The Financial Literacy Cell
CRYPTO-The Dawn of Digital Currency
Can a tweet fluctuate the market cap of a commodity by $149 Billion? When Elon Musk changed his Twitter Bio to ‘Bitcoin’, the price of Bitcoin Skyrocketed from $32,000 to $38,000 in just a few hours and its market cap increased from $597 billion to $708 billion. On Dec 20, 2020, he tweeted-One word: Doge This increased the price of Dogecoin by 17% in just one hour. However, later he admitted that tweets about Dogecoin were just a joke. But it forced many to think that if one tweet can increase its value so much, another tweet can wipe out a similar value. This was witnessed when on Feb 20, 2021, he tweeted that the prices of Bitcoin & Ethereum ‘seem high’ and the bitcoin prices fell by $8000 leading to a decrease in the market cap of bitcoin by $149 billion.
To understand in simple terms, a cryptocurrency is a digital currency that can be used as a medium of exchange. Being a virtual currency, it does not exist in physical form and the transactions are secured by cryptography, which makes it next to impossible to counterfeit or double-spend. It is typically not issued by any central authority. Most Cryptocurrencies like Bitcoin, Ethereum, etc. use decentralized control, based on blockchain technology. Bitcoin is the first decentralized cryptocurrency created by an unknown person or a group using the name Satoshi Nakamoto.
Bitcoin is one of the most Volatile Commodities in the world. On March 12, 2020, its price was INR 3,65,982 & on Feb 21,2020, its price was 41,71,081. So, in less than one year, the price rose by more than 38 lakhs – that’s a profit of almost 1040%. Fascinating, isn’t it? Let’s see the other side of the coin. If someone had one bitcoin on 21st Feb 2020 and sold it just after 2 days on 23rd Feb, he would have lost approx. Rs. 6,30,000. This shows how much volatile the market is. And it’s just the price of one bitcoin. So, is it possible to understand the pattern of Bitcoin’s market or to predict its value or worth in the future? And the most important question- Is value investing possible in Bitcoin? If we see back at the history of Bitcoins, we will find that it was never created with the purpose of investment. The creator Satoshi Nakamoto created bitcoin to use it as an alternative form of currency. But due to an unusual increase in its value, it is mostly used for investment purposes. In December 2017, Chicago Mercantile Exchange (CME) Group, one of the largest Future Exchanges in the world, launched Bitcoin Futures. Like a commodity or stock index’s futures contract, investors can also speculate on the future price of Bitcoin with Bitcoin futures.
Investors around the world have different views on Cryptocurrencies. Bill Gates, Steve Wozniak, Elon Musk, and many other notable investors believe that Cryptocurrency is a miracle in itself since it cannot be duplicated and provides security in transactions. Elon Musk even tweeted a lot in favour of Bitcoins and Dogecoin which pushed their prices to new heights too. According to him, he even bought dogecoin for his son, Lil X. Elon’s electric automaker, Tesla has invested around $1.5 billion in Bitcoins and it has announced its plans to begin accepting the digital form of currency as a payment method for its high-end vehicles soon. In reaction to Tesla’s announcement, the price of Bitcoin soared 15.4% in a day to around $44,500. However, legendary Investor Warren Buffet considers Bitcoin as a non-value-producing asset. Even, India’s big bull, Rakesh Jhunjhunwala publicly called Bitcoin the ‘speculation of the highest order.’ According to him, any currency should be backed by some central authority; whereas in the case of Bitcoin, even the creator is unknown.
Currently, Cryptocurrency is illegal in Algeria, Egypt, Morocco, Nepal, and Bolivia, and many other countries like China, Bangladesh, Nigeria, Canada, Colombia, Russia, Saudi Arabia, Taiwan have banned banking transactions involving private Cryptocurrencies like Bitcoin, Ethereum, etc. China has developed it's Central Bank Digital Currency (CBDC) by the name of DCEP -Digital Currency Electronic Payment that can be used to pay and is accepted as legal tender in China. Even India’s Central Bank, RBI, in 2018, barred banks and other financial institutions in India from facilitating transactions involving cryptocurrencies. However, after a lawsuit was filed by cryptocurrency exchanges, the Supreme Court, in March 2020, removed the ban. But recently the government announced to introduce Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Crypto Bill) that will prohibit all private cryptocurrencies in India and create a state-backed digital currency issued by RBI. Though Lok Sabha Bulletin says that permission will be given for certain exceptions “to promote the underlying technology of cryptocurrency and its uses.”
Even environmentalists criticize Bitcoin for the amount of electricity consumed in mining it. It is estimated that bitcoin now uses 129.22 terawatt-hours of electricity a year, thus making Bitcoin alone a bigger consumer of electricity than Argentina. A study published in 2018 claims that bitcoin & other cryptocurrencies "could alone produce enough CO2 emissions to push global warming above 2°C within less than three decades.” Recently, much of bitcoin mining is done in China due to the government’s subsidy on electricity. China’s Inner Mongolia is clustered with large coal mines and known for cheap energy. It was a hub for crypto-miners until recently when the region banned new cryptocurrency mining projects and announced it will shut down all such existing projects by April 2021 to curb the amount of energy consumed in Mining Operations.
So, Bitcoin faces oppositions from almost everywhere yet it is one of the few commodities in the world which achieved the milestone of having a market cap of $ 1 Trillion. Though Bitcoin’s Future is uncertain to some extent yet it has successfully brought a revolution in the banking sector of the world economy. Since many tech Giants started accepting Bitcoin as a means of payment and countries have started launching their own cryptocurrency, the future of cryptocurrency seems to be bright.
By Hardik Agarwal