It is quite evident that ‘Cryptocurrency’ has become the buzzword after the record-smashing rally of Bitcoin(BTC). Abnormal returns on BTC have instigated the feeling of FOMO(fear of moving out) in the investing community. Everyone wants to taste gains in this ‘Booming’ asset but the brutal truth is that it’s not for everyone. Only investors with an enormous risk appetite or who believe in the underlying technology should test the depth of this river. Cryptocurrencies are inherently volatile and their volatility is one of the reasons fortunes are made in this market. There lies a huge upside potential if it breaks out in mass markets like Asia and South America. This dangerous volatility won’t stop till there is mass-market momentum, till then it will be risky for defensive investors. The ‘Bears’ predict a brutal ending while the ‘Bulls’ call it just the beginning of a revolution in the financial system. While the ‘Bulls’ and ‘Bears’ may have conflicting views, the fact of the matter remains that in this decade one cannot ignore the presence and potential of cryptocurrency. Let’s understand the meaning of cryptocurrency
Cryptocurrency is an asset used as a means of exchanging value, it is considered reliable because it’s based on cryptography. Cryptocurrency uses blockchain and decentralized ledger to eliminate the need for a central authority. It means that no supervisory authority controls all the actions in the network, which allows it to reduce the threat of cyber attacks and data theft. The decentralization would involve only two parties in the transaction, i.e., the sender and receiver. You no longer have to deal with any third party, this helps in eliminating the high transaction fee charged by our traditional banking system. Cryptocurrencies are safe, reliable, transparent and easy to use.
Due to Covid-19, people all around the world were forced to use digital payments. Many experts believe that this trend is here to stay due to the ease of online payments. Digital payments are currently controlled by central authorities which leads to delay and requires collection of irrelevant personal data before activation. Unlike a decentralized system, the centralised system becomes the storehouse of personal data of all clients. This data in a centralised system is more vulnerable to get hacked and may be transferred to law enforcement agencies at court request. In a nutshell, privacy becomes a myth. Cryptocurrency provides a solution to eliminate all impediments to easy and real time transfer of money. Just like digital currency is replacing cash, cryptocurrency will replace digital currency due to its numerous benefits. Many institutions have talked about this theory of replacement like the Deutsche Bank in its report called ‘Imagine 2030’ said, “ Cryptocurrencies are currently just additions to the current money payment system however, in the next decade they could be a replacement”.
We are at a point where investors and regulatory bodies have to take a stand whether to allow cryptocurrency as a legal tender or not. Most of the developed countries have accepted the presence and usability of cryptocurrency in their economy. Indian Government is willing to explore the underlying technology of blockchain but turns a blind eye to the existence of cryptocurrencies. It will lead to loss of opportunities for budding entrepreneurs. Early adopters of this technology are creating new business opportunities and models at a fast pace. India has the largest pool of ‘Engineers’, with the help of sound policies Indians too can create zero to one innovative business models in the world of crypto.
Cryptocurrencies are gaining recognition throughout the world. Small bitcoin transactions have increased from 20 million in 2017 to 38 million in 2020. Last week, its market capitalisation touched the $1 Trillion dollar mark which hints that Cryptocurrency is here to stay. Paypal, the payment gateway giant has announced that it will now provide the facility of buying, holding and selling cryptocurrency. This will lead to retail investors entering the crypto market. Few restaurants and businesses have started to accept BTC as a mode of payment. The price of BTC will keep on increasing as more and more people use it in their day to day lives.
There is no doubt that USD is getting weaker due to an increased supply of it by the Federal Reserve and consistent stellar gains in the emerging markets. Many institutional investors are viewing Bitcoin as a hedge against inflation and an alternative to a depreciating USD . One can also say that bitcoin has become a rival of gold. While Bitcoin has marked new highs, billions of USD have fled from gold, resulting in gold taking a hit. Millennials prefer to buy Bitcoin aka ‘Digital Gold’ instead of the bullion, this has led to a competition between gold and Bitcoin. Some analysts believe that Bitcoin is too volatile for hedging, cryptocurrencies trade without any circuits so a bad day may bring a 20-30 % reduction in price of BTC. On 11th January 2021, crypto market nearly $170 billion due to mass profit-booking and sell off from miners. A mass market-momentum will bring stability to the crypto market, which will further make it a safe haven for hedging.
In the pursuit of this so-called ‘revolution’ one may forget to see it from a sober view, thus disregarding all of its downsides. Bitcoin’s anonymity is also a powerful tool for financing crime. For Pablo Escobar’s cartel the toughest task was to bring the money realised from the sales of cocaine in the USA back to Columbia. Storing tons of 100 dollar bills was also a problem for all drug traffickers and criminals. In Bitcoin this problem of moving and storing physical money doesn’t exist, making it a preferred choice for all dark web operators. According to Elliptic, a U.K. based blockchain analytics company the number of criminals using ‘wallets’ to facilitate crypto-money laundering are on the rise. There is an urgent need for law enforcement agencies to address this issue. One of the prerequisites of eliminating it is to accept the presence of cryptocurrencies in the economy. Turning a blind eye to cryptocurrencies is no longer an option for Governments across the world.
It is rightly said that change is the only constant in this world. But our reactions to change are never the same, some accept it with open arms and some try to resist it. It is very important to weigh the positives and negatives before jumping to conclusions. The Internet was resisted by many in its early days but now it’s impossible to imagine a world without the internet. Blockchains are referred to as the greatest new disruption after the internet. It is expected to grow at a Compound Annual Growth Rate(CAGR) of 67.3% from 2020-2025. Cryptocurrency is just one application of blockchain, the world is full of some unexplored opportunities and we must be nimble to seize them after weighing the harms and benefits.