Decoding Crypto Currency
Very soon you may not need to have dollars or Euro to buy a Tesla Electric car. All you need is bitcoins! And indeed it looks as though you can make windfall gains and sometimes losses also investing in virtual currencies. Bitcoin prices rose 1430% in 2 years to hit $61,556.9 in mid-March 2021. When compared with a paltry annual return of 6.92% and 40% in five years in gold, bitcoin indeed looks attractive even if it has now fallen to $50,000levels. Elon Musk, founder and CEO of Tesla has made $1.5 bn in bitcoins. Several investment advisors have emerged in the online and social media offering advice on bitcoin investments and how you can become rich overnight.
Bitcoin, the world's first digital cryptocurrency was launched in October 2008 following the aftermath of the global financial crisis. The rise of cryptocurrencies mirrors the erosion in trust of governments following the financial crisis and anger at the resulting bailout of the US financial system. The currency is controlled by a decentralised network of users and allows people to pay for goods and services. Transactions are recorded in a publicly distributed ledger called a blockchain, which protects the identity of the user. Now there are 1448 cryptocurrencies in the world that are developed using algorithms.
Types of Cryptos
Cryptocurrencies like Bitcoin, Litecoin and Dogecoin only provide basic functions such as transferring value from one party to another. The second type is smart contract cryptocurrencies such as Ehtereum, Cardano, Neo and Waves. It can be programmed and hence can become the basis for applications like games and digital markets. The third type is designed to preserve the privacy of the user such as Monero and Zcash. These claim to be ‘untraceable’ although transaction records are still available. Cryptocurrencies use blockchains, a technology-based alternative to trusted parties such as banks or financial institutions. Blockchain doesn't require a trusted party between two sides of a transaction. Here the transaction records are added by the network of computers using cryptography and only created if agreed by the majority of computers in the network.
Dogecoin: From Fun to ‘Currency of Earth’
Dogecoin has become the 6th most valuable cryptocurrency in the world. The coin was conceived 8 years ago as a meta-joke about monetary value and the internet. It comes with the mascot Shiba Inu, an oft-meme dog breed. It is the most inexpensive cryptocurrency now priced at 40 cents moving quickly from 6 cents recently. Elon Musk, Tesla Founder is now an ardent fan of Dogecoin. He tweeted: “Dogecoin was made as a joke to make fun of cryptocurrencies, but fate loves irony. The most ironic outcome would be that Dogecoin becomes the currency of Earth in the future.” He also said Doge spelt backwards ‘Egod.’
Is Cryptocurrency Real?
Cryptocurrencies don't come under the definition of cash. One of the important requirements of legal tender is that is it requires sovereign-government backing. They also don't fit into the traditional shape of a financial instrument or asset. Cryptocurrency is not a tangible asset that might be defined as inventory. Bitcoin is a complex computer program that enables transactions and they are developed by IT entrepreneurs. According to researchers at Monash University, Australia, major cryptocurrencies are slow in processing massive amounts of data sent by users. The technology used to secure the data is expensive and inefficient. Bitcoin can only handle a maximum of seven transactions per second; Ethereum can handle 15 transactions per second. Comparatively, the VISA payment system can process up to 56,000 transactions per second. Bitcoins consume a large amount of energy per transaction.
How to Lose a Crypto?
A currency note or coin can be stolen, misplaced or lost due to carelessness. But Bitcoins are lost mainly due to forgotten passwords and backup problems. A man purchased 1000 bitcoins when it was cheap. In December 2020 when its prices rose to US$17,900 the value of his bitcoins rose to US $17.9 mn but he couldn't cash it as he had lost his password. Dr Joseph Liu, cryptocurrency pioneer and Associate Professor at Monash University said the man launched a fundraising campaign asking people to give money to him so that he can find some expert to recover the password!
Crypto Pioneer Joseph Liu
Even as Bitcoin was the first cryptocurrency to be launched in 2008 the credit for introducing the concept of cryptocurrency goes to Joseph Liu, now Associate Professor Cyber Security and Systems at Monash University, Australia. His PhD thesis was on how to secure the anonymity of people who were buying and selling goods on the internet, using cryptographic algorithms. He mooted the idea that the web could be used to devise a peer-to-peer system of currency exchange, without involving banks or central authority.
The Future of Crypto
Facebook with over 2.5 billion users has announced its intention to launch a cryptocurrency or Libra tokens. FB says that Libra will help over 1.7 bn people who don’t have bank accounts to make digital payments. According to Joseph Liu of Monash University, there is nothing to be afraid of FB’s cryptocurrency. Libra will be linked to existing major currencies such as the US dollar and the Euro. It will be a 'partially decentralised' cryptocurrency. WeChat, a social media service, is used in China by people to buy Coca-Cola, coffee or train tickets. However, it is unverifiable as it works in a close system, Liu says.
Dr John Vaz, Senior Lecturer, Banking and Finance at Monash University feels that despite the better control and private over cryptocurrency transactions, there are some negative consequences including unrecoverable losses due to the inability to track and identify transactions. Many countries have put strong regulations to prevent the widespread use of cryptocurrencies or their misuse. Dr Vaz is of the view that cryptocurrencies are yet to be proven to be ethically acceptable and trustable, unlike Fiat money which is backed by the government. It still lacks the function of money.
Crypto in India
In India, the Ministry of Corporate Affairs has asked companies to disclose their investments in crypto or virtual currencies. Companies will now have to declare the source of funds and profit or loss earned through crypto transactions. Crypto players have seen it as a positive sign that the Indian government has come to accept it as an investment asset. Cryptocurrencies were banned by the Reserve Bank of India in 2018 but it was overruled by the Supreme Court of India. Cryptocurrency exchanges enable buying and selling of cryptocurrencies. Among the top cryptocurrency exchanges in India are CoinSwitch, CoinDcx, ZebPay, WazirX and Unocoin.
The present speculative investment in bitcoins brings back memories of the Tulip bubble of 1637 in Holland when the commodity prices crashed all of a sudden, the tech bubble of the 2000s which was led by the speed of internet growth. Experts feel that the advancement of blockchain technology may have a role to play for the future of cryptocurrencies as well.
Major References: https://lens.monash.edu/@business-economy , Reuters, Gulf News