Crypto Bubble Burst?

Once hailed as a solution by Libertarians and Free marketeers alike, the Cryptocurrency market has been riding on a high since April, when the largest of these currencies, Bitcoins, hit a record USD 63,000 Valuation. But since then, things have slowly started to unravel for the top-performing asset. Let us have how Crypto works on a fundamental level and then evaluate its trajectory.

CRYPTO ASSETS:

Cryptocurrencies are a subset of a larger set of digital assets, that use Cryptography to store and transact values on a DLT (Distributed Ledger Technology). The three broad categories, as per Burniske and Tatar, 2017 are

• Cryptocurrencies
• Cryptocommodoties
• Crypto tokens

Cryptocurrencies are digital coins that are designed to fulfill the traditional role of real-world currencies (read Fiat Currency), as a digital medium of exchange. Cryptocommodities (like Gas in the Ethereum Network) are the computing, storage, and networking resources that power the blockchain system, just like Physical commodities like Oil. Crypto tokens, also referred to as Tokens in the DLT sphere are the creation mechanisms for goods or services. These also include tokenized investment assets, viz., Cryptocurrencies.

BITCOINS:

Whenever a transaction occurs in Bitcoins, it does not immediately join the Blockchain. Rather it is held in a waiting area called Memory Pool. It is from here that Gossip-style nodes relay the information to other such nodes. However, this is still not on the blockchain but merely validated by other such nodes. Then it reaches a special node, otherwise referred to as a Miner, which then builds up the block of transactions they wish to publish, by selecting them from the memory pool discussed earlier. To publish the block, the miner has to solve a cryptographic puzzle, by brute force method, using the last solved puzzle and the current puzzle as two functions. This process of guessing is called a Hash. Validating the correct answer is very easy, compared to brute force solving. The reward for the miners includes a small fee from the transaction.

SPECULATION:

Money is like a myth that requires only imagination for its creation, but faith for its effectiveness- Morris Perlman, Macroeconomics (3rd edition), 1999

A cursory look at the crypto market and the countries in which it is doing well would let one believe that Crypto Currency has already overtaken the Financial Institutions in many Developing countries like Nigeria, Vietnam, the Philippines, Turkey, etc.

There has been a widespread belief that the primary reason for the increase in value of the various cryptocurrencies has been because of money laundering, wherein individuals keep to keep prying Government eyes away from their assets, so they are converted to bitcoins and then stored in tax-free havens. In some more nefarious cases, Bitcoins are being used on the dark web for transactions that would leave no money trail.

As rightly argued in this Research Paper by Dr. Zeynep Gurguc and Prof William Knottenbel Imperial College, London,

"Cryptocurrencies can become units of account only if there is a friendly and conducive regulatory environment...”

And in no other country is this more apparent than in China, which is turning into an Orwellian state, The Rich had earlier used to trade their Bitcoins, which led to fears in China that it would lead to depleting wealth. Yesterday, Chinese Industrial bodies issued a joint statement warning against the use of Cryptocurrencies for trading and any other use. This statement served as a double whammy for the crypto market which had already been facing flak for Environmental concerns, given that a large chunk of the crypto mining happens in China, which has cheap electric power, but a majority of this power comes from Coal, which was affecting the environment.

Billionaire investor Elon Musk, who also holds renewable companies like Solar City, as well as Electric Car company Tesla, had earlier let loose Positive sentiments when he purchased USD 1.5 Billion worth of Bitcoins, and also promoted viral cryptocurrencies like Dogecoin on his social media handles; had also contributed to the price correction/fall of Bitcoins this week citing similar environmental concerns.

IMPACTS in INDIA:

India happens to be the second-largest Bitcoin market in Asia in 2021, after China. Given the stance of RBI to ban the decentralized currency, many apps trading in Crypto were already operating in the legal Grey area. Popular apps like WazirX and Coinbase had also crashed yesterday given a large move by investors to quickly withdraw and cut their losses.

Earlier the Indian Govt had proposed setting up a committee to work out plans to work with Crypto, as well as creating a Digital Rupee currency. Many are considering this a positive development for Crypto in India, which has high taxation costs for the rich. Given the latest instability, the Govt would now be hesitant to make any changes in a rush.

CONCLUSION:

Crypto is an evolving technology that is still maturing. For any currency system to replace existing currency, it has to satisfy three constraint

• Medium of exchange
• Unit of account
• Store of value

Currently, Cryptocurrency satisfies the "Store of Value" constraint of Fiat currency, however, the other two constraints depend entirely on the Business Environment and Govt Regulations, which given the latest developments, do not bode well for Crypto Currencies.

-BasuDeo Dubey