Dr. Rajan Katoch
You may be shivering in the cold weather of December. If it’s any consolation, it is positively freezing in the world of cryptocurrency. The heady days of the crypto boom are over. The cryptocurrency market has tanked, and has been in free fall for most of the year. Crypto is no longer “hot”. Techies are calling it a “crypto winter,” a prolonged period of price contraction.
Let’s see what has been happening since we last set out a layman’s take on cryptocurrency in February in “The Cryptocurrency Scenario – After the Budget” (https://risingkashmir.com/the-cryptocurrency-scenario–after-the-budget). The crypto market hassince come crashing down on investors. The value of the oldest and biggest crypto coin Bitcoin has declined from a high of $ 68,000 in November last to about $ 17,000 now. Ethereum over the same period has gone down from $ 4200 to $ 1200. It means that if you put money into these leading cryptocurrencies a year ago, you would have lost three-fourths of it by now.
There have been lots of bad news for crypto. A major crypto currency, the TerraUSD stablecoin crashed and became worthless in May, entirely wiping out investors money. Stablecoins are supposed to be linked to the dollar, and therefore thought to be safer than other cryptos. Unfortunately, there were no actual US dollars or securities backing up Terra or its associated coin Luna. So when investors wanted to get out of Terra-Luna, they couldn’t get their money back. The price of the coin plunged from $ 116 to $ 0.02 overnight! The founder Do Kwon is on the run.
Much more cataclysmic for the crypto world was the meltdown in November this year of FTX, the world’s second biggest crypto exchange. FTX was valued at $ 32 billion before the crash. It was owned by one of the best-known crypto moguls, the 30-year-old whiz kid Sam Bankman-Fried (SBF). SBF was the Warren Buffet of crypto, whose personal net worth was said to be $ 16 billion. His exchange FTX was backed by big name funds like BlackRock, SoftBank and Tiger Global.
Yet in November, FTX could not rustle up the funds needed to pay customers who wanted to withdraw their money, and had to file for bankruptcy. Later it was found that SBF had clandestinely diverted billions of dollars of customer holdings placed with FTX to a sister company of his. A fraud investigation is underway, and the now bankrupt SBF has been arrested.
Is it curtains for crypto? Were the financial pundits and naysayers right all along? Experienced financial advisers in India and abroad viewed cryptoall along as akin to a Ponzi scheme. They saw it as a market with no underlying value that can collapse anyday. They are now saying “I told you so,” and with reason!
Nothwithstanding the market crash, the frauds, the meltdowns, the essential features of crypto haven’t changed. The “market” for crypto is totally unregulated, and therefore very high risk. Unlike the share market, there is no underlying security here that determines the value of a crypto coin. It is a purely virtual digital asset, and the value of any particularcrypto coin is determined only by demand, and by speculation. Consequently, prices are highly volatile, and subject to wild swings.
People put in money in crypto hoping to get rich quick. Many did get rich too, when the coin prices were zooming up and up. But anything that goes up must come down. And anything that zooms up rapidly is liable to crash equally dramatically. For those seeking to get rich quick, they should be prepared to get poor too equally quick!
Whither crypto, then? Indications are that crypto coins may come and go, even crypto exchanges may come and go, people may lose lots of money, yet the crypto world will survive. There was a crypto winter in 2018 toothat lasted a couple of years, and people had then predicted that crypto was finished!
What about the frauds? Frauds will happen, as they happen everywhere. The difference here is the absence of regulation, due to which crypto will inevitably be more prone to fraudulent behaviour. Hopefully, the events of 2022 will lead to action towards putting in place much needed regulatory oversight.
It’s difficult to opine about other coins, but the veterans of the crypto coin universe Bitcoin and Ethereum will continue to exist as digital assets.Bitcoin has a first mover advantage and limited number that will ensure it always has some value. Ethereum has revamped its technology recentlyand it now requires less energy and computing power to generate, making it more sustainable. It is also the building block for many applications of blockchains. Of course, existence does not mean absence of high risk; no one can predict what value they will have at any point of time.
In India, added risk factors are the tax burden imposed in the current year, and the ambivalent regulatory environment. Trading volumes of Indian exchanges are estimated to have fallen by around 70% after the tax changes earlier this year. Surprisingly, according to crypto platform BrokerChoosers, users registered with crypto exchanges in India now number over 100 million, the highest in the world. It is arguable how many are still active in the current downturn.
The critical question remains. With all that has happened, with prices at all time lows, should you even think of risking your money in crypto? The answer remains the same as it did in boom time. Avoid, if you don’t understand what it is about. Think about it only if you know what you are getting into, and have surplus funds that you can afford to lose in entirety without getting upset. Not because someone gives you a tip, or promises extraordinary returns once the winter is over.
Spring may be around the corner. Or maybe not. It’s after all a virtual world and doesn’t have to follow the rules of the real world.
Right now, it’s cold out there!
