ON NOVEMBER 9, 2021 overall market capitalisation of cryptocurrencies topped $3 trillion for the first time. This news is seductive and many of your friends may be making oodles of money on their crypto investments. But if you are possibly suffering with fear of missing out or FOMO, then let’s sound a note a caution. Don’t ride this tiger without doing your homework.
Cryptocurrency is a medium of exchange which is digital, encrypted and decentralised. Cryptos are based on blockchain technology, seen as stable and secure, but are hugely volatile and combustible.
India has not recognised it as currency but people can trade in cryptos. The world too is divided on cryptos. Multiple US government agencies are mulling ways to regulate cryptos. UK too is treading cautiously and has prohibited crypto derivatives for retail customers. Meanwhile, China banned cryptos in September 2021and has made crypto mining and crypto transactions illegal.
The real concern for regulatory bodies is the volatility endemic to crypto assets. An unpredictable asset class, investors can make a small fortune in a single day or book mammoth losses in a few hours, even go bankrupt in quick time. Since this asset class is largely unregulated, retail investors can often seem to be at the mercy of punters and speculators.
The world then must come together to build an overarching regulatory framework for cryptos. Regulations will only be effective if there is a concerted global movement – remember, cryptos are traded on global platforms and are beyond the jurisdiction of any one single country.
For a paradigm, consider the bitcoin scam by hacker Sriki which has sent shockwaves through the political class in Karnataka. Sriki hacked into the crypto exchange Bitifinex, which has a presence in over 50 countries, with impunity. And it’s not uncommon for cyber criminals to target crypto exchanges. Now, would you invest in stocks if stock exchanges like the NYSE or our NSE and BSE were vulnerable to hacking? Hence, the need to regulate the crypto industry.
Cryptos Need Circuit Filters
Stocks have circuit filters which halt trading for a certain duration before trading commences again. In India, circuit filters for index get triggered at 10%,15% and 20 % (and then there are circuit breakers for stocks as well). Then, there are caps on overall market exposure, with investors forced to keep margin money with stock exchanges, etc. Why can’t a stock-market inspired regulatory framework be adopted for cryptocurrencies?
For adequate checks and balances in place, a global crypto-supervisory body may well be called for, perhaps a bit like the WTO or the WHO.
And if all this is not possible, why not restrict investments in cryptos to institutional investors like mutual funds? Retail investors open to bitcoin exposure can do so through a fund of their choice.
Interestingly, in the US, a few months ago ProFunds, a Maryland-based firm, has launched what it says is the first publicly available mutual fund correlated to the value of the largest cryptocurrency bitcoin (according to Bloomberg). And that may well be the way to go in countries like India to check unbridled speculation in cryptos. At least, until people can develop a risk appetite for a highly volatile asset class like bitcoin.
The Bottom Line
At the moment, cryptos appear to be more an asset class than a currency. Now, in 2020, rupee depreciated 3% against the dollar. Bitcoins can shed much more in a matter of a few minutes – in fact, have tumbled 30% intra-day on an occasion. Would you want to preserve your life-savings in cryptos, instead of the rupee, when at the wink of an eyelid your portfolio can go up in smoke without any fault of yours?
Remember, in our country, many states have been forced to ban lotteries, betting and liquor to prevent their abuse. Cryptos too can offer a kick, a dangerous high to traders. It’s the responsibility of the state to encourage responsible investment behaviour in bitcoin and its siblings.
(With inputs from Abhishek Sankhyayan)
(Rishi Joshi is Executive Editor with India Ahead News. The views expressed in this opinion piece are those of the author.)
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