“The ascent of money has been essential to the ascent of man.”
- Niall Ferguson in The Ascent of Money: A Financial History of the World
As human civilisation progressed from barter deals to paper tenders and then to online transactions, we moved towards binary wealth. We evolved in sync with the evolution of money and reached the age of cryptocurrencies.
The death of a young chief executive of a Canadian cryptocurrency exchange cost his clients $250 million simply because his password could not be cracked. Gerald W Cotten did not share with anyone the access to his offline folder where he had stashed the investors’ money to fend off pirates. At the end of a long fight to recover their money, the investors had to accept the loss. There was none to redress their grievance.
Welcome to the unbound and unregulated wild world of cryptocurrency where fate hangs in a fine balance and fortune is encrypted.
From buying a Bentley to losing it all – investors in the crypto space have had myriad experiences along the course of their journey. Traders booked a record loss of $4.53 billion on May 19 alone and $14.2 billion for the week when the market crashed nearly 50 per cent amid a frenetic sell-off by investors, who had pumped $17 billion into the industry in the last six months. The untamed volatility of cryptocurrencies resembles that of a wild stallion – more unpredictable than the charging bulls or the biting bears of the stock market. And, there’s no watchdog to control the $1.33-trillion market.
Despite a rapidly increasing demand across the world, most governments loathe cryptos because of this regulatory uncertainty of the instrument. Investors run the risk of being pulled up by various authorities for their transactions and, the biggest concern is the lack of a monitoring agency to resolve their issues.
Crypto is not a crime in India now but is still out of the legal ambit and the government is yet to reveal its stand on the virtual asset. Cryptocurrencies and crypto assets were banned in India from April 2018. “The government does not recognise cryptocurrency as a legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payments system,” then finance minister Arun Jaitley had said.
In March 2020, the Supreme Court announced culmination to the Reserve Bank of India’s April 6, 2018 decision that restricted financial entities from providing services to cryptocurrency players. While lifting the ban, the apex court said that the RBI was unable to provide evidence on the potential harm to banks from cryptocurrency players.
This was a turnaround time for cryptocurrency in India. The long lockdowns form March 25, 2020 took cryptos to an inflection point as mobile phones became the lifeline for most of us through the nation’s battle with the Covid-19 pandemic. In the sweeping wave of digital disruption, cryptos became an instrument of choice for their three fundamental properties – they are electronic, they are not liability of anyone, and they allow peer-to-peer exchange.
Cryptocurrencies are bought and sold like stocks in stock exchanges. The main difference is that there is no physical feature to the instrument. There are several exchanges to buy and sell cryptos and the investor needs to pay a fee for trading. The charges vary across exchanges and across currencies being traded.
In the absence of any regulatory mechanism, there is no circuit breaker or warning system, for crypto trade. The inherent volatility of the instrument stems from the fact that the assets can be traded in minute fractions. Cryptos can be divided up to several decimal places and an investor can buy even a fraction of a currency. Selling cryptos is classified as a business and one has to pay taxes according to business and professional tax slabs and, as an investor, profits would fall in the ambit of capital gains tax.
The pandemic has brought a change in consumer behaviour. Investors are now exploring new-age options and going for assets like cryptos such as Bitcoin, Ripple and REIT while holding some liquid cash as emergency funds. “Most crypto assets have grown and users investing systematically tend to benefit over time. A Bitcoin SIP has outperformed other forms of investing by 10 times over the last five years,” says Gaurav Dhake, Founder and CEO of Bitbns.
While Bitcoin, Etherium, Litecoin or Dogecoin have made substantial inroads into our minds, there are over 10,000 types of cryptocurrencies in the market and most of them are unlikely to survive for long. The top 10 together account for almost 90 per cent of the market share. Bitcoin and Etherium make up for almost 65 per cent of the pie. This shows that all cryptocurrencies are not the same and it is imperative to understand the specific coin before one decides to invest in it.
In the post-Covid world, investors have focused their efforts on passive income investments, instead of speculative assets that only offer capital appreciation opportunity. Staking has come up as a tool to earn passive income out of cryptocurrencies. It lets the investor make money from holding cryptos and lend her assets in a secure and easy way while fetching interests on them. The average return an individual can earn is around 12.78 per cent per year, though the rate of return varies across currencies.
CoinSwitch Kuber CEO Ashish Singhal says there are various factors that differentiate the currencies from one another. These factors could be circulating supply and upper limit, cryptocurrency mining, and release rates. Other factors include reputation, decentralised applications, transaction speed, and scalability.
“Bitcoin and Litecoin are standalone cryptocurrencies but Ether and Ripple are a part of wider networks and expanded applications. Hence, their value is determined by the projects going around them. Ethereum has a lot of DeFi (decentralised finance) projects being built around it. Naturally, when these applications are adopted by mainstream businesses, the demand for its underlying currency would surge,” says Singhal.
DeFI application, a kind of blockchain technology, offers a myriad financial solutions like savings account, lending, payment, structuring of derivatives, investment and trading options.
Unlike stocks that indirectly derive their value from the performance of the underlying companies, or currencies that derive their value from the guarantee of the central banks, cryptocurrencies derive their value from factors like user demand, scarcity and utility.
“Working under an uncertain regulatory environment comes with its own challenges. There have been challenges in partnering with the banking industry and payment gateways. However, the recent RBI circular clearly stated that its 2018 order to restrict banks from dealing with cryptos is no more valid,” says Avinash Shekhar, Co-CEO of ZebPay, one of the oldest cryptocurrency exchanges in India.
Gerald Cotten of Quadriga was in India where he fell ill and passed away in 2018. Crypto was illegal in the country then. Three years on, India’s nascent crypto ecosystem is still wobbly with less than a dozen exchanges in operation now. These crypto exchanges are set up and managed by graduates and post-graduates from IITs and IIMs.
They have experience with multinational marques like Google, Ola, Amazon, Flipkart, Twitter and Facebook and are aware of the intricacies of the Indian legal system and are now trying to break the shackles by presenting a united front.
In the absence of any well-defined regulatory framework, the crypto exchanges in India are associated with the Internet and Mobile Association of India (IAMAI). They are working on a code of conduct for cryptocurrency companies in India and a draft version of the charter is ready. It lists guidelines for KYC/AML and other regulatory features. “Until there are clear regulations from the government, we will continue to work together to self-regulate and operate in line with the existing laws,” says Shekhar.
The government plans to make an educated and calibrated approach towards cryptos and the crypto industry. “We have seen over a five-fold increase (year-on-year) in the number of users from last year. This is despite the lack of clear regulation around crypto,” Shekhar says. His company works in India and Australia and runs a global exchange out of Singapore, serving clients across 162 countries.
A rapidly growing demand for cryptocurrencies has fostered the growth of crypto exchanges in India. These exchanges work 24x7, churning out a monthly trading volume of $3-5 billion, which is less than 0.01 per cent of the global market. In step with the rising demand, Indian crypto bourses are drawing global attention.
Binance, the world’s largest cryptocurrency exchange by trading volumes, acquired WazirX, an Indian exchange, in November 2019. Last year, another Indian exchange, CoinDCX, secured financing from Seychelles-based BitMEX and San Francisco-based Coinbase. These investments took place despite the fact that the Indian banking system was averse to accept cryptos even after two years of lifting the ban.
Most crypto traders in India fall in the 20-40-year age bracket. The exchanges have laid out a strict due diligence procedure through know-your-customer (KYC) norms for the investors to keep off any dubious entity in the volatile instrument. India’s demographic dividend plays crucial to the growth of the crypto industry in the country. With an average age of 29 years, the 1.3-billion-strong nation is one of the youngest in the world.
“This predominantly young population is tech-savvy and far more adaptable to cryptocurrencies than most other nations,” says Harish BV, Co-Founder of Unocoin, which has a userbase of 13 lakh in India.
The dynamics is favourable for India’s flourishing start-up ecosystem. “Start-ups want to set their roots in initial stage so that when the phenomenon of crypto becomes bigger they are in a comfortable situation. The best part is it is virtual. There is nothing that can be confiscated like gold or bank accounts,” says an industry insider, refusing to be identified. He suggests that the crypto phenomenon is for HNIs and big businesspersons. For a common man, it’s a gamble that should be played very carefully.
Arjun Vijay and Vikram Subburaj, of Giottus Crypto, caution that investors need to understand the nature of assets. At a very early stage, the assets show up high volatility. Most of the crypto users suffer either from the fear of missing out (FOMO) or go for panic buying or selling out of a perceived fear, uncertainty and doubt (FUD).
It is the same psyche that determines the trend in securities. Equity market statistics show that more than 90 per cent of traders lose money and only 10 per cent or less manage to make gains. By doing frequent trades, users lose more money on the volatility, than on trading fees.
“People usually end up buying at high and selling at low, while it should ideally be the other way round to be in profit,” points out Subburaj of Giottus. The company advises its customers to trade less and treat cryptos as a long-term investment. “This is against our business model, yet we follow this because we care for the users’ portfolio. We lose if our customers burn their money and never try crypto again.”
No matter how much the government detest the virtual currency, India cannot do away with blockchain, which it needs to support its increasingly digitised economy. The spiralling demand for cryptocurrencies is pushing the government to adapt to the binary wealth with proper regulatory framework and security system to safeguard the investors.
A Quick Catch-up with Crypto Exchanges
Gaurav Dahake Founder & CEO, Bitbns
Avinash Shekhar Co-CEO of ZebPay
Vikram Subburaj and Arjun Vijay Co-founders, Giottus Cryptocurrency Exchange