Cryptocurrency-Yes or No!!

Cryptocurrency has been a buzzword in the financial markets for quite some time now. The world took time to understand the new blockchain technology on which Bitcoin, the first cryptocurrency was based. Since 2008 there has been a rapid growth and presently there are more than 2000 different cryptocurrencies in the global market. The interest has renewed recently due to frequent conversation on the subject by some celebrated entrepreneurs like Elon Musk. One would have also observed a subtle increase in the targeted digital marketing of various cryptocurrencies. Before plunging into cryptocurrencies, it is important to gain some general understanding about it.

What is Cryptocurrency?

Cryptocurrency is a class of privately issued digital means of payment. It depends predominantly on cryptography and distributed ledger technology (DLT) such as the blockchain. Cryptocurrency is often allotted through initial coin offerings (ICOs), which are used as a means of raising capital through crowdfunding. Cryptocurrency is not a liability of any entity and is not backed by any authority. Its drives value by users’ confidence in it and a sense of scarcity. The paper on Bitcoin for example claims it to be in finite quantity. It is available after mining which involves solving some complex algorithms by the computer, or you may buy from crypto exchanges. The buyers have to hold cryptocurrencies in digital form.

Is Cryptocurrency Legal in India?

The RBI declared the cryptocurrencies illegal in India in 2018. This position was however struck down by the Supreme Court and presently they are not illegal. The government is evaluating options and methods to regulate cryptocurrencies in India. So far, the stance has been to discourage the use of cryptocurrencies. But with the daily increase in number of participants and the amount of money involved, we might soon see some form of regulation. In times to come we can expect it to be accepted as a digital asset. The possibility of private cryptocurrencies becoming legal medium of monetary exchange in India is very remote.

How to Buy/Sell Cryptocurrency?

Many crypto exchanges have come up in India to facilitate buying and selling of cryptocurrencies. The number is already in double digits. The relative ease of transaction is what has made trading in cryptocurrency more popular in the last few months. In absence of regulation, each exchange has its own fees/cost structure and medium of storage. One needs to be a little tech savvy to understand the technology behind cryptocurrencies. The front-end convenience of transaction should not be the driving factor for any indulgence.

What are the Cons?

No Underlying Asset.

The value of any investment reflects the value of the underlying asset. In the case of cryptocurrencies, there is no underlying asset. The currency drives its value from the sense of scarcity and at times due to manipulation by large players. The only reason why most people buy it is with the belief that they will be able to sell it at a higher price. As it derives value from nothing which is real, most regulators around the globe have termed private cryptocurrencies as Ponzi schemes. Treating them as a threat to the Fiat Currency, many countries are directly or indirectly cracking down on its usage.

Lack of Authority/Guarantee or Regulation.

As mentioned earlier, the biggest drawback is that the cryptocurrencies are private in nature and not backed by any sovereign guarantee. There are already several examples where a particular cryptocurrency has vanished overnight with the investor’s money. If you find out that your cryptocurrency is missing for any reasons, there is mostly no authority to approach for redressal. There are also technical issues wherein if the holder loses his wallet or keys to the wallet, even the cryptocurrency provider may not be able to help. There have been cases wherein investors have lost lots of money due to sudden death of the sole key holder and they are not able to find any technical/legal way out of the situation.

Prone to Hacking and Manipulation.

While the blockchain technology so far has proved to be robust, each system has its own vulnerabilities. There have been several instances of cryptocurrency hacking resulting in huge losses to investors. Many a times it is some insider job. In the absence of any regulation, it is difficult to trust any system purely based on the claims of the currency providers.   

Illegal Activities.

There is adequate evidence indicating use of cryptocurrencies for illegal financial transactions. This is one of the areas of great concern.  The funds obtained through selling cryptocurrency can be diverted into something illegal, thereby putting the investor in trouble. Money laundering is a known global concern and the structure of private cryptocurrencies suits the purpose well. Recently there was news that some countries are doing extensive Bitcoin Mining and using it as medium of exchange to evade US/UN Sanctions.

Why Are Cryptocurrencies getting Popular?

One would wonder that if there are so many cons, then why so many cryptocurrencies are getting popular by the day. One simple reason is that this is a new opportunity to make money out of nothing. Second is the intense urge of many of us to gamble. Third is the influence of targeted digital marketing wherein the vulnerable buyer keeps reading about it on his smartphone either as a news item or an ad. Fourth is the influence by celebrities through social media conversations, often driven by their own interest. Fifth and probably the most common reason for the gullible buyer is the strong desire to get rich soon. Many large global players also see it as an avenue to challenge the Fiat Currency and associated regulations which are controlled by respective governments.

Recommendations

• Carry out deliberate consideration before treating cryptocurrency as an investment.

• If at all you want to indulge, do not put more than 2% of your investible cash in cryptocurrency.

• Be aware of the latest developments esp. the local regulations and taxation which are presently not clear.

• Be aware that you can lose all money, and there is presently no recourse for any redressal.

Suggested Reading

Look Before You Leap- Are You measuring Risk before Investing ?

Understand Your “Why?” of Investment, Before Deciding on the “Where?”