Bitcoin rally: Why the cryptocurrency’s crash may be dramatic ?

The Bitcoin was created as a cryptocurrency in 2009 by an unidentified person using the alias Satoshi Nakamoto, its popularity has grown manifold in recent months with its per unit price soaring to close to $20,000 (over Rs 10 lakh) earlier this month. However, the price has been swinging wildly and last week itself it fell by almost half to about $10,000, only to again rebound to the near $15,000 level.

Bitcoins was launched with a promise of lower transaction fees than traditional payment methods with a decentralized authority unlike the government-issued currencies in various countries. At present, bitcoins command a market cap of over $240 billion while more than 16 million units are said to be in circulation. The maximum supply is pegged at 21 million.

It is the anonymity of bitcoins, minted through complex computer algorithms, that has made them so famous, but has also increased the risks. These are stored in digital wallets, in the cloud or on the user’s computers. Against this background, one can understand why there are several clones or wannabes vying for space in the market for cryptocurrencies, none having even a minuscule share of bitcoins. It has also tantalized services that are rendered on payment of bitcoins especially in the underworld like sex, terrorism financing, among others.

The bitcoin had recently taken a step toward legitimacy with the launch of a product on a Chicago exchange that allows investors to take bets on its price in the future. The new contract on the Chicago Board Options Exchange came as the digital currency jumped another 10 percent, sparking fresh warnings of a speculative bubble — a 40 percent climb in price.

In India, however, its trade is ostracized if not banned. The RBI (Reserve Bank of India) has been at pains to discourage people especially the hoi polloi from entering this choppy, if not unchartered waters. The income tax authorities have mounted raids on the mushrooming bitcoin exchanges across the country especially in the IT hub, Bangalore and got a list of over lakh investors.

The income tax authorities’ anxiety is that there should be no tax evasion. It has rightly clarified that it is a capital asset in the hands of investors, and hence liable to capital gains tax. For traders of course it would be their business income. The GST (Goods and Services Tax) too is clearly exigible, being another commodity and not a medium of exchange, as the RBI hasn’t conferred its imprimatur on it.

But the concern worldwide including on the part of the RBI is bitcoin is a rogue currency, unregulated and without any underlying asset. True, with the collapse of the gold exchange standard in 1944, most of the currencies are fiat currencies, i.e. guaranteed and regulated by the central banks issuing them without underlying assets. But then the huge stockpile of gold in Fort Knox in the USA held by the US government gives the world some comfort about the greenback that rules the international currency market and transactions. There are commodity currencies implicitly backed by coal for example as far as the Australian dollar is concerned. Even if unsupported by a commodity, fiat from an authority is some comfort.

The bitcoin remains a mystery. Its parentage continues to remain in the realm of speculation. It is unregulated. There is no guarantee as to its value. It is not legal tender in any country. In the event, anyone accepting it as payment is doing so at his own risk. It is his funeral, so to speak. That its supply is pegged at 21 million by its anonymous regulators who refuse to surface lends credence to the theory that its phenomenal and mind-boggling valuations reflects more its scarcity value. Even if this gag order on its quantity in circulation is lifted, it is difficult to mint except by mathematical whiz kids endowed with enormous patience to crack complex algorithms and willing to expend prodigious quantity of computing power, electricity and broadband.

One has heard of commodity currencies as explained above. A currency that rewards mathematical ability is no currency at all.

Anything that goes up has to come down except for gravity-defying objects. The Bitcoin too must come down. And when it does, it would be with a thud because markets the world over have the habit of falling with greater speed than at which they rise.

The Chicago board might have given a bit of legitimacy to the cryptocurrency but that was more to bring it under some semblance of regulation than to proclaim its official status.

The RBI is therefore right. Those hugging it could well stew in their own juice! It could be a bear hug!

06 Jun 2020, 10:27 AM (GMT)

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