Few days back a reader's query about something which is purely virtual in nature and generally not much known to people including even best minds in investment, prompted me to do some extra home task before responding to the query. The reader had asked about investment in virtual currencies, precisely known as cryptocurrencies.
Even as there is much talking about this type of currency among the people, the fact is that even bankers, financial consultants and professional investors too have very limited knowledge about it. And you can well understand the plight of common people who often fail to even understand the basic concept about cryptocurrencies.
So in an atmosphere when virtual currencies are still beyond the comprehension of majority of us including even the financial experts/consultants, seeking an investment advice in this type of currency seems premature. However after the urge of the reader to know about the right track of investment in cryptocurrency, it makes a sense today to know and share what this cryptocurrency is all about.
At a time when demonetization has shaken the confidence of people on Indian currency and general public scrambling for alternative payment and investment options, the virtual currency can be seen as a strong alternative in the digital money segment.
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, the virtual currency has two properties: transactional and monetary properties. As far as transactional properties are concerned, the transactions are irreversible after it's confirmed.
If the government's unstoppable push towards cashless (digital) transactions is taken into account, then in near future cryptocurrencies gaining legitimacy for business transactions, etc. will emerge as the preferred fund transfer tool. 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.
Notably, in the aftermath of demonetization of high value currency notes of 500 and 1000 rupees and when technology is being invoked to its full potential to play a crucial role in transforming the digital economy, scope of adopting digital currency taking the lead seems huge. Reportedly, in India over one lac user base of cryptocurrency in Bitcoin with an estimated total turnover of Rs 300 crore. Besides, industry experts have forecasted Bitcoin all set to expand its user base with annual growth of 200-300 per cent.
Although the cryptocurrency has gained broader acceptance and growing user-base, the laws and regulations around bear some question marks. There's scare vis-a-vis this virtual form of currency. Though perceptions seemed changing when in June 2013 the Reserve Bank of India (RBI) formally touched upon the topic of virtual currencies in a report on the financial sector. However, in December 2013, the regulator issued warning cautioning users of virtual currencies against risks at the time when India already had few cryptocurrency exchanges and services running. This impacted the operations and the virtual currency trading was called violation of the Foreign Exchange Management Act (FEMA) rules.
However, in December 2014, the then RBI Governor Raghuram Rajan infused new blood among investors when he said, "I have no doubt that down the line, we will be moving towards a primarily cashless society…and we will have some kinds of currencies like this (bitcoin) which will be at work." He further added, "I think these virtual currencies will certainly get much better, much safer and over time will be the form of transaction, that's for sure."
Despite this, confusion over the legality of the cryptocurrency still prevails. The government is seriously looking at virtual currency exchanges as money laundering tools.
(The views are of the author & not that of the institution he works for)