One of the biggest gainers of 2024 was cryptocurrency. The US president-elect Donald Trump and his advisor Elon Musk throwing their weight behind crypto resulted in Bitcoin shooting through the $1,00,000 mark in December. This was a dramatic comeback after the collapse of the crypto exchange FTX in 2022, which resulted in losses of billions of dollars.
One fallout of the 2008 financial crisis was a deep mistrust of the banking system around the world. When the first successful digital currency, Bitcoin, appeared in 2009, it was perceived as a bid to circumvent regulation that was seen as ineffective and cumbersome. It was believed that cryptocurrencies would allow greater transparency and security in financial transactions.
But as a quintessentially disruptive technology, its credibility today divides experts and laymen. While many still think of it as a game of smokes and mirrors, it’s endorsed by tech-savvy younger generations. At present, the global cryptocurrency market is worth around $3 trillion.
In the context of this market volume, the intrinsic value of cryptocurrency is relevant. Cryptocurrency is basically a piece of programming software; its value is linked to its momentum of exchange and its perceived investment potential. For Bitcoin, the value is also attributed to the fact that out of the 21 million available, some 19 million have already been mined.
Now, cryptocurrencies are also increasingly being used for dodgy purposes. As they initially managed to duck the radar of regulators, they came to be used for illicit transactions. They are known to be used for money laundering because of the stealth and speed of transaction they offer. Crypto scams are rising, too. Some global cyber-crime syndicates systematically target crypto investors. Around 840 crypto-related complaints were registered in India in 2023, with total losses amounting to hundreds of crores of rupees. A single initial coin offering in 2021 duped investors of `1,200 crore.
The approach of various nations to regulation has been diverse. Cryptos have been banned in nations that see it as being capable of undermining the state. Some others recognise them as an asset class. And in a few, they have been legalised as a payment method.
In the midst of this, India has adopted a wait-and-watch approach. Although there is no outright ban in India, there is still no comprehensive regulatory framework. It is treated as a virtual digital asset that can be bought and sold on crypto exchanges; the transactions are taxed at 30 percent.
But because these transactions are borderless, there is need for a global consensus to avoid regulatory arbitrage. The irony is that though cryptos reimagined a financial ecosystem free of regulation, their stability and broader acceptability today depends on regulation.
The addition of meme coins or fun coins to the cryptocurrency portfolio by a lively online community has added a level of volatility. These tokens, that are based on memes or video game characters, have recently registered big growth.͏ A community culture governed by common sentiments is its secret sauce. But that contributes to volatility in the absence of any underlying value.
When Elon Musk temporarily changed his name on X to Kekius Maximus, a token traded on centralised crypto exchanges, its value immediately soared 900 percent. Market sentiments also suddenly propelled Dogecoin up almost 800 percent. A meme coin popular in India is Shiba Inu—it has an emotional connect, as $1 billion worth of these tokens were donated by Ethereum’s founder for Covid relief in India. But the extreme swings in the value of meme coins render them vulnerable to dangerous pump-and-dump schemes. On the other hand, stablecoins, which are backed by underlying assets, could undermine sovereign currencies.
In the middle of such dizzying expansion, India’s crypto investor base—estimated at nearly 2 crore of mainly under-35 tech-savvy users—makes it an attractive market. No wonder then that crypto exchange Binance returned to India after paying a fine of Rs 18.82 crore imposed by the Financial Intelligence Unit.
The introduction of exchange traded funds has also opened opportunities for investors without having to directly engage in the complex dynamics of crypto trades. This has also increased institutional participation and credibility of crypto as an asset class. However, it is also essential to increase investor literacy about the risks involved. While market surveillance by the authorities is visible, regulation is still evolving and lessons are still being learnt.
Cryptocurrency is here to stay, but the average investor is yet to fully understand its fundamentals. As the plot thickens with crypto developers, hackers, newer algorithms and cyber criminals bringing in continuous innovation in this business, caution should be the watchword.
Geetha Ravichandran
Former bureaucrat and author, most recently of The Spell of the Rain Tree