Trouble Currency
The path to investing in digital currency is full of pitfalls. Here’s why one must be careful while playing the game
Jyoti Gupta, 30, is a homemaker. She used to work as a real estate agent until slowdown hit the industry. While she was struggling to make ends meet, Bitcoins caught her fancy. Given the digital currency’s speculative nature, she earned good returns in a short period. “I have made good money over the past one year. I will continue to invest in Bitcoin,” she says.
Many people in India have started buying and selling crypto currencies, a digital currency where encryption techniques are used to regulate the generation of units and verify transfer of funds. These operate independently of a central bank. India has over one million Bitcoin users; the country accounts for almost 10 per cent trading in volume terms. According to a recent report by PHDCCI, combined trading volumes in India could be in the range of Rs 200–250 crore per month.
Trading in crypto, or virtual, currencies has surged due to extraordinary returns. For example, Bitcoin, the oldest and the most popular virtual currency, has given 30 times returns over the past four years. The value of the currency surged
from $100 in June 2013 to $3,025 in June 2017. Similarly, Ripple, a crypto currency based on inter-bank settlements, has given 200 per cent returns over the past three months ended July 31.
The other reason for such an increase in volumes is the low returns given by other asset classes such as real estate, fi xed deposits and gold. While awareness about Bitcoin and altcoins ( virtual currencies other than Bitcoin) has been rising, for investors, there are several concerns that they should be aware about. For example, Bitcoins are not backed by any tangible asset but sheer demand. Unlike other investments, there is no underlying asset; its value is measured by just demand and supply. Moreover, there is a lot of opacity behind their operations. For instance, no one knows who is behind the creation of Bitcoin. Most important, the crypto currency market is not regulated in India. If you lose money in a bank, you can complain to the Reserve Bank of India ( RBI). But for Bitcoin, there is no regulator you can turn to.
Given these concerns, the government formed a committee this April to give recommendations for regulating the crypto currency market. The committee members, however, have not reached any agreement yet. The report is still awaited. Several issues, ranging from who could be its regulator to how secure are these transactions, are being deliberated at the government level.
GENESIS OF CRYPTO CURRENCY
In 2008, after the subprime mortgage crisis, governments of a number of developed countries had to print billions of dollars to bail out banks and insurance companies. The surplus money weakened and debased several topnotch currencies. It was during this time that Satoshi Nakamoto (a name used by an unknown person) launched Bitcoin, through which one can pay each other without an intermediary. The idea was to have a currency with limited supply that was impossible to devalue.
Unlike central banks, which can print money on the basis of the needs of the economy, Bitcoin is mined by bots. When the algorithm was created, it was decided that 21 million Bitcoins will ever exist. At present, over 17 million are in circulation; it is expected to be fully mined by 2140. After Bitcoin, hundreds of altcoins have been launched. But Bitcoins have 40-50 per cent market share in value terms.
The underlying technology of digital currencies, including Bitcoin, is Blockchain. “It is a distributed database that maintains a list of transactions called blocks. It is secure by design and inherently resistant to modification of data,” says Prateek Ranjan Sengupta, CTO, Liberin Technologies, which is into cloud and web services.
Archit Tyagi, CFO, Bitxoxo, a Bitcoin exchange, says, “Unlike fiat currency, which is governed by law, Bitcoin is governed by the simple rule of demand and supply. It is similar to gold in terms of valuation and is governed more by demand and supply than external factors.”
GALAXY OF CRYPTO CURRENCY
Though there are hundreds of virtual currencies, most of the trading happens in just 10. According to the Coinmarketcap website, there are more than 1,000 crypto currencies in the world having a total market cap of around $90 billion.
Bitcoin is the oldest and the largest with a market cap of around $44 billion. At present, it is trading at $2,687. The website states that “Bitcoin uses peer-to-peer technology with no central authority managing transactions. It is open-source and its design is public. Nobody owns or controls Bitcoin and everyone can take part.”’
Ethereum is the second-most popular with a market cap of $18 billion; it is trading around $202.93. While Bitcoin is only a currency, Ethereum functions as a token and can run any application in a decentralised ledger. “It is a decentralised platform that runs smart contracts: applications that run exactly as programmed without