Saturday, Jun 25, 2022
Outlook.com

Why Have Cryptocurrencies Been In The Eye Of The Storm?

With regulators and governments still unsure about their policies regarding decentralised digital currencies, investors have been left in a lurch.

Why Have Cryptocurrencies Been In The Eye Of The Storm?
Bitcoin coin with money

Just this week, 44-year-old Changpeng Zhao, CEO of cryptocurrency exchange Binance, became one of the richest persons in the world with a net worth of $96.9 billion. However, this could be an underestimate, as this net worth does not include his holdings in cryptocurrencies and Binance’s token known as Binance coin (BNB), which has been trading in the $500/token range recently. Add all these to his net worth, and Zhao is possibly the richest person on this planet. However, except El Salvador, almost all countries including China, Russia, Indonesia and India do not allow cryptocurrencies to be used as fiat money or legal tender. Governments and regulators are generally unsure about how to deal with it. So, it’s no wonder that cryptocurrencies have invoked mixed, and extreme, emotions from regulators and governments. Investors are left in a lurch – should they commit to cryptocurrencies or not.  

Clearly, there are a lot of people willing to bet on cryptocurrency’s future. There are 100 million Bitcoin owners and 53 million traders globally. Some 22 per cent of Americans own bitcoins. In India, the figure stands at 400 million cryptocurrency investors, according to various estimates. Overall, the total market size of cryptocurrencies is a huge $2.1 trillion. Out of this, Bitcoin has a market share dominance of about 40.2 per cent and Ether 19.9 per cent, at present. The market cap has grown from nil to $2.1 trillion in just 13 years.  

Bitcoin was the first cryptocurrency, launched on January 3, 2009. That was a crucial period in global markets as the sub-prime crisis had taken a heavy toll on the world stock markets and global economies. It also exposed the flaws in centralised banking systems. Of course, in the post-subprime crisis era, several governments chose to deal with the situation by printing notes and spending their way out of the situation – something that has led to a multi-decade high inflation in many countries.  

The Covid situation led to more printing from countries to fight the disease as well as to stop their economies from going into depression. For example, the inflation in the US stands at 7 per cent – the highest since 1982. In India, the consumer price index (CPI)-based inflation stood at 5.59 per cent in December, even though the Indian government hasn’t been printing money and spending to shore up the economy. More than 40 per cent of the currency in circulation globally was printed in the last two years. This means, if you are not invested in an instrument that is beating inflation, you are getting poorer by the day.     

The rise of Bitcoin and 20,000 other cryptocurrencies (2,000 actively traded; the rest 18,000 don’t have enough liquidity) has to be seen against this backdrop. Global currencies, controlled by central bankers, have a large number of uses. Most importantly, they can be used for retail transactions. However, Bitcoin is more like gold or diamond—they are scarce in supply (21 million) and therefore, command a higher price.  

Goldman Sachs, which has restarted its cryptocurrency desk in 2021, predicted in a recent note that Bitcoin will take away market share from gold in 2022. However, all cryptocurrencies don’t have a limited supply. Some, such as Ether, have an infinite supply, but the annual supply is limited to 18 million.     

  

Why Are Regulators Uncomfortable? 

A decentralised and digital currency means that there is no one controlling it. Investors across the world can invest in it and the demand-supply equation is taken care of by the existing network and protocol – one which has millions of people involved in the process. So, there is no need to have a third-party regulator. In contrast, the onus lies on the Reserve Bank of India to honour the rupee, since the note says: “I promise to pay the bearer the sum of ...”. The same applies to other global currencies.  

Obviously, with the element of control being taken away from all regulators and government, cryptocurrencies cannot be added/reduced to say, buy their way out of an economic crisis or a pandemic situation. The lack of control makes regulators as well as government extremely nervous.  

  

Going forward, regulators and governments need to look at cryptocurrencies as something that is evolving. Its value has to be judged from the fact that millions are willing to invest in it. Much like shells, stones or gold became ‘standards’ during different periods. Gold, for instance, was the base for printing currency notes for a long time before the latter created a ‘standard’ of its own. So, the 13-year-old cryptocurrency market needs to be given space to grow in a regulated manner and stand on its own feet. After all, a teenager needs space to grow and become an adult. Of course, the watchful eye of an elder (the regulator) is welcome.   

  

The writer is Sidharth Sogani, CEO of CREBACO Global, a crypto focused research and rating firm.

 

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly. 

Advertisement
Advertisement
Advertisement