MUMBAI: The birth of cryptocurrency in 2008 was based on the idea that it could one day function as a common currency system that would help replace the inefficiencies of the current centralized system around the world. The idea of an internet cash system, the emerging blockchain technology that should allow people to trade with one another without a third party checking, like a central bank. The peer to peer system that emerged in the midst of the global financial crisis solved the problems that had preoccupied cryptographers since 1992.
Fast forward to 2021. Nowadays, more and more people are looking at cryptocurrencies as an investment vehicle rather than a currency; In fact, the view that a cryptocurrency like Bitcoin could become a widely accepted currency is now limited only to the Bitcoin maximalists. In India, where cryptocurrency acceptance is increasing rapidly, companies that are active in this area are moving away from the ideas of Satoshi Nakamoto, the pseudonym of the person who developed Bitcoin, to paint cryptocurrencies as an asset class. They are trying to convince the government and the monetary authority against banning this form of digital cash.
“There’s a huge misunderstanding … you can’t get Bitcoin (a deflationary asset) to compete with the rupee (an inflationary currency system),” said Nischal Shetty, CEO of WazirX, at the ETMarkets Conclave in February. “Using Bitcoin for everyday transactions because of its high cost. “But does a cryptocurrency have the attributes of being a“ good ”asset class? “To be honest, it’s more like the Wild West at the moment. This asset class is plagued by fraud, fraud and abuse in certain applications. In many cases, investors cannot obtain accurate, balanced and complete information, ”said SEC chief Gary Gensler at a recent event.
An asset class is defined as a group of instruments that share similar characteristics and are subject to the same regulations. According to Chakri Lokapriya of TCG Asset Management, a good asset class should have liquidity, stability, value and low transaction costs. “The asset class that can show stability in most of these characteristics can be described as a “good asset class”, Lokapriya told ETMarkets.com. Even the most ardent proponents of cryptocurrencies have struggled to deal with the inherent volatility of these instruments. Cryptocurrencies are often prone to sudden failures, which can be attributed to a number of factors, such as the sudden departure of a large investor or systemic failures in cryptocurrency exchanges.
While Bitcoin has improved liquidity significantly with the introduction of tiny coins called satoshi’s, others remain scarce prone to sudden bouts of liquidity. One of the top concerns among crypto investors has been large holdings of cryptocurrency. The so-called whale investors, whose output may come a drop in the market. The market risk is therefore one of the greatest weaknesses of cryptocurrencies. The high transaction costs of trading Bitcoin, Ethereum and other cryptocurrencies is another factor that is working on the asset class. In April, the average transaction fee on Bitcoin was at a historic-time high of $ 59 following China’s crackdown on the country’s Bitcoin miners. The high transaction fee is also one of the main arguments used by traditional investors to dismiss the usefulness of cryptocurrencies as a medium of exchange.
Bitcoin’s high transaction fee is also caused by the high energy costs miners face in order to keep their mining farms running around the clock. According to some reports, the amount of energy used to mine Bitcoin is higher than Argentina’s electricity consumption. The role of cryptocurrencies as a store of value is still open to the jury. While a Bitcoin is worth Rs.36 lakh today, many still doubt its ability to function as a stable store of value due to the high volatility that goes with it. It has been equated with digital gold because its range is slim. Skeptics like Nassim Nicholas Taleb say the real value of Bitcoin is zero. The author and risk analyst said in June that Bitcoin cannot be a short-term or long-term store of value, it cannot serve as a reliable inflation hedge, and “worst of all, it isn’t even remotely a rear-guard vehicle for catastrophic episodes.”
However, many institutional investors and Fortune 500 companies are using Bitcoin and other cryptocurrencies as a hedge against their expectations of high inflation in the future, as well as black swan events such as the Covid19 pandemic. Companies like Tesla and MicroStrategy have already converted some or all of your credit. Recently, a Texas-based biotech company converted its cash into bitcoin to avoid a “bank overrun”. Technical factors aside, one of the biggest barriers to accepting cryptocurrencies as a good asset class is regulatory uncertainty. The US SEC has already requested powers from Congress to regulate both crypto tokens and the entire decentralized financial framework, and in India, crypto investors and entrepreneurs want the government to regulate the industry so that innovation can flourish and doubts about money laundering can be dispelled , Fraud and terrorist financing.
Asset managers and advisors speak of high yield investors willing to invest in cryptocurrencies through the right channels but unable to do so for fear of law enforcement. In some countries regulators have shown a willingness to regulate cryptocurrencies like an asset class and enable assets management companies to launch instruments such as exchange-traded funds, cryptocurrency-backed bonds and the like that provide access to ordinary investors in a risk-controlled environment. Perhaps, among the many problems that cryptocurrencies have to tackle to be acknowledged as a good and viable asset class, regulation could be the first step in the journey. With Finance Minister Nirmala Sitharaman proposing a more calibrated approach to cryptocurrencies in the proposed cryptocurrency law, investors will hope that the death of a utopian coin will lay the foundation for a stable asset class.