Would you believe me if I tell you that it is possible for a commodity priced zero to touch 5 million rupees mark in merely a decade?
Take the example of Bitcoin, the leading cryptocurrency that recently touched its all-time high price and just as easily became the most favoured hot topic by keen investors and media.
With the discussion of cryptocurrency in rise online as well as offline, I realized that this might be the perfect time to dive into this subject with the intention of helping the readers learn more about Bitcoin’s history.
Bitcoin’s Birth: The What, The How and The Why?
13 years ago, on 31st October 2008, a pseudonymous person/group of people named Satoshi Nakamoto published a paper on the Internet. Satoshi’s idea was novel to the world yet very clear and unambiguous from the very first sentence of the paper. A version of electronic cash that would allow payments to be sent directly from one party to another without going through a financial institution. Plainly put, cryptocurrency is a digital asset over which central banks or financial institutions have no control or regulation.
For example, Central Bank of US controls the US dollar and the Indian Rupee is controlled by the RBI but no financial establishments or banking entities control the bitcoins/cryptocurrencies.
Earlier, the idea of cryptocurrency was just that, an idea, but presently, trading worth lakhs, even crores happen every day on crypto exchanges, online platforms where one can exchange fiat money with cryptocurrency, like stocks are traded on standard stock markets.
In order to fully comprehend the paper of Satoshi and the context of cryptocurrency, we will have to understand some important concepts of our economic history.
Our financial systems are based on trust. Currency notes and coins hold value in our society because they are guaranteed by the central bank and the government. Take a look at any note in your wallet. Be it a 10 rupee note or a 2000 rupee note, it must unquestionably phrase, (for instance in a 100 rupee note) – “I promise to pay the bearer a sum of 100 hundred rupees.” This is a promise made by the Governor of the Central Bank i.e. the Reserve Bank. You will find his signature below as well. Any note would be of zilch value without this promise/guarantee. This same note would have been relegated to an ordinary piece of paper had it been signature less.
Let us travel further back in time to when and how the birth of various currency notes transpired.
After the World War II, America became the most powerful country in the world; the rest of the countries had to align their currency with the US dollar but what was the US dollar guaranteed by? A reserve of gold. The real value is that of gold or silver but it is impractical to carry gold or silver around in your pocket. The currency notes were printed for convenience but US did away with this gold standard rule back in 1971. Preceding that, the central banks of the rest of the countries could print their notes as they wish.
But what does Bitcoin, or broadly speaking, Cryptocurrency has to do with this?
It helps you estimate how powerful the government and the banks are, especially, the central banks, as far as monetary policy is concerned. The fact of the matter is that when you deposit your money in the banks, you give banks permission to play with your money. The banks provide loans to companies or individuals using these deposits and in turn, fetches interest on the money that YOU have deposited.
Not too far back in time, we have seen these very banks exploiting our savings and deposits in a haphazard manner incurring irreversible losses. It happens very often that these banks incautiously provide massive loans to so-called reputed industrialists without performing adequate checks and then these loans become bad debts/NPAs (Non-Performing Assets); no one but depositors like us become unfortunate victims of such cases.
In the span of last 20 months, three deposit taking institutions hit rock bottom – Yes Bank, PMC bank and Laxmi Vilas bank. Along with centralized banks, certain decisions by the government too, hold capacity to threaten the common man’s financial security.
Do you remember November, 2016? Demonetization! The government laid to waste all 500- and 1000- rupee notes in a single strike. 86% of Indian currency became worthless. Those in favour of Bitcoins and cryptocurrencies reason that they do not wish to grant the government or central banks
so much control over their hard-earned money and rightfully so.
Do you now grasp Satoshi’s idea of separating governmental institutions from private incomes by using digital platform as an ally?
Satoshi envisioned Bitcoin as an alternate financial system which would be based on software technology and would function outside the control of any third party. The birth of Cryptocurrency happened right after the Global Economic Meltdown of 2008 when mega investment bankers like Lehman brothers had become bankrupt. Bitcoin was the first to gain popularity among the thousand others that soon followed; Ethereum, Litecoin, Wink, Dogecoin and Ripple to name a few. In fact, in the beginning of the year 2021, more than 2000 cryptocurrencies were available on the internet.
Geekspeak: Decrypting the Technology Behind Bitcoin
In order to understand this, one needs to have sufficient knowledge of advanced mathematics and computer science which lies outside the realm of investors or traders, and of this article. For now, I would cover the basic information relating to this subject. Let us take the example of Bitcoins.
There is one public account in digital form, of all the bitcoin transactions – this is called a ‘ledger’. A copy of this ledger exists on all the systems that are a part of the Bitcoin network. Those that run this system are called ‘Miners,’ – their job is to verify transactions.
Let us take the case of two individuals, A and B. A has to transfer 2 Bitcoins to B’s account. Miners will have to confirm whether A has the required Bitcoins in his account or not. To complete this transaction, miners promptly begin to solve a complicated mathematical equation in the background. You might have studied about variables back in school. Every Bitcoin transaction has a unique variable, which is simplified by the miners. These calculations are carried out behind-the-scenes digitally; they are extremely complicated and their combinations run in crores which is why miners require computers with complex and high processing power.
Once the equation is solved, other computers within the network confirm its completion. Every transaction of the coin is stored as a block, and all the transactions for the particular coin are connected like a chain, and hence, the technology is called ‘Block Chain’.
And what do miners get in exchange for their tasks? Bitcoins!
This coordinated system is called ‘Proof of Work’ since the miners need to prove their computation work in order to get Bitcoins as a reward.
If you can’t make heads or tails of all this technical jargon or if it went straight above your head like a bouncer, then do not worry!
Because understanding the philosophy, vision and future of crypto technology is far more important than understanding the working of crypto technology.
Bitcoin’s Emergence as Alternate Currency?
The important question that springs up now is, how to make use of cryptocurrency?
Undoubtedly, it is a crucial point of discussion because on one hand, some people use Bitcoins for investment purposes while on the other hand, some use it as an alternate currency. Surprisingly, many cryptocurrency enthusiasts went so far as to express a desire to replace it with currency and use Bitcoins instead.
However, in the present scenario, the primary use of crypto currency is like an investment.
We invest money in cryptocurrency hoping for a higher return in the future and hence get more money in return. This, then becomes a “store of value”, just like gold. Similar to how we do not use gold in our daily transactions, but buy it and store it in the bank lockers like a guarantee to get more returns in the future as the price of gold keeps rising gradually, we buy and store bitcoins hoping for higher returns in the future. Thus, a bitcoin is also referred to as “Digital Gold”.
Keep in mind that just like any other investment, buying or trading bitcoins has its own set of risks as well. Sceptical individuals argue that Bitcoin is merely an unreliable digital currency and invalidate it as a form of investment. Simply put, you can physically touch the gold in your hands, if you buy a house as an investment, it will be physically available to you, but Bitcoins, on the other hand, are not tangible and are more of an abstract concept than a material one since everything ranging from transactions to ownership occurs in the computers. For this reason, it still does not have a widespread acceptance in the society. Although, this line of argument has no inherent value on its own.
Granted, cryptocurrency is not yet a medium of exchange, i.e. you cannot just run to your nearby stores to buy bread and milk or purchase groceries with Bitcoins. But, the possibility of it happening isn’t entirely impossible. To your surprise, there are several restaurants and hotels in Western countries that have begun to accept Bitcoins as an alternative form of payment. Tesla, the electric car company has begun accepting Bitcoin as a form of payment, according to a confirmatory tweet from CEO Elon Musk. He also stated that the Bitcoins paid to Tesla would not be converted to fiat currency.
A major stumbling block here is the use of Bitcoins as a medium of payment in daily transactions. The Bitcoin transactions on the block chain take time to get confirmed. One block process takes around 10 minutes for the computers to calculate which is not practical for a transaction to get completed in daily life. But at the same time, there are some cases of present-day use of Bitcoins where they function better than the traditional ways.
Cryptocurrency: Present Day Use
A noteworthy example is of our Foreign Funds transfer. When you have to transfer money from one country to another, the banks deduct a lump sum called foreign transfer fees which is a hefty amount. To the contrary, Bitcoins do not charge any tax and prove to be a more economical option along with faster transaction rate i.e. ten minutes as opposed to 24-48 hours taken by bank. A similar scenario plays out in credit card companies. It can be assumed that banks, credit card companies and remittance companies stand against the use of cryptocurrencies for the same reason; since cryptocurrency is capable of becoming a strong rival to their business model. In the last few months – the situation has changed, in that while several industries and mutual funds are struggling, the value of Bitcoins and Ethereum are on the rise, attributable to the Covid pandemic.
From the 1st of March 2020, until November 30, 2020, the value of Bitcoin rose to more than 120%, that is, it more than doubled in value.
Good news is, cryptocurrency is now slowly gaining more trust in the financial world.
PayPal, the world’s biggest digital payments company, has introduced the feature of crypto transactions in November 2020.
JP Morgan Bank used to be the biggest foe of Bitcoins. When Bitcoin was on a bull run in 2017, the CEO of JP Morgan had accused it of being a fraud, but now – just a few months ago, JP Morgan has opened corporate accounts for famous crypto exchanges like Coinbase and Gemini Trust.
The doors that had earlier been shut for cryptocurrency are gradually opening up. An open mindedness is being observed with regard to cryptocurrency in the general public and the financial industry.
If we talk strictly about India, a change of attitude has been observed this year in India as well.
In April 2018, the RBI had frozen out the crypto industry from the banking system. It instructed all the banks via a circular to desist from dealing in crypto related platforms or transactions. The mainstream media had claimed that RBI had placed a ban on cryptocurrency but it was technically inaccurate to say so – cryptocurrency had never been directly banned in India. RBI had merely blocked the banking access of the crypto ecosystem which meant that public could not deal in INR that is, in Indian Rupees on the crypto platforms. The banks treated the crypto platforms with lot of harshness. With the platform accounts frozen, platform owners were not able to pay their employees or pay rent to their landlords.
Cryptocurrency: The Good, The Bad and The Ugly
A natural question that follows is, Why did the RBI block banking access?
RBI’s decision was primarily driven by security concerns. Cryptocurrency although mostly a beneficial investment venue has its own set of cons, for instance, a major concern is that of money laundering. On the dark web where a number of illegal activities occur, people started accepting payment in Bitcoins to buy weapons and drugs. With cryptocurrency as the mode of payment, it became unmanageable for the law enforcement agencies to track transactions because they lied outside the traditional financial system. Besides, issues related to hacking also surfaced. To add to the pile-up, anyone can come up with their own cryptocurrency and if that were to happen, a lot of bogus and fraud companies might take advantage of the unsuspecting public with false promises that their invested money might double/triple thereby looting money.
A person named Amit Bhardwaj came up with a similar fraud crypto scheme by the name of “Gain Bitcoin”. There is an allegation of fraud of a whopping 2000 crore against Bhardwaj. Bhardwaj claimed that he had “mining farms” (a large collection of computer servers solving complex equations) in China and added that investors were to be profited with Bitcoins earned as a result of mining operations. Evidently, his promises were lies and he fled from India after his phony stunt. On April 2018, he was arrested and as per the latest update, he is out on bail and the case is pending in the courts. Such fraudulent affairs formed a negative bend of mind regarding cryptocurrency and Bitcoins, and in a response stemming from distrust, RBI took the decision to impose a banking ban on crypto. Crypto exchanges had been operational in India since 2013. In what was a legal retaliation, some exchange founders decided to challenge the ban imposed by banks in courts, as it was not only a matter of their livelihood, but also a matter of their principles.
The ban, in a peculiar way, even provided the founders with an opportunity to explain how the crypto technology and blockchain works to the government and the RBI. They were of the opinion that the negative points pertaining to cryptocurrency are equally applicable on other asset classes as well. Say, there can be money laundering over property and even fake notes can be printed. The software of banks or stock exchanges can also be hacked. They argued that every other asset class is as susceptible to fraud schemes as cryptocurrency then why the biased judgement? A rational point, indeed.
After a sufficient debate upon the matter at hand, the reputed Indian platforms suggested including a number of safeguards. KYC (know your customer) process was made mandatory during sign up but these measures were not reciprocated with a removal of ban. The case eventually reached the Supreme Court. Several famous senior lawyers refused to fight the case because of a string of rumours and a negative portrayal of cryptocurrency by media houses. There were repeated adjournments during which some exchanges could not survive and consequently, they had to wind up.
Finally, a three-bench judge heard the case in January 2020 and the court accepted the stance of the exchanges and conceded that the ban of the RBI was “disproportionate” as RBI failed to prove to the court that crypto investments and trading had in any way, negatively hampered the financial institutions.
Under Article19 (1)(g) of the Indian Constitution, it is the Fundamental right of every citizen to indulge in any business/occupation or trade. The court said that the banking ban imposed by the RBI was interfering with this fundamental right. To defeat an institution as gigantic as RBI was an unimaginable deed in itself. Therefore, 4th March was considered a historic day for the Indian crypto industry. The court clearly declared that there is no legal prohibition on cryptocurrency trading and investment, and RBI would have to repeal its banking ban. The victorious hearing is good news for each one of us as well since we now have the freedom to invest in cryptocurrency and reap profits for ourselves. An asset class has been added to our current list of investing options and this can be extremely helpful in further diversifying our funds. You can dive into the world of digital profit too by starting to invest small amounts in cryptocurrency to extract a better judgement of the risks and rewards involved. After the decision of the Supreme Court, several exchanges have burgeoned and the investing/trading process has become extremely straightforward and easy in India.
Advice for Investors and Traders
An important line to jot down is, when in the world of cryptocurrency (or any other asset class for that matter), DO NOT invest in cryptocurrencies if you do not have sufficient investable funds and are needing to take a loan. Keep in mind, when you invest, you do so with the risk of losing your money. Do not overdo it and stay in your comfort limit to safeguard yourself against tragic amount of losses. The prices of the cryptocurrencies fluctuate every second and are extremely volatile. Investing in cryptocurrency is both an opportunity as well as risk. Your risk appetite and investment goals decide whether you want to play a short term or a long-term game.
What’s to Come?
It would not be too far-fetched to say that cryptocurrencies and Bitcoins might play an important role in the future of finance. It remains to be seen whether cryptocurrency levels up to become a popular medium of exchange that will be subject to widespread use or will it remain a store of value investment?
In a few decades, will it be possible to buy bread and milk from your nearby shops with Bitcoins?
The future of cryptocurrencies is indeed a topic to ponder upon.
Nihal Makwana 