CRYPTO A FRIEND OR A FOE ?
The euphoria of investing in cryptocurrencies has been spreading like an enigmatic fire all over the world in the past two years. This had been a manifestation of the ultra-loose monetary policies followed by central banks all over the world to promote growth during the spread of Covid-19 virus, as of October 2020 roughly $2.59 trillion was released by the USA government to respond to the challenges inflicted by this infectious virus plus the excess amount of liquidity sloshing around in the Indian economy was around rupees 13lakh crore during the October and November 2021 period. Such amount of free cash ends up searching for the best asset class promising the highest possible returns. Cryptocurrency as per the Forbes Advisor is a medium of exchange that is digital, encrypted and decentralized which is based upon the blockchain technology.
Basically blockchain is a system for recording information in a way that makes it difficult to change, hack or cheat the system where each block in the system contains a record of transaction in a decentralized ledger and taken together the blocks forms a chain in a peer to peer network. So the usage of cryptos takes place on this peer to peer networking structure ensuring anonymity and free from the regulatory control of the central banks. This incognito mode of payment helps in minimizing the burden of tax payment as much as possible and also keeps the wealth of the investors protected from any policy mix of the central banks like depreciation of currencies, increasing the money supply and so on. These days the returns on traditional assets have been falling as stated due to the excess liquidity, for example the return on 10 year government bonds in India is around 6.58% whereas the Bitcoin the most popular crypto averaged a return of over 200% per year over the last decade, since 2011 the cumulative gains of Bitcoin has been around 20,000,000% and that of NASDAQ100 has been only 541% , respectively. This asset class is easily accessible and its maintenance is easy as pie as it requires a phone, internet connection and basic knowledge of the process to buy cryptos. A person residing in USA with a crypto wallet can send any amount of bitcoins to a person having a crypto wallet in India without paying any tax like the international gift taxes.
Such benefits of cryptos played a very major role in making their usage popular as result there are 380 crypto exchanges operating all over the world and in India there are currently 10 exchanges which offer services in the crypto space some of them are Wazir X, CoinSwitch Kuber, Unocoin and so on. The volume growth in transactions as recorded by Wazir X rose by 44% month on month in 2021 as per the company’s report which also observed a 2,648% growth in the user signups especially from tier II and tier III cities. As per Statista there were over 6,000 crypto coins and tokens in year 2020 and further new coins continue to be developed each with a different use case and backstory.
There is a class of cryptocurrencies known as the Stablecoins which are a type of digital currency backed by a reserve asset or physical asset like U.S dollars or any other fiat currencies or simply gold, to offer price stability but are based on the same blockchain tech as per a report from Investopedia . Hence, providing the best of the both the worlds i.e., the privacy of the crypto processing and the volatility free valuations of the stable fiat currencies. But because these cryptos are basically not attached from the real economy and its specific structures their valuations depend upon their own demand and supply analysis which makes their valuations highly turbulent. Bitcoin with a market share of 40.28% of the global crypto market attained its highest valuation of $68,000 in November 2021 after starting at $30,000 in January 2021 and recently the price of Bitcoin was $42,180 on January 2022 which shows that how explosive the returns on this asset class can be, this happens because the bitcoin has a maximum supply embedded in its design of which roughly 89% has been reached in April 2021 and from simple analysis of economics we know that when demand of a product is more elastic than its supply there occurs some distortions in the market which in this case creates excessive loss or gains from the speculative trades. Also there were instances of the crypto exchanges being hacked or the private keys to the cryptos being stolen by some rebellious groups. Between 2011- 2014 MT. Gox reported that U.S $ 350 million worth of bitcoin were stolen which eventually let into the exchange shutting down its operations around 2018.
Since cryptos are anonymous so it encourages its use in the underground economy and in the illegal goods market. As per CNBC the U.S government seized an unprecedented $1 billion worth of bitcoin linked to the most notorious online criminal marketplace Silk Road which was shut down in 2013. Despite these negative consequences of cryptos, they are still winning over the minds of a lot of people all over the world and any stringent regulations that stymie the development of this asset class will not have any much of the wanted results but if allowed can lead to some advanced theories in the field of payments, sovereign control over currency, controlling inflation, ease of monetary transactions and many more. It is the wheel of time which will eventually make us aware how much of cryptos can contribute to the advancement of an economy and what can be its negative externalities.
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