What is the common thing we all share? No matter where we live, we all need food, shelter, water and money. A majority of our transactions occur in money for exchange of goods and services, stocks, etc, and a lot of us spend our lives accomplishing our dreams and chasing money. In early days, we exchanged goods for goods, then currency got discovered, and now comes the next development—from hard cash to digital currency, or cryptocurrency, such as ethereum, bitcoin, iota, dash, etc. Among these, the value of bitcoin is increasing at rocket speed. At the beginning of this year, its value was around $1,000, and now it has touched $15,000. Why is this happening? And is it a good sign? One of the reasons for its popularity is constant publicity. Also, countries like Japan have accepted bitcoin as a legal digital currency. The US also permitted bitcoins to be traded in futures markets, supported by an analysis that says the value of bitcoin has crossed the GDP of New Zealand, its value is more than that of Boeing and has crossed Warren Buffet’s wealth (along with stories of someone who bought bitcoin in 2010 and where has the value reached and so on). Such positive statements doubled the demand for limited supply of cryptocurrency. In fact, it is the demand from an increasing number of investors which is creating a surge in bitcoin valuations. The first step for cheating others is to stimulate the desire/greediness of others, and that is what bitcoin is doing right now. In India, its price is 20% higher than in international markets because of demand.
As of now, central banks/regulators are silent on bitcoin. But the number of investors is increasing; they are anticipating they will make huge abnormal returns. However, bitcoin is not a currency that creates value for each individual investor. As we see in capital markets, a winner’s gain is a loser’s loss. Even the game theory says everyone cannot be a winner. This fundamental principle is being ignored by investors who are investing in bitcoins. So, this is the right time for regulators to pitch in and share their formal opinion about cryptocurrencies. In the market, there are disclaimers like “Mutual funds are subject to market risks…” and consumer awareness initiatives such as “Jago Grahak Jago” to protect investors’ and consumers’ interest. In addition, there are advertisements to educate consumers on financial literacy about such financial products that can be risky. We have witnessed how the capital markets in the country have emerged over the last two decades. The Sensex was at the level of 3,000 in 2003; it took more than a decade to reach 30,000. It took so long since capital markets were under the scanner of regulators, even then we have seen all sorts of scams, frauds and undue advantages of insider trading. On a continuous basis, the government also created awareness about stock markets and mutual funds to protect investor investments. A point to be noted is that digitalisation and demonetisation helped the capital markets to touch high indices in Sensex and Nifty.
Coming to the point, the regulators, as of now, are not concerned about bitcoin because a small portion of investments is going into cryptocurrencies. What will happen if a large number of investors shift investments from capital markets to bitcoins? In fact, such a shift might happen soon. The trend appears to have started, to move out of capital markets to cryptocurrencies such as bitcoins. Who knows, a majority of investors may follow the trend! Past records of bitcoin show several stomach-churning moments where its value has fallen suddenly by 40-50% in a single day, without any warning. The April 2013 bitcoin meltdown where the currency fell by over 70% overnight from $233 to $67 still haunts many. What if the same situation repeats? Will the investors be able to bear the loss? Because many are investing just to earn more money in a short span of time, or fast money. Finally, if a code creates a currency, then professional coders working in IT companies will make their companies rich by minting new bitcoins, on a 24×7 basis, but not the investors.
M Chandra Shekar & Kumaran R
M Chandra Shekar is ICSSR fellow and assistant professor, Institute of Public Enterprise, Hyderabad.
Kumaran R is student, PGDM-IB, Institute of Public Enterprise