Cryptocurrency – Current Status and Does the Current Values Offer an Opportunity for Future Growth?
To begin with
The past decade has been abuzz with all the news surrounding cryptocurrencies and their future potential!
But, does this particular class of investment considered safe enough? Does it hold any water in the near future?
As a neo-medium of digital exchange, cryptocurrency came in the disguise of a universal currency system which resolves the problem of currency exchange between two different nations having different currencies. Being dependent on a secure distributed ledger data structure for transactions, cryptocurrencies have risen as a tough contender to the existing fiat currencies regulated by central banks worldwide.
Charting the Growth of Cryptocurrency – Various Perspectives
Since the past few years, the growth in the popularity of cryptocurrencies has been phenomenal. However, the road to growth has not been without headwinds. Acceptance of cryptocurrencies amongst various governments has been a cause of debate and they believe it to be the key source behind various cyber-crimes and funding for anti-social elements. The governments who are keen to somewhat accept the legitimacy of cryptocurrencies are bent on taxing them heavily thus viewing them as a source of gambling and not a regular store of investment.
From an individual investor’s perspective, it has been a mixed bag since there have been people who have both made and lost fortunes of wealth. Still, there remains a huge potential investor base to be unearthed as only ~5% of the global population surveyed have ever admitted to possessing knowledge about cryptocurrencies, let alone investing in them.
The Ever-Looming Threat of Fluctuation, Scams & Security
As with any other digital form of payment, cryptocurrencies have been the victim of user-perpetrated scams and frauds. Dogecoin is a good example of how social media buzz made a cryptocurrency’s value go kaput after artificially zooming ahead in the recent past. Being a user-authenticated store of value, the owner shall forever lose possession of his cryptocurrency should he ever lose access to it through fraud or his wallet get hacked. It is estimated that ~20% of the cryptocurrency ever minted has been lost to scams and mal-authentication.
The noting absence of any exchange or regulatory body would also mean that the values of cryptocurrencies may fluctuate without any preset circuits or rules. Due to the constant variability in the price owing to fluctuating supply and demand, the true valuation of a cryptocurrency can never be made. Companies are vying to pay truckloads of money just to get a hand on the data that crypto platforms store, although they might be considered as ‘secure’ by the masses.
The Present Scenario in India – Legality & Taxation
Neither the RBI, SEBI nor the Government of India has acknowledged the legality of cryptocurrencies in India so far. The latest Finance Act introduced the concept of Virtual Digital Assets (VDA) where they defined cryptocurrencies and other related crypto-assets and proposed to levy a tax on them. After the Supreme Court regulation specifying that cryptocurrencies should be regulated by a governing body, the Government seeks to make trading in them less volatile and risky for the investors at large.
Schedule III of the Companies Act, 2013 has been amended to now include disclosures by companies having investments in cryptocurrencies. A flat 30% tax on the transfer of virtual assets including NFTs and cryptocurrencies has been proposed via the insertion of a new section 115BBH. No deduction for any expenses or carry forward of losses has been allowed against the current year's income generated.
The Supreme Court had earlier ruled that RBI being a financial institution that has the aim to protect public money within its ambit, could even proceed to ban cryptocurrencies outright. But it also held that, instead of banning such virtual assets altogether, the RBI can explore alternatives that may be beneficial to investors in virtual currency. As an alternative, the authorities are also exploring the avenue of ushering in a new concept – Centre Backed Digital Currencies (CBDCs) that function as a virtual currency similar to cryptocurrencies but would be regulated by the government authorities instead.
The Road Ahead
A turbo-boosted 2017 followed by an ice bath in 2018, cryptocurrencies have seen a massive price correction till the end of this year. Macroeconomic factors such as the Ukraine war have dragged down its value even further.
However, there has been a ray of hope that financial regulators across the globe might arrive at a consensus on drafting a common global framework for the regulation of cryptocurrencies. Although global unity, for the time being, seems unlikely in the current scenario, cryptocurrencies have started to see some form of adaption federally, by several economies.
Apt scholars and researchers have been drafting the framework for future regulations and there lies a hope that a workable system can mutually be developed for investors, consumers, crypto-run businesses, financial advisory firms and traditional banks alike. Financial regulators when well informed are expected to better understand crucial and meaningful topics such as differences between a value storage platform (Bitcoin) and a sophisticated ledger-based platform with smart contracts enabled (Ethereum).
However, not everyone seems to be warming up to the idea of accepting cryptocurrencies in their daily financial life. A recent rush of online security breaches, erroneous technology platforms, and other threats to the security of blockchain-based systems could undermine the overall public trust in cryptocurrencies. Retailers might not accept the unpredictable value of cryptocurrencies and may insist on traditional cash or credit card transactions instead, defeating the entire original purpose.
The Final Verdict
The combination of the above circumstances could mean that the cryptocurrency revolution could face a setback of a few more years. Hypothetically, governments across nations will look to halt the growing trend of cryptocurrencies in its track completely, but they would be successful in only slowing it down and steering it in various directions.
Mystery still surrounds the growth trajectories of cryptocurrencies – skyrocketing in one certain year and coming crashing down heavily in another. Experienced investors should look forward to building a diversified portfolio in the long run that can withstand any potentially dramatic setback within any particular macroeconomic indicator.
Moreover, the wheels of bureaucracy across governments across the globe move at a snail’s pace, and this pressing issue requires some deep deliberation and analysis in depth.