Of all the wonderful things that happened in 2017, the surge in popularity of cryptocurrencies has been the most fascinating. From retail investors in Japan to tech enthusiasts in India, bitcoin has held the attention of governments and individuals alike.
In May 2010, the first real world transaction of bitcoin was carried out, where a person bought 2 pizzas for 10,000 bitcoins in the USA. In December 2017, with the same number of bitcoins, this person’s wealth would have been roughly Rs 900 crore. This frantic wealth creation has made everyone sit up and take notice of cryptocurrencies or bitcoins. There are several types of cryptocurrencies, but bitcoins are the most popular and that is why the terms are sometimes used interchangeably.
Let us first understand what a bitcoin is and why it is so unique. Bitcoin is basically a virtual currency that is based on technology. Unlike say money in your e-wallet, which is regulated by a government and can be dealt with, in exactly the same way as its physical counterpart, bitcoin has no physical counterpart. Instead there is a long line of security code. Bitcoins cannot be printed or published, these are ‘mined’. When we use the word ‘mining’, it means these are codes, which are cracked using painstaking mathematical calculations over computer systems connected to the Internet. When you sell a bitcoin, the buyer will decode this security code. These codes are enlisted on a sort of a digital book, where these are validated. Each bitcoin can be validated electronically. This mechanism of mining is profoundly complex.
The fact that bitcoins are completely decentralized and unregulated has added to their popularity. You can trade your bitcoins anywhere in the world without worrying about any exchange rate controls. Bitcoins are priced purely based on demand and supply. So, basically its price is the value a person may be willing to buy for or sell at. Besides the value of a bitcoin is secure, as no central bank or country can release more currency to devalue a bitcoin. In fact, it is said by the year 2040 no more than 21 million bitcoins can be mined. Mining of every successive bitcoin is harder than before. All of this makes bitcoins regulation free and yet a fully secure way to transact anywhere in the world.
Governments across the world have been struggling with laws around taxation of gains. There is intense fear across the world of bitcoins becoming a safe haven for unaccounted wealth. Bitcoins are also accepted in several parts of the world in exchange of goods and services. This means you can use it like any other currency. Since its value is borderless and it is uncontrolled by governments, these are becoming a cause for concern for many economies. Transactions may take place without use of real currency and in a way remain outside borders. Some governments have started to define how gains from bitcoins will be taxed.
There has been significant regulatory oversight to understand its pricing, to help cover the possibility of money laundering. We believe governments around the world will invest more time and effort to understand bitcoins and to bring them under some form of regulation and control. While this may impact pricing in the interim, it could lead the way for bitcoins to become a globally acceptable way to transact. Governments may approve exchanges where bitcoins can be traded and allow trading only via these qualified exchanges.
Bitcoins will continue to be popular across the world in 2018. And are likely to see more price volatility. Technology evangelists will continue to involve themselves in the world of cryptography and be fascinated with it. Conservative investors will stay away from these currencies avoiding the lack of transparency and absence of regulation. Could we see enthusiasts go a bit further and launch futures trading of bitcoins? That is definitely a possibility. The world is now saturating with options to invest your money in. Property, stock markets, gold are already overdone in some markets. Therefore, some wealth is likely to pursue bitcoins and sustain them. Some experts have also cautioned against a bitcoin bubble. In a nutshell, bitcoins will continue to spike hysteria and hog headlines around the world in 2018.
(The author is CEO & Founder, ClearTax.in)