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Investing in Cryptocurrency? You should know this

Investing in Cryptocurrency? You should know this

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The cryptocurrency craze is taking over the world by storm for the last few years. You too are probably investing in cryptocurrency. But do you know the details of this ecosystem? What are the advantages and disadvantages of the crypto world?

Stefan Thomas, a San Francisco based programmer lost $265 million just because of not finding passwords. Well, the passwords were of 7,002 Bitcoins he received years ago. He received the bitcoins when a single unit of that was worth a few dollars. he put all his Bitcoins in a digital wallet. While trying to unlock the digital wallet and redeem Bitcoins, Thomas lost the password, which eventually resulted in him losing a huge amount of money.

What do you get from this? Also, do you know that it can happen to you as well? Sounds scary but it is a reality.

Just like we become helpless when we forget the password of our email account or net banking, not finding the password for Bitcoins can result in trouble. In fact, massive trouble. Bitcoin doesn’t have any central bank. It doesn’t any option to reset the password as well. In fact, this is not the case for only Bitcoin but any kind of cryptocurrency. The cryptocurrency ecosystem comes with a decentralized system, which is actually a highly complex safety feature of this digital currency world.

The transaction process of cryptocurrency is so complex, that even if the transaction status can be understood, tracking the details of the sender and receiver of the digital currency is almost impossible. In short, this safety mechanism is the biggest strength of the cryptocurrency ecosystem and it is the biggest weakness of the system at the same time.

Cryptocurrency mining is like mining diamonds from a deep dark mine. In this case, you need a highly powerful computer and a super-strong algorithm. Also, cryptocurrency mining demands huge energy consumption. Speaking about Bitcoin, the most popular cryptocurrency, there are around 2.10 crore coins and 1.85 crores among them have been already mined. While some just seek to mine the cryptocurrencies, some aim to store them just like we deposit money in our bank accounts.

Cryptocurrencies are also being used as a form of transaction in many places across the world, in a less popular manner though as compared to other conventional mediums. What’s surprising is that almost one-fifth of the total mined Bitcoins have been already lost, just because of the complex password mechanism the cryptocurrency follows.

Cryptocurrency

Why cryptocurrencies are being compared with Hawala?

Hawala has remained a popular and informal value transfer system based not on the movement of cash or computer network-based wire transfers between the banks, but instead on the performance and honour of a huge network of money brokers that is something like human blockchain. This is why the cryptocurrency ecosystem that depends on the blockchain is often compared with the hawala system.

Just like hawala has been used as a decade old-system to evade the governments and regulatory infrastructure, cryptocurrency too is being used by many parties to evade the governments and their respective financial regulatory networks. The functional similarity between the hawala and cryptocurrency mining and the transaction process is very high matchable and this is why many dubs this new-age digital currency ecosystem as the neo-hawala.

The lack of regulation in the cryptocurrency ecosystem has many disadvantages and dangers. The non-state actors like terrorist organisations have been using this technology for their benefits and using the money to fund their activities. In the recent past, we have seen several ransomware attackers demanding ransoms from the affected parties through cryptocurrency.

Cryptocurrency

Reminiscence of subprime mortgage crisis and tulip mania

The current craze around cryptocurrency is often being compared with the dot-com bubble of the 1990s or the subprime mortgage crisis in the US that took place between 2007 and 2010 contributing to the 2007-2008 global financial crisis or Great Recession. The crisis was triggered by a huge decline in US home prices after the collapse of a housing bubble, which resulted in mortgage delinquencies, foreclosures and the devaluation of housing-related securities. The declines in residential investment preceded the Great Recession and were followed by the slump in household spending and eventually business investment as well. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.

The cryptocurrency craze is also compared with the Tulip mania that took place during the Dutch Golden Age when contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels. The tulip mania is considered to have been the first recorded speculative bubble or asset bubble in history that witnessed major acceleration starting in 1634 and then dramatic collapse in February 1637. In many ways, the tulip mania was more of a then-unknown socio-economic phenomenon than a significant economic crisis. The term tulip mania is however now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.

Experts believe that the craziness for cryptocurrency is even more fragile than the tulip mania.

At one point in history, tulip flowers became the status symbol of Holland or the Netherland’s wealthy people. A few types of tulip became highly expensive. There are examples that a bulb of a special type of tulip was worth ten times the annual earnings of a skilled worker. Also, a whole 12-acre land was given for just one bulb of a special type of tulip flower. A distinctive financial transaction system was created in Netherland, which was known as the futures contract. There was a futures market called windhandel where deals used to take place for purchasing the end-of-the-season tulip bulbs. The price used to be sky-high. There are examples when a deal for the bulb of a special type of tulip flower was purchased and sold over ten times a single day and each time higher than the previous transaction value.

However, a bubble is bound to burst at some point. So did the tulip mania bubble when the bubonic plague devastated Haarlem city in 1637.

Many experts believe that the craziness for cryptocurrency is even more fragile than the tulip mania. During the tulip mania, people even used to have the bulbs of tulip flowers no matter how low the prices were, but in this case, if the bubble of cryptocurrency bursts, the only thing that will remain is sheer disappointment.

Cryptocurrencies are being used in many countries in European Union, in the UK and USA as well.

Blockchain blessing

It’s not all same between the cryptocurrency craze and tulip mania. For tulip mania, it used to be documented – who name of the farmer, name of the buyer and the dealer as well. However, in the faceless world of cryptocurrency, nobody knows anyone. No one is responsible to track the details. Hence, the world of cryptocurrency is just like the neo-tulip mania building up through the ancient route of hawala. The world of cryptocurrency is so complex that humankind took nearly a decade to decode the mystery of controlling this techno world.

Bursting the cryptocurrency bubble might disappoint many for sure. But it is not all dark as it seems, as there is a single bright light. Even if it bursts, it will leave the biggest innovation the ecosystem has given us – Blockchain. This technology has already redefined various digital sectors such as banking, voting, asset registration etc.

Cryptocurrency

Global approach: Crypto dilemma

The world has been witnessing diversified opinions about cryptocurrency. El Salvador has already accepted cryptocurrency officially by giving Bitcoin the status of legal tender. The central American country has also announced that it aims to build a Bitcoin city that will transact with Bitcoins only. No wonder, El Salvador aims to grab the most out of the cryptocurrency bubble. But a majority of the countries around the world are facing a dilemma when it comes to the question to accept it or not.

Cryptocurrencies are being used in many countries in European Union, in the UK and USA as well. The transactions are often hush-hush and not very open. At some places, they are happening in a regulated manner. The world has understood that it cannot completely bar people from using cryptocurrencies. This is the reason several countries around the world are slapping taxes on income generated from cryptos. This is helping those countries to fill up their coffers for sure.

India’s take on cryptocurrency

This has been a major topic of discussion among the crypto enthusiasts of the country. It was speculated that the Indian government might impose a tax on earnings from cryptocurrencies and it would also increase regulation on the system. This would help the federal government to fill up the national coffer for sure and that too at a time when businesses and revenue-earning sources have been hit by the Covid-19 pandemic. This would be a similar step as China, which has banned all the cryptocurrencies except the digital yuan issued by the People’s Bank of China (PBC).

India was previously thought to be introducing the cryptocurrency bill in the winter session of Parliament but it was postponed. However, as of now, the Cryptocurrency and Official Regulation of Digital Currency Bill is unlikely to be introduced in the upcoming Budget session as well. Being a highly complex subject the finance ministry wants to take more time before taking any decision. The government is also awaiting technical inputs from the Reserve Bank of India (RBI) after the pilot launch of its Central bank Digital Currency (CBDC), the digital Indian rupee. RBI has repeatedly warned about cryptocurrencies and expressed concerns about the risks posed by them.

While the route map of India’s crypto bill is not known yet, it would mainly target the hawala and terrorism funding activities through the digital currency network.

Also Read: CSR – A catalyst for growth

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