All about virtual currency

Outbreak of coronavirus and subsequent lockdowns saw unprecedented crazy things happening. Just in the beginning of the outbreak, we witnessed crude oil crashing, equity markets all over the world tumbling down, job losses at mass level leading to surge in unemployment never-seen-before, GDP growth declining in almost every country, tourism & aviation industry coming to a grinding halt etc. Amid this situation, when people were forced to stay indoors and stop working as precautionary measures against this deadly infection, one segment which not only remained unscathed, but also witnessed growth was cryptocurrency, which a layman knows by the name of Bitcoin.

While keeping myself updated in the field of my profession, I came across some data on cryptocurrencies, which showed strange surge in the investment of these virtual currencies. The Covid-induced lockdown from February to June 2020, when almost 80% of the world’s population were staying indoors, surprisingly witnessed bee of investors parking their money in cryptocurrencies.

A report highlighted trading volume on Mumbai based WAZIRX, one of India’s leading crypto exchanges, rising 400% and 270% month on month in March and April respectively, and there is a continuous increase in the new sign-ups and active users.

Experts on the subject point out fair percentage of educated population foreseeing the devaluation of the fiat currency in the coming months or years and being that the case, investment in crypto currency can be a very promising venture irrespective of its highly volatile nature.

However, the industry of cryptocurrencies is in nascent stage in India. There are certain issues which got further complicated with the onset of coronavirus pandemic. In pre-covid situation, the industry was struggling with various issues, like regulations, liquidity. scams etc. As the industry was aiming to come out of these issues, the pandemic pushed it far away from being institutionalised. Precisely, till measures to regulate it and make it easier to buy / sell / hold are taken, the crypto industry will continue to struggle in India. At the moment, despite surge in investment in cryptocurrencies, the negative narrative of this investment arena won’t fade out to a positive one.

Meanwhile, a few days back, cross section of media reported that cryptocurrencies as an asset class have gained through the pandemic. The two most popular cryptos (by trading volume, and also market-cap) are Bitcoin and Ethereum. Since January, Bitcoin has risen about 141 per cent, while Ethereum is up over 250 per cent. Both are at three-year highs. Let’s have a look at various aspects of investment in cryptocurrencies in our vicinity.

What this cryptocurrency is all about?

Cryptocurrency is basically a digital cash, created from code. It‘s just a software that everybody can download for free. It’s through this software one can receive and send cryptocurrencies. It’s monitored by a peer-to-peer internet protocol. Every peer has a record of the complete history of all transactions and thus of the balance of every account. It’s completely decentralized with no server or central authority.

Some examples of this virtual currency are Biticon, Ethereal and Ripple. Bitcoin is the largest and oldest of cryptocurrencies, which is trading at a huge premium across various global exchanges, including India. Today, cryptocurrencies with age of less than a decade have been found as a fast and comfortable means of payment across the globe.

Broadly speaking, this virtual currency has two properties: transactional and monetary properties. As far as transactional properties are concerned, the transactions are irreversible after it’s confirmed. The transaction is global in nature and executed fast. It’s secure and confirmed almost instantly. And above all, you don’t need to seek permission from any regulator or government to use any cryptocurrency. However, from monetary point of view most cryptocurrencies have controlled supply. They don‘t represent debts, but are as hard as gold coins.

In succinct, cryptos are speculative stores of value. Coins are unique codes, not fiat currency backed by central banks. A coin can be broken up into fractions, each fraction defined by its unique code. Every crypto transaction is verified by a peer-process of blockchain matching, to see if a given coin is valid, if it is contained in a given wallet (the wallet-owner may be anonymous), and a given coin is not used in two transactions at the same time.

What is the legal status of cryptocurrencies in India?

The RBI imposed a ban on cryptocurrency, which was lifted by a Supreme Court decree in March 2020. Investors in India can trade cryptos on several exchanges, in rupees. Despite lifting of ban by the apex court, experts say it is perfectly possible that cryptocurrency trading will be banned again, perhaps through legislative action.

What are the dangers in cryptocurrencies in the digital world?

Here investors have to keep regulatory risk described above in mind  and must be prepared for, if they do trade these currencies. Apart from regulatory risks, prices are very volatile. Daily price ranges for cryptos are higher than for equity, derivatives and forex. This is because there are no fundamental factors affecting price. So, prices are moved purely by demand and supply and those variables are driven purely by news-related sentiment.

Overall, you have to be mindful of risk associated with cryptocurrencies. For example, if your password is hacked, there is no redress. This means, trading cryptos carries high “digital” risk. If we look at the performance of reputed cryptocurrency Bitcoin, we find it as the currency of choice for cybercriminals.

Besides, this type of virtual currency is not used very often in ordinary transactions. It’s however, very useful for cross-border transactions. It allows convenient currency exchange, bypassing controls and minimising transaction cost. For example, buying Bitcoin in rupees and selling it in US dollar is an efficient way to exchange rupees for dollars, compared to a standard INR –USD exchange, with bank commissions.

Can cryptocurrencies such as Bitcoin become the new preferred destination of investors in India after the apex court lifted ban on it?

Current situation does not seem favourable to this view. This is the time when people struggle to survive. They need cash and other liquid assets. It will take some time for people here to make crypto market as their darling destination for investment as far as their investment appetite goes.

Even as cryptocurrency like Bitcoin is considered a highly liquid asset, the investors will still like other liquid assets, like equities, owing to the uncertainty which has enveloped the crypto market here. Though apex court’s decision has paved way for increasing its liquidity, there is still a lot of lack of information and regulation regarding cryptocurrencies in India. So, there will not be major shift in focus of investors at mass level to cryptocurrencies anytime soon.

What should have prompted experts to propose ban on cryptocurrencies in India?

Globally, crypto market is seen by the experts as convenient route to launder ‘dirty money’. It’s considered as one of the channels for terror funding. Lacking a legal backing, the use of cryptocurrency in the India is a violation of foreign-exchange rules. In this backdrop, the income tax department in the recent past sent notices to thousands of people dealing in cryptocurrency after a nationwide survey some time back showed more than $3.5 billion worth of transactions conducted over a 17-month period. Today such transactions must have multiplied at faster rate.

Should investors off load investment in cryptocurrencies when threat of total ban through legislation looms large?

In investment matters, experts always suggest not to do anything as a reaction to any adverse market scenario. Apex court’s decision lifting ban on cryptocurrency is a good sign though it’s yet to see light of the day. I am sure there would be an option for the existing investors to exit from the crypto market if the ban is invoked through a legislation. If no such proposal is in the recommendations, it’s the responsibility of the government to invoke a provision for an exit plan to ‘declare’ and ‘dispose’ the cryptocurrencies which are currently being held by the crypto investors.