for transactions to take place. Digital one is based on a technology called NFC (Near Field Communication) which allows to carry offline payments unlike Alipay and WeChat. You can make payment even when you are on a flight or climbing a mountain or in a forest where the Internet is bleak. It also has zero transaction fees for the merchant, whereas Alipay and WeChat charge 0.6% of every transaction.
WHY IS IT BEING INTRODUCED? As cited by Fan Yifei, Deputy governor of People’s Bank of China, it saves the cost incurred on printing and straw and storing notes and coins. Cash and coins can also be counterfeited and can be used for illicit purposes, and the identity of the user remains anonymous.
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Digital Yuanis a step where the government could find the anonymous user of the illicit activities when the need arises by checking every single transfer, whereas to some extent it remains anonymous too. This would mean that it is anonymous horizontally but not vertically, meaning people wouldn’t know the details when they sent the money to another person, but the central bank of China knows it all. This would eradicate counterfeiting and money laundering and clearly get a picture of who is spending what?. It could be a threat to foreign companies as China's central bank would then have all the details when they transact. It increases the government control over the currency. There are currently two major players in China in digital payment: Alipay And WeChat,, both privately owned therefore the introduction of digital Yuan is to encourage competition in the payment space and lower systematic risk. This new system will also bring in more efficiency. Also, another big advantage is for the visitors in China. Travelers in China cannot use WeChat or Alipay unless they have a Chinese bank account or Chinese registered credit card, but there is no need for both of them with digital Yuan. It is also beneficial for people in remote areas in China, Eg- Qinghai or Tibet,, where people are under bank. HOW WILL DIGITAL YUAN RUN? Digital Yuan will be distributed with a two tier system, where the PBOC will distribute the digital Yuan directly to commercial banks. The commercial bank will then transfer the currency to the customers. This could include services to allow customers to exchange their coins in cash for digital Yuan. The most common form of mobile payment in China depends on so-calle Quick Response (QR) codes. Users can use this barcode in the Alipay or WeChat App in a store, and the shop owner will scan it. Alipay on WeChat pay could have a section of that app separated for the digital Yuan. Apart from this, smart phone makers could also create a separate digital Yuan wallet feature in the devices. It is said that government employees will get half of the travel allowance as digital Yuan. IS CHINA BECOMING FULLY CASHLESS? The trial for digital Yuan has been taking place in several cities in China in the form of lotteries that dispense red envelopes. Last year in October, Shehzhen distributed around 1.5 million digital Yuan to locals. In Suzhou, $3,000,000 was handed out. For 2021’s Chinese new year holidays Beijing gave out around 1.5 million digital Yuan in red envelopes to 50,000 residents. Presently, there are limitations to the use in the travel phases, including deadlines on spending and a limited selection of participating merchants. Also, American giants like McDonald’s, Starbucks and Subway have become the first vendors to tender digital Yuan. It is also believed that digital Yuan will be piloted in the Winter Olympics in
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2022 with international guests. Jd.com, the e-commerce giant along with video platform Billy in December 2020, started accepting payments in digital Yuan. There is no announcement of a nationwide roll out yet, but regional tests have been successful. IS IT A THREAT TO US DOLLAR? This Yuan is less about the money and more about the data. It is currently difficult to say that it is a threat to the US dollar, as the digital Yuan lives below the weight. This is because 93% of the time China’s imports and 95% of its exports are dominated in dollars. Another thing being it depends on which currency the world businesses want to process and trade in, whether Yuan or dollar? The range of options to foreigners who find themselves with a pile of one is minimum, compared with a pile of dollars, euros, or Yen. Also, foreign companies have issues with the digital Yuan’s privacy concern as it gives a clear picture to the central bank of China of who is paying how much. Also, with digital, the holder of the currency becomes more vulnerable as any action to restrict will have an immediate effect. China has less high-quality assets, and the government control on the outflows of capital and begging exchange rate will all have to be changed to compete with the US dollar. For most international businesses, the Yuan still falls in the former camp and inhibits little sign of moving out. This Yuan is less about the money and more about the data.
Cryptocurrency: The New Futuristic Online Currency? By: Nihar Darnay (VESIM, Mumbai) Cryptocurrency, the current trending financial terminology in the entire globe. There are around 4000 cryptocurrencies in the entire world as of Jan 2021 and many of us are just aware of hardly 2-3 cryptos. Cryptocurrencies are viewed as a profit-making source due to its current boost. And because of this many people tend to ignore its volatility features and market efficiency. Many young minds out there have these common questions like, What exactly is a cryptocurrency? Why is there a bubble being created around it? Why such a hype? What technology does the crypto work on? Let’s try to clarify one question at a time.
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Image Source: https://www.corporatecomplianceinsights.com/regulatory-oversight-cryptocurrency/
What is Cryptocurrency? Cryptocurrency as a concept is a digital asset, digital currency which is been designed to work as a medium of exchange over the internet, where coin ownership is stored in a computerized database using strong cryptographic methods in order to boost security of the transactional records. The exact year and the creator of cryptocurrency is unknown to the world, but it was developed around 2009 by an anonymous programmer or a group of people under the name of Satoshi Nakamoto. Bitcoin is believed to be the first of the cryptocurrency to be created.
Technology behind Cryptocurrency Cryptocurrency runs on the blockchain technology. Blockchain Technology is a digital ledger of transactions that is duplicated and distributed across the entire computer network. Blockchain is one of the most secure method of recording and storing information on a digital platform which is impossible to change, hack or even break the system. In blockchain, data.is stored in blocks and once that block is filled, it is then chained onto the previous block creating a data chain in a chronological order. The blockchain technology is decentralized, which means there is no central authority. There is no single person or a group has control over it - rather, all users have equal control over it. The transactions are processed through thousands of computers in the network around the world.
How are Cryptocurrencies created? New crypto coins or cryptocurrencies are created by a process known as “Mining”. “Mining” is the act of verifying, encrypting, and securing transactions in each block. Mining a cryptocurrency is a process where many powerful computers compete against each other to solve complex and cryptographic mathematical problems. They compete to mine a currency’s block which rewards them a predetermined amount of coin. These blocks are then added to the ledger after a certain amount of time. When transactions are confirmed, new coins are created. Most of the currencies use Proof-of-Work (PoW) algorithm to verify blocks within the blockchain which also helps to prevent attacks on a cryptocurrency. Mining requires an intense amount of energy often generated from the fossil fuels. Running these complex computers requires massive electricity supply.
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Coin Market Cap Did you know that Bitcoin has a mining capacity of only 21 million? Every cryptocurrency ever mined has its own unique market cap. Some of them are finite, while some have an infinite market cap. Finite Cryptocurrencies like Bitcoin, Cardano, Litecoin, ChainLink, XRP, etc. are bound to hit there market cap and at that point they will no longer be minable. Other currencies such as Dogecoin, Ethereum, Tether, Polkadot, etc. have an infinite supply. A major disadvantage of infinite supply is that the reward for mining a block often lessens over time to keep up with the inflation.
Current Crypto Situation Cryptocurrencies were hidden until the late 2010s, when suddenly Bitcoin caught the attention of millions of investors when its price hiked from $1,028 from Jan 2017 to an all-time high of $19,783 at the end of Dec 2017. Since then, Bitcoin has been at its highest peak of $66,514 in April 2021; a sudden rise of 246% from December 2020 to April 2021. Along with Bitcoin, Ethereum become the 2 most popular and expensive cryptocurrency. Ethereum as created as an alternative to Bitcoins and to improvise its demerits. Another crypto which came into light was Dogecoin, after the hysterical tweet from Elon Musk went viral worldwide. The idea of Dogecoin was to create a payment system as a joke, to make fun of the speculations of cryptocurrencies at that time. The price hiked from $0.059 to $0.39 in just 7 days of April 2021, a whopping 560% rise. And then a rapid fall of 130% from its all-time high of $0.74. This just amounts to show that the price volatility of Cryptocurrencies is very high. Any huge comment on the crypto market in the globe, tends to shake the entire stability. Although cryptocurrencies are at the starting stages of its bright future, currently the crypto market is very unstable. Investors tend to run after profits rather than looking at the broader perspective of why the Crypto’s were designed for. Nevertheless, cryptocurrencies have received a significant interest from various financial and government institutions, venture capitalists, angel inventors and retail consumers. Cryptocurrencies are being made legal in most of the countries across the world few of them being U.S, U.K, Japan, South Korea, India, Israel, etc. India’s RBI is currently planning to mine its very own Cryptocurrency which will boost the Indian Economy in the upcoming future. Whereas in recent news, China banned the use and mining of cryptocurrency which speculated a crash of net prices of major crypto coins. Looking at the past few months of the Crypto market and its volatility, Chinese Government took this major step in order to prevent an economic burst in the mere future which would disrupt the financial stability of the country. This huge decision created a havoc amongst the Crypto coins as their price values dipped to a great instinct. The top 10 Cryptocurrencies are listed below as of 22 May, 2021 – nd
nd
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Image Source: https://coinmarketcap.com/currencies/
Conclusion Crypto Market is currently at its genesis, just like Stock Market was in the early 1980s. No one could have imagined way back then, that the Stock Market scenario would rise rapidly to such great extent in less than 50 years. Cryptocurrency market at present-day is volatile, unstable and unpredictable; But it is bound to bloom in the coming future. There is a lot of misconception and skepticism about crypto based on what we are witnessing right now. But over the long term these things will be of little significance if you get into the right crypto, that has the potential and functionality to sustain in the future, and by having patience and trusting in time, you won't regret getting into this universe. There’s Volatility, there’s FOMO, there’s Scam. But the real question is do you have the ability and the risk appetite to identify the right crypto or not.
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Shocks That Shook Economies By: Devansh Gupta (SGGSCC)
Financial panics or crisis have been in existence since the dawn of humanity. Not only they have contributed towards causing tremendous terror for the systems of the economy, but also have caused people to question the viability of current financial systems. People who bet on the markets have been seen losing their entire money in a short span of time. To give a brief idea, a financial crisis is the failure of financial systems, leading to economy slowdown, recession or even worse, depression. The constant pumping of a bubble leads to an eventual burst. Any segment of the economy can face this bubble burst, be it Currency or Debt or Real Estate. What comes next? No one knows. These shocks range from being minor and hence recoverable, to being massive and more destructive. The latter entails a wider population of affected victims and is difficult to cope up from; difficult, but not impossible. Causes The causes and reasons for a financial crisis mainly include Debt (or Leverage), Future Uncertainty, Failure of regulatory measures and lastly, the market’s behavior. Out of all the above mentioned the most potent is Future Uncertainty, which is a quite logical and indelible reason. It is a well-defined fact that the future is unpredictable and the risk involved is massive. The current situation that global economies are facing due to the spread of a contagion, perfectly describes the need to accept this fact. Another major reason that is worth discussion is failure of regulatory measures. These are mainly institutional measures, which lie in the jurisdiction of the Government and other regulatory bodies. It has often happened that these institutions have themselves faced the plight of the crisis. Banks and lending institutions regularly face the risk of payment defaults, and when this repayment bubble pumps and explodes, it affects the parties seriously. The History If you look at the history of financial panics, you would be astounded to find that the first ever panic is believed to have taken place as back as during the 1630s. The Dutch population saw a speculative opportunity in the market when prices of exotic tulips surged. People spent a year’s income on rare tulip bulbs, in a hope to sell them on profit. And as it happens, the price bubble burst and it wreaked havoc on the Dutch economy. The consequences were such that merchants were washed off on the footpaths as beggars, and people were pushed back to their original, mundane life. Even though many authors believe in the above anecdote, there are a few who say that the story has been falsified. What truly happened was a small spur of high-end people speculating in a niche of tulip market. But, till date no substantial proof exists.
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The next recorded bubble was that of South Sea Bubble, in the 1720s. This is one of the earliest recorded modern crises, named after the company involved, South Sea Company, a British joint-stock company. The company had collaborated with the British government to reduce the cost of national debt. With rapid expansion, the company’s stock also surged and soon the bubble burst, leaving investors in the deep sea. Soon after, it was found that many government officials and the founders of the company were involved in malpractices like bribery and insider trading. The Panic of 1819 The Panic of 1819 was the first widespread financial panic of the States. The crisis resulted in a collapse of the US economy, which persisted for a period of three years. The consequences led to it being named the First Great Depression. The main reason behind the crisis was global interdependencies. In the year 1815, France and Great Britain decided to end their warfare and signed a peace treaty. While the nations were indulged in war, the US had prospered. Both these nations needed industrial and agricultural goods to sustain the country during times of conflicts. The ending of the war meant that American goods were no longer in demand from Europe.
A part of the American population was left destitute, so much so that they could not even repay their loans. The Bank of the United States, as well as state and private banks, began recalling loans, demanding immediate payment and this resulted in the Banking Crisis of 1819, further fuelling the panic. People blamed open trade for the depression and opined that tariffs should be implemented on imports. The then president, Monroe, resorted to monetary expansion. State banks suspended specie payments (redemption of paper money in bullion form) and issued large amounts of inconvertible notes.
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The Great Depression of 1929 And now, let’s talk about the elephant in the room – the Great Depression; an event which left the global population stunned. These 43 months of crisis were obliterated anything and everything connected with the global economy.
During the “roaring twenties” – a period of high earnings from 1920-29 – every participant of the US economy was investing in the bourses. Be it janitors, sweepers, millionaires, housewives – everyone had poured their savings in the market. Simple economics played and the prices started to shoot, due to rapid inflation in demand – and almost all stocks became overvalued. Fearful investors started selling off their holdings and the crash swept in. People lost more than they ever earned in their lives. The bloodshed in the markets caused devastation which spread throughout all countries. People lost jobs, companies lost capital wealth, and borrowers ended up in mega-debt. Conclusion A description of these events act as a reminder that catastrophes can swell up to cause global devastation. Our history is full of examples of financial panics – some problematic at a local level, others dangerously severe. The only way to tackle is planning in advance for such contingencies. The risk can obviously not be 100% predictable. But, risk-mitigating practices can, to some extent, help develop a shield to reduce the impact of the hit. Holding people liable, and playing the blame-game would not lead us anywhere. What is required is to think collaboratively, for the prosperity of humanity.
REFERENCES 1. 2. 3. 4.
wikipedia.org thebalance.com history.com britannica.com
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Cryptocurrency: “Technological tour-de-force” or “Fraud, worse than tulip bombs” By: Mansi Suhaney and Aman Arora (IMT Ghaziabad)
Evolution of Money : Barter, Beads, Bullion, Banknotes, Bitcoins
Blockchain : Basic Building Block of Crypto Blockchain is a specific type of database which stores data in blocks that are chained together. It is a record of transactions, like a traditional ledger, which can be any movement of money, goods or secure data. This data is assigned an address—a string of data, publicly viewable on the blockchain. The owner of the data is given a private key, a hash of the address data. It stores information in a way that makes it virtually impossible to add, remove or change data without being detected by other users.
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Key features
Working of blockchain
Cryptocurrency Cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of authorities. Cryptocurrencies allow for secure online payments denominated in terms of virtual "tokens", represented by ledger entries internal to the system. It is secured by cryptography, making it nearly impossible to counterfeit/double-spend. Bitcoin is by far the most popular cryptocurrency, followed by Etherum, Litecoin, and Cardano. As on March 2021, the aggregate value of all the cryptocurrencies in existence was around $1.86 trillion—with bitcoin representing more than 60% of it*.
Key attributes * Source : Coinmarketcap
No financial intermediaries required
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Traditional vs Cryptomarkets Particulars Market Hours
Traditional Markets Crypto Markets Strict timings, banking holidays, 24 X 7, 365 days a year participation; pre and post market trading for Information can be priced in real time professionals making the markets more efficient and liquid Settlement Settlement takes place in central Settled by an exchange on its books or depository with varying confirmed by the numbers of blocks on settlement period creating an block-chain following the transaction unnecessary counterparty risk Intermediaries Financial advisors, brokers / No reliance on intermediaries, settlement is dealers, market makers, done through the same venue on which the exchange, clearing houses order was placed – centralized exchange, decentralized exchange, OTC desk
Order flow: traditional market
Order flow: crypto market
* Source : Kraken Research
Advantages of Cryptocurrency
Easy to use No intermediaries required Security Minimal processing fees Inflation resistant and protection against unlawful government seizures Portable Transparent
Drawbacks
The semi-anonymous nature of transactions makes them well-suited for illegal activities Rapid surges and collapses in value impacts its exchange rate with other currencies While blockchains are highly secure, but other aspects of ecosystem, including exchanges and wallets, aren’t immune to hacking Environmental concerns
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Crypto Market : The Rise Cryptomarket has been continuously outperforming other assets’ and indices’ returns. It has shown 1989% (c.21 times) increase in value from 2013 to 2017; whereas the growth has been 5890% (c.60 times) from 2017 to 2021.
Data as on April of respective year
Growth of crypto market Particulars Bitcoin Ether Dogecoin S&P NASDAQ Gold
Crypto Market - breakup
YTD May 2021 returns 36% 272% 7544% 17% 6% 0.2%
* Source : Coinmarketcap, HDFC Research
Crypto Market: The Fall A speculative bubble: The fact there is a strong correlation between bitcoin prices and google searches indicates that it is perhaps more of a fad
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* Source : HDFC Research
2017 boom and 2018 crash After an unprecedented boom in 2017, bitcoin’s price fell by c.65% in January 2018. Subsequently, all other cryptocurrencies followed Bitcoin's crash. By September 2018, cryptocurrencies had collapsed 80% from their peak in January 2018, making the 2018 cryptocurrency crash worse than the Dot-com bubble's 78% collapse. By 26 November, Bitcoin also fell by over 80% from its peak, having lost almost one-third of its value in the previous week.
2021 boom and crash In early 2021, Bitcoin's price witnessed another boom, soaring more than 700% since March 2020 and surged, above $40,000 in January 2021 and $50,000 in mid-Feb. On May 19th, Bitcoin tanked 30% to $31,000, Ethereum lost 40%, and Dogecoin was down 45%.
*:
Coinmarketcap, HDFC Research
Elon Musk’s rol(ling) in Cryptocurrency: The Tweet and The Thwack Bitcoin’s volatility fueled by Musk’s tweet 1. Musk announced in start of February 2021 that Tesla would invest $1.5 billion in bitcoin; the price of one bitcoin hit a first time high crossing $50,000 2. May 2021, Musk tweeted about bitcoin mining’s environmental cost due to computing power, and announced that Tesla would no longer accept payment in the currency; Bitcoin’s price crashed soon after to nearly $30,000, c.50% from its high of $64,800 in April, 2021 3. Musk took to Twitter to indicate his support to help miners make their processes greener. Following the tweets, Bitcoin jumped 19% to trade at $39,944, which had earlier slumped to nearly $30,000
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Impact on Dogecoin’s price movement 1. On 8th May, Musk referred to Dogecoin as a "hustle“ resulting in slump in the price of Dogecoin from c.$0.75 to c,$0.45 (40% down) 2. Musk tweeted “Working with Doge to improve system transaction efficiency. Potentially promising,” on 14th May which caused the price of dogecoin to soar from about $0.43 to $0.52
~USD 780 bn has been wiped off the market capitalization of the entire crypto market from 17th May till 24th May 2021 * Source : Coindesk, HDFC Research, Coingecko
Cryptocurrency in India: Timelines and Guidelines Currently in India, cryptocurrencies aren’t legal tender whereas cryptocurrency exchanges, while effectively legal, regulations for the same are being considered
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2008 : A paper titled ‘Bitcoin: A Peer to Peer Electronic Cash System’ was published by a pseudonymous developer by the name of Satoshi Nakamoto 2012 – 2016 : Cryptocurrencies steadily gain traction leading to rise in exchanges, including Zebpay, Coinsecure, Unocoin, Koinex and Pocket Bits Feb 2017 : RBI Press Release states that virtual currencies aren’t backed by RBI and that their value isn’t underpinned by an asset, hence is speculative Dec 2017 : The RBI and the Ministry of Finance issue compared cryptocurrencies to Ponzi schemes April 2018 : The RBI issues a circular preventing commercial and cooperative banks from “dealing or settling” in virtual currencies March 2020 : The Supreme Court strikes down RBI’s banking ban on crypto, terming the April’2018 circular unconstitutional citing lack of legal basis to impose restrictions at the moment Jan 2021 : Government seeks to pass a bill which shall prohibit all private cryptocurrencies in India
Future scope – Marketmania or a New Asset Class for India Volatility in prices, and government plans to prohibit private currencies, makes cryptos a bewildering asset No income, utility or relationship with economic fundamentals of cryptos make it difficult for it to be considered a store of value Multiple credible investors and institutions are engaging with crypto, which has cemented its position as an official asset class (most widely distributed asset in history except Dollar & Euro) Easily stored and transported, unlike gold making it a valuable asset class Technically, cryptocurrencies are still trapped in a downtrend which began in mid-December amid increasing fears of a regulatory crackdown by governments. Though unlikely, this downtrend may come to an end if investor sentiments suddenly change in favour of cryptocurrencies again. The government has been giving conflicting signals on this. FM Nirmala Sitharaman, said that there won’t be a total ban on the use of cryptocurrencies in the country but the Centre soon plans to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which is said to contain provisions completely banning the use of all cryptocurrencies.
Potential Usecases
Smart contracts with IoT Battling electoral fraud Investment solutions Medical records Property records AR experiences
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Fluctuation in Crude Oil Price, 2021 By: Anyatama Basak (Xavier Business School, St. Xavier’s University Kolkata) Crude oil prices all over the world are influenced by a number of factors, such as
Decisions of the oil-producer like Organization of Petroleum Exporting Countries (OPEC – a consortium of 13 countries namely Algeria, Angola, Congo, Nigeria, Equatorial Guinea, Gabon, Iran, Iraq, Libya, Kuwait, Saudi Arabia, the United Arab Emirates and Venezuela). Independent producer countries like Russia, private oil-producing firms like ExxonMobil and others. Political instability in the Middle East as the region accounts for the lion’s share of the worldwide oil supply. Cost of production and difference in oil storage across regions. Increase in interest rate followed by raise in manufacturing cost and resulting in less money in hand and less time spent for driving. Demand and supply of oil from non-OPEC countries, balance between OECD inventories and future spread, spot prices, operations in financial markets.
Surprisingly, unlike other natural disasters which increase the price of oil by generating a supply shock, COVID-19 pandemic has created a demand shock by several lockdown and cancellation of both domestic and international flights in different nations throughout the world during different phases of lockdown.
Pre-pandemic era:
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It is a common thought that fluctuation of crude oil price directly impact on the financial sector of the economies. The stock market, interest rate, cost of production, cost of transportation etc. are affected by this. Less exploration activity can cause less availability of oil since most of the new sources are unconventional and leads to a higher cost per barrel than a conventional source of oil reserves. Lower level of oil price can affect the production process in different ways such as increase in transportation cost, rise in prices of consumer goods followed by effect on company’s stock prices. The present supply, the future supply and the expected demand of oil are the three important factors that influence the oil price.
Graph 1: Calculations by West Texas Intermediate (US$ per barrel)
Effect on Indian economy: Despite the challenges of 2020, crude oil remains one of the most important commodities for Indian import sector and it creates impact on Indian stock market in various ways. Being one of the largest importers of crude oil, India fulfills more than three-fourths of its requirement through importing oil. Hence, a decline in the price will have a positive effect on current account deficit (CAD) situation of the country. Lower CAD refers to reduced need of foreign currency outflows which in turn, can lead to appreciation of rupee. The imports will be cheaper if the value of rupee appreciates. The companies, who depend on import of crude oil and other raw materials, will be affected by this, in their business. Thus the price of stocks of those companies will experience a rise. Companies dealing with tires, lubricants, logistics, footwear hugely depend on crude oil prices along with refinery and airlines industries. Commodities like paints will also benefit from reduced oil prices since most of the paints used today are oil-based. A decline in price affects the cost of input for production of these goods. Therefore, a reduction in oil price has a positive result on the stocks of such companies.
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Graph 2: Monthly average of India’s Crude Oil Basket (till February 2021, US$ per barrel)
Fluctuation in oil prices affects the cost of transportation of products. The prices have a remarkable impact on the prices of goods like consumer durables. These commodities are manufactured in industrial units and then sold in various cities across India. Decline in the logistics cost of such goods will lower their final price which will raise its demand followed by its stock price. Every rise in oil price results in increase in Consumer Price Index (CPI). Crude oil has an impact on the prices of many agricultural commodities or manufactured products and services, change in oil price affect their Manufacturing Retail Price (MRP). A considerable decline in prices of goods and services will ease inflation. Inflation is often viewed to have a negative effect, by an investor. Hence, a comparatively lower inflation level will be beneficial for the stock market.
Present Scenario: As evident from the experiences of past few months and the last year, almost every country in the world has faced different economic changes due to Covid-19 pandemic. A major issue has been the sudden fall in crude oil price which has affected other financial activities as well. The urgency of lockdown and its expansion in different phases for various nations have worsened the preexisting oil-price regime. The shutdown of many business units, the slow rate of operation of the biggest oil-importing industries, the cease on vehicles and airlines, both domestic and international, have resulted in continuous low level of oil-price as depicted in the following diagram. Both the supply and demand of oil have been affected. The step by step release of lockdown has helped to bring some positivity in the price.
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Graph 3: Global oil supply and demand by month (Million barrels per day)
As given by the Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration or EIA says that Brent crude oil spot prices has averaged at $68 per barrel during May, 2021 rising $4/b from April,’21 since global oil inventories have continued to decline, in comparatively slower pace than the first four months of the year.
Future Prospect:
Graph 4: Brent crude oil price forecast by EIA (US$ per barrel)
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It is expected that in the upcoming months, the global oil production will increase to serve the increase in global oil consumption. This rise in production will put an end on persistent draw of global oil inventory which has taken place in last year and will lead to relatively balanced scenario in the next half of 2021 due to growth acceleration. EIA assumes to have Bent prices near $68/b. The resurgent global economy will drive this recovery followed by increase in GDP growth. OPEC is trying to keep market in balance and avoid surpluses as the economies recover, though nonOPEC supply will be less as like as the first few months of the year. It is also evident from the predictions by different sources.
Graph 5: Average crude oil price forecast by IMF (US$ per barrel)
Since both the Central and state governments have increased taxes on petrol and diesel, hence Indian consumers were unable to experience the gains of fall in international crude oil prices in 2020-21. The government has enjoyed the windfall gain in taxes and this situation will continue until the globalprice of petroleum comes down to a usual equilibrium level. References 1. 2. 3. 4. 5.
News articles by Hindustan Times Reports by EIA Report by Forbes Reports by Energyworld.com Analysis by Kotak Securities
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Celebrities and stock market fluctuations: correlation or causation? By: Prachi Joshi (FORE School of Management) It isn’t unusual to be in the news when you are one of the best football players in the world, especially during the UEFA European Football Championship. It is however a bit uncommon for those write-ups to feature in the business and finance section instead of the sports section of the bulletin. As it turns out, Christiano Ronaldo has accomplished that feat. The Juventus forward recently made headlines for allegedly causing a whopping $4 Billion loss to coca-cola at a press conference after he moved two coca-cola bottles, choosing water over the soft drink. Following Ronaldo’s lead, Italian footballer Manuel Locatelli did the same thing. A similar act was performed by French midfielder Paul Pogba who removed a Heineken bottle from his view at another press conference. Both these beverage makers being top tier sponsors of the football championship had their products prominently displayed at the media events as a part of the commonly practiced product placement strategy. This act led to the UEFA issuing a notice to the players telling them to refrain from removing sponsors' products during press conferences. There was a 1.6% decrease in the share prices and a $4 billion fall in the market value of cocacola. Ronaldo was blamed for both of these. This isn’t the first time when a public figure has been blamed for stock market movements. Back in 2018, Kylie Jenner’s tweet stating she doesn’t use snapchat anymore was blamed by many for a $1.3 billion decrease in the market value of the parent company. We live in a world where tweets by people such as Donald Trump and Elon Musk have been known to prompt movements in the stock markets. Be it the Tesla founder’s influence on prices of cryptocurrency or the former U.S. president’s peculiar tweets led to the creation of ‘The Volfefe index’ - an index created by JPMorgan to measure the impact of then U.S. president’s tweets on the country’s treasury bills. This raises an important question - Can celebrities significantly influence stock prices and market value? Are these merely coincidences or do these people really wield that kind of power? Before we answer this question, it is important to understand the difference between correlation and causation. It is important to note that “correlation does not imply causation” Causation indicates a cause and effect relationship. For instance, when the sales of popsicles increase, the number of deaths by drowning also increase. Does this mean that consumption or sale of popsicles is the cause for drowning?
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No. Certainly not. People buy more popsicles during the summer season. Similarly, the number of people going to the beach or the swimming pool during the summer season is also more. While Popsicle sales and drowning are correlated, they do not have a causal relationship. Both these variables have a causal relationship with weather but not with each other. It is quite easy to jump to conclusions and assume that there exists a cause and effect relationship between the actions of the celebrities and the fluctuations in the stock prices but, we need to look at the bigger picture and in order to determine whether the relationship is that of correlation or causation. In the post-truth world, we often give in to confirmation bias and draw conjectures based on that Similarly, In the case of coca cola and snapchat, it is easy to solely blame Cristiano Ronaldo and Kylie Jenner respectively for the fluctuations in stock prices. There is no conclusive evidence to prove the same. The two public figures were, to some extent, responsible for the market noise which is a routine short term fluctuation but, there were a lot of other factors at play. The prices of both these companies were already in decline when Jenner and Ronaldo made their move. A point to be noted is that on the day of the press conference, coca-cola’s shares became ex dividend which means that all dividend for that year had been distributed. It has been observed that there is a general trend of fall in stock prices occurring after the dividend payout. Another fact is that U.S. markets opened lower that day. Coca-cola’s shares were already down by 0.9% before even the infamous press conference began. Same goes for the stock prices of Snap inc. which were down a week before Kylie’s tweet. These alternative facts imply that contrary to the popular belief, Kylie Jenner and Christiano Ronaldo did not cause these fluctuations. It is important for investors to ignore the market noise and not rely on the actions of celebrities while making important investment decisions because the influence of celebrities in the stock market is generally short lived. This is because they have little to no impact on the actual value of the company. References 1. https://www.business-standard.com/article/sports/footballer-cristiano-ronaldo-knocksoff-4-billion-from-coca-cola-s-value-121061600680_1.html 2. https://www.cnbctv18.com/business/companies/why-ronaldo-alone-wasnt-responsiblefor-coca-cola-losing-4-billion-9801601.htm 3. https://www.goal.com/en-in/news/cristiano-ronaldo-coca-cola-controversy-euro-2020press/boc10jxcu1791950qedw9ydzf
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4. https://www.hindustantimes.com/sports/football/uefa-asks-euro-2020-teams-to-stopremoving-sponsor-bottles-101623936133572.html 5. https://www.nasdaq.com/articles/did-ronaldo-really-cost-coca-cola-ko-%244-billion2021-06-23 6. https://www.nationalworld.com/sport/football/cristiano-ronaldo-what-the-portugalcaptain-said-about-coca-cola-at-euros-and-why-share-prices-have-dropped-3275108 7. https://www.bloomberg.com/news/articles/2018-02-22/snap-royalty-kylie-jenner-eraseda-billion-dollars-in-one-tweet 8. https://towardsdatascience.com/why-correlation-does-not-imply-causation-5b99790df07e
Bitcoin & Energy By: Balaji. R (IIM Ahmedabad)
Sathoshi Nakamoto’s coinage, Bitcoin is a virtual and decentralised currency used for mutual payments over a common computer network (Block chain). It has become the world’s highest return generating assets over the past couple of years. It witnessed immense growth within a short span. Now there are 18.7 million bitcoins (89.7%) in circulation. Each new block adds 6.25 bitcoins and 2.3 million bitcoins (10.3%) are left to be mined. Initially, the bitcoin had its own flow in its market trend. Later, the value of this cryptocurrency has been influenced by other real currency makers. Elon musk purchased $ 1.5 billion worth of bitcoins this year in
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February and announced that Tesla intends to accept bitcoins as a mode of payment from people to buy its vehicles. The bitcoin witnessed a phenomenal growth and it was valued $ 2 trillion at that time. Within few months of announcement, Elon musk broke his words by selling about 10% of the company’s bitcoin holdings and renounced that Tesla had suspended the idea of using bitcoins as a mode of payment. After the announcement, the value of bitcoin fell by more than 10% and Tesla’s share also dipped. What happened to Elon musk suddenly? One theory based on bitcoin and energy started gaining greetings across the world. The bitcoin is mined by solving a mathematical problem to keep the network safe. These computations are done using super computers that use excessive amount of energy. In some countries like China, this large amount of electricity which comes by burning fossil fuels is less expensive and hence miners are attracted towards those countries. This increases the share of carbon foot print in our environment. In America, it is mandatory for every automobile manufacturer to earn certain amount of RECs by producing certain number of clean energy vehicles or else, the government files penalty over the firm. It is really tough for conventional manufacturers like General Motors, Fiat Chrysler to develop infrastructure required to bring out zero-emission electric vehicles. However, the American government allows the automobile manufacturers to get credits from surplus holders. Now it’s time for visiting the pages of Tesla, which promised to promote sustainable environment by accelerating the emergence of clean transport and clean energy production. Tesla produces zero-emission electric vehicles and earns Renewable Energy Credits (RECs) which indicate their fair share in reducing the carbon foot print. Tesla holds more credits than the required share. The conventional manufactures paid truckload of money to Tesla to earn Renewable Energy credits from Tesla. Reports allege that Tesla made money of $ 428 million between April and June 2020 by selling their RECs to other firms. This $ 428 million is comparatively low when compared with the revenue of $ 6 billion realized by Tesla during the same quarter. Money is not the matter of concern here, it actually quantifies the effort put by Tesla in reducing the carbon foot print across the environment. Now, it would be hypocritical for the green branded company which promised to create a sustainable environment, to promote bitcoin which is mined using cheap fossil fuels. Before being called as a hypocrite by anyone, Musk woke up and suspended the idea of using bitcoin as a mode of payment on mid-May of 2021.In social media, Magda Wierzycka, the CEO of asset manager Sygnia criticised Elon musk for his incompatible decisions. She claimed that Musk had deliberately influenced the market of bitcoin so, Tesla could sell a big part of it. Many tweets alleged that, he was manipulating market prices for benefit of his business. Within one month, the betal again flew back to tree with a different constrain. On June 2021, Elon musk again accepted Bitcoin as a mode of payment for his vehicles, once bitcoin miners can show they are using roughly 50% clean energy and countered Wierzycka claims by stating that Tesla only sold 10% of its bitcoin holdings to confirm BTC could be liquidated easily without moving market. Ensuring whether bitcoin has mined using clean energy is a big task. It is like finding a lost one dollar coin from a basket of one dollar coins. Estimates on renewable energy consumption by miners vary widely and research by Cambridge University shows that 65% of bitcoin mining takes place in China which uses coal as the main source of energy production. Nearly 90% of bitcoins are mined and remaining 10% is required to be mined. So, already lot of harm is done to the environment by this burgeoning industry. Elon musk’s new announcement also encourages many companies to take initiatives to go green. Recently, Reliance Industries unveiled new clean energy
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project to bridge the energy divide in India and globally. Development should not widen the gap between human and environment. The real development should add ecosystem as one of its beneficiary. So, whatever may be the goal or end product of development, the path of development should not disturb the ecosystem. Sources & References 1. https://www.businessinsider.in/tech/news/elon-musk-says-tesla-will-accept-bitcoin-payments-againonce-miners-use-50-clean-energy/articleshow/83509061.cms 2. https://www.bbc.com/news/business-57096305
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