Will crypto ever be a currency
MUMBAI: The birth of cryptocurrency in 2008 was based on the thought that one day it could act as a common monetary system that would help replace the inefficiencies of the current centralised system around the world.
The idea of an internet cash system, built on the then nascent blockchain technology, hoped to allow people to transact with each other without a third-party to verify it, like in a central bank. The peer-to-peer system, born in the midst of the global financial crisis, solved problems that troubled cryptographers since 1992.
Fast forward to 2021. Today, more people see cryptocurrencies as a tool for investment rather than a currency. In fact, the view that a cryptocurrency like Bitcoin could become a widely accepted currency is now confined to just Bitcoin maximalists.
In India, where cryptocurrency adoption is rising fast, businesses involved in the space are breaking away from the ideas of Satoshi Nakamoto — the pseudonym of the person who developed Bitcoin — to paint cryptocurrencies as an asset class. They are trying to convince the government and the monetary authority against banning this form of digital cash.
“There is a big misunderstanding… you can’t have Bitcoin (a deflationary asset) compete with the rupee (an inflationary monetary system),” crypto exchange WazirX’s CEO Nischal Shetty had said in February at the ETMarkets Conclave. “You can’t use Bitcoin for everyday transactions because of its high cost.
But does a cryptocurrency even have the attributes to be a “good” asset class?
Frankly, at this time, it’s more like the Wild West. This asset class is rife with fraud, scams and abuse in certain applications. There is a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced and complete information, US Securities Exchange Commission head Gary Gensler said at a recent event.
An asset class is defined as a group of instruments that have similar characteristics and are governed by the same regulations.
According to Chakri Lokapriya of TCG Asset Management, a good asset class should have liquidity, stability, value and a low transaction cost. “An asset class that can display stability in most of those characteristics can be termed as a ‘good asset class!’” Lokapriya told ETMarkets.com.
Even the most ardent supporters of cryptocurrencies have found it hard to deal with the inherent volatility of these instruments. Cryptocurrencies are often prone to flash crashes that could be due to a number of factors, such as a sudden exit of one large investor or systemic failures at cryptocurrency exchanges.
While Bitcoin’s liquidity has improved markedly due to the introduction of bite-size coins called Satoshis, others remain vulnerable to sudden bouts of liquidity drying up. A major concern among cryptocurrency investors has been the large holdings among so-called whale investors, whose exit can create market crashes. Market risk, therefore, is one of the biggest vulnerabilities of owning cryptocurrencies.
High transaction costs of trading in Bitcoin, Ethereum and other cryptocurrencies is another factor that works against the asset class. Back in April, the average fee of transacting in Bitcoin was at an all-time high of $59 after China’s crackdown on the country’s Bitcoin miners. High transaction fee is also one of the major arguments used by traditional investors to discard cryptocurrencies’ utility as a medium of exchange.
Bitcoin’s high transaction fee also emits from the high cost of energy that miners face to keep their mining farms running 24 hours a day. According to some reports, the amount of power used to mine Bitcoin is more than the electricity consumption of Argentina.
As for cryptocurrencies’ role as a store of value, the jury is still out. While a Bitcoin today is worth Rs. 36 lakh, many still doubt its ability to act as a stable store of value because of the high volatility associated with it. Bitcoin has been equated with digital gold given that its supply is scarce by design.
Sceptics such as Nassim Nicholas Taleb say the true value of Bitcoin is zero. The author and risk analyst said in June that Bitcoin can neither be a short-term or long-term store of value, cannot operate as a reliable hedge against inflation, and “worst of all, does not constitute, not even remotely, a tail protection vehicle for catastrophic episodes”.
Yet, many institutional investors and Fortune 500 companies are adopting Bitcoin and other cryptocurrencies as a hedge against their expectations of high future inflation as well as black swan events like the Covid-19 pandemic. Companies like Tesla and MicroStrategy have already converted part or all of their balance sheet cash into Bitcoin. Recently, a Texas-based biotech company converted its cash into Bitcoin to avoid “overreach from banks”.
Technical factors aside, one of the biggest hurdles in accepting cryptocurrencies as a good asset class is because of the regulatory uncertainty. The US SEC has already demanded powers from the Congress to regulate both crypto tokens and the entire decentralised finance framework. In India, crypto investors and crypto entrepreneurs want the government to regulate the industry so as to allow innovation to thrive and address misgivings about the asset’s role in money laundering, fraud and terrorism financing.
Wealth managers and advisors speak of high networth investors willing to invest in cryptocurrencies through the right channels but unable to do so out of fear of prosecution.
In some countries, regulators have shown a willingness to regulate cryptocurrencies as an asset class and allow asset management companies to launch instruments such as exchange-traded funds, crypto-backed bonds and the likes that provide access to common investors in a risk-controlled environment.
With Finance Minister Nirmala Sitharaman suggesting a more calibrated approach to cryptocurrencies in the proposed cryptocurrency law, investors will hope the death of a utopian-style currency will give birth to the foundation of a stable asset class.