SHOULD YOU INVEST IN CRYPTOCURRENCY?

Penned By Varnika Gupta

INTRODUCTION

The words like Cryptocurrency, Bitcoin, Ethereum are a few which are now thrown around here and there in one discussion or another. Especially with the Cryptocurrency Bill in the row, this topic has taken up a new spotlight. For a layman person, what matters is, if you can get filthy rich by investing in cryptocurrency. Though there also exists an underlying risk that you might even lose all of your hard-earned money in a go, still there has been an ongoing rage around this topic with India having the highest number of crypto owners as per data collected in October 2021. To get a deeper understanding of cryptocurrency and the ongoing discussions around it, let us examine it from various facets, before taking a decision.

What is Cryptocurrency?

Starting from the basics, let us first know what exactly is cryptocurrency.  A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.  A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference and they also do not have any intrinsic value linked to it. Bitcoin is the first generation cryptocurrency that remains most popular and most valuable.

Stablecoins are the second generation of cryptocurrencies that attempt to peg their market value to some external reference like the US Dollar or to commodity prices such as gold.

For their part, Cryptocurrency has been praised for its portability, divisibility, inflation resistance, and transparency. However, like any other system, they too have received their share of criticism for a number of reasons, including their use for illegal activities- money laundering, drug trafficking, financing of terrorism; exchange rate volatility; and vulnerabilities of the infrastructure underlying them.

Is Cryptocurrency Safe?

Cryptocurrency exchanges, more than stock markets, are prone to hacking and other forms of criminal behavior. Investors who have had their digital currencies stolen have suffered significant losses as a result of these security breaches. Moreover, Cryptocurrencies are much more difficult to store safely than equities or bonds.

Additionally, there is no guarantee that a cryptocurrency project you invest in will thrive. Thousands of blockchain ventures compete for attention, and the crypto market is littered with projects that are nothing more than scams. Only a few cryptocurrency projects will succeed in the long run. Many people are investing in these coins after seeing the increase in value. But after a while, the makers will sell all their coins to make money and that leads to falling of the value drastically. This type of scam is now a common phenomenon. They are called ‘shitcoins‘.

In the end, the major risk which cryptos pose is that they do not possess any intrinsic value, that is, if the crypto market collapses, and its value drops down to zero, the person owning crypto will be left with nothing.

Recent Happenings in Crypto World

More and more people are now investing in cryptocurrency, and as of October 2021, India has the highest number of crypto owners in the world. However crypto markets remain unregulated within India, and the government is likely to take a decision in the ongoing Parliament winter session this year. The government, before the beginning of the winter session, had notified of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, days after a meeting of the Cabinet and representatives of the Reserve Bank of India. Unlike the previous stance of a total crypto ban by the Government, it is likely that there will be some space for operating crypto in India. According to a recent report by The Economic Times, Prime Minister Narendra Modi will take a final call on the regulatory framework of the Bill as stakeholders have found themselves in a conflict regarding the same.

Last month, at the Sydney dialogue, the Prime Minister called on democracies to work on cryptos so that “they do not fall into the wrong hands and spoil our youth”. As per our RBI Governor, Shaktikanta Das, cryptos are a concern as it is a threat to macroeconomics and financial stability, as fluctuations in cryptocurrency value may lead to economic instability.

Why the Government wants the Crypto Bill

Even with their fair share of vulnerabilities as mentioned above, cryptos are an asset, and regulating them will allow the government to monitor trading activity, tax the capital gains of the investors and enforce some standard of transparency and a code of conduct.

However, recognizing cryptos as an asset is against the backdrop of the following insecurities which the government might face –

  • Cryptos may erode the monetary sovereignty that the Government and RBI enjoy. The first generation of cryptos was not much of a concern for the central banks as they did not possess any intrinsic value, however, with stablecoins coming into the picture, the story can be quite different, as it is feared, that the national currency will be pulled into the crypto market which may impact economic activity.
  • RBI fears that cryptos may become conduits for outflows and domestic money may go abroad through a crypto exchange. It is reported that China lost $80 billion to cryptos before it banned all crypto transactions in September.
  • Lastly, there is an ongoing concern for financial instability which may arise due to cryptos. In 2017, Bitcoins were valued to be around $1000 and their value shot up to $65000 this year.

Given these concerns, the Government has to decide what should be the steps that need to be taken in order to regularise crypto but also not to lose out on its potential benefits.

Different responses to cryptocurrency

To date, response to cryptocurrency by different nations has fallen under three broad categories-

  1. The Central Banks, turning a blind eye to the cryptomarket and not laying down rules of crypto operations explicitly. RBI had tried this option but then it was struck down by the Supreme Court.
  2. Total crypto ban as implemented by China. But this entails the risk of illegal trading, which may be dangerous for the state.
  3. Allow space for crypto operation but not recognize them as legal tender. This approach is followed by countries such as the UK, Singapore, Japan.

Given these 3 broad approaches, it is to be seen which route the government is going to take.

Is crypto a good long-term investment?

Many cryptocurrencies are founded with ambitious goals that can be accomplished over long periods of time. While the success of any cryptocurrency initiative is not guaranteed, if it meets its objectives, early investors may be well rewarded in the long run, however, the most important goal for any cryptocurrency is to achieve widespread adoption before embarking on its aim to achieve long term success.

References

Aishwarya | Ayush | Bhavya | Jayati | Shivika | Varshita

Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika

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