Regularisation of Crypto exchanges will help in decisive investment

S Mohini Ratna, Editor, VARINDIA
 

Millions of innocent Indian users have risked their hard-earned money in highly-volatile cryptocurrencies, which are not legal tenders. The country is at the cusp of an economic disaster in making self-styled crypto cartels bombarding citizens with misleading ads while relevant government authorities quietly watching the whole game. 

The global cryptocurrency market cap had dropped to $1.24 trillion mark from the $1.29 trillion and Bitcoin accounts for about a third of the cryptocurrency market. Experts say after crypto the next downfall will be on the non-fungible tokens (NFTs) that have fallen from its all-time high. It seems that Cryptocurrencies are risk assets. 

Crypto-assets are the result of advances in cryptographic methods and distributed ledger technology. Innovation has made it possible to create an asset that lacks any underlying claim. In the initial set-up of what we today call “unbacked crypto-assets”, nobody is liable, nor are these assets backed by any collateral or managed by a trustworthy operator. This makes them purely speculative in nature, and hence highly volatile.

As a digital currency, cryptocurrencies are susceptible to technical glitches, human error or hacking. As per the industry estimates, Indians have invested around Rs 6 lakh crore cumulatively in crypto assets. Young investors in tier 2 and 3 cities, who don’t understand much about the stock market, have taken a fancy to virtual currencies such as Bitcoin, Ethereum, Cardano and Solana.

Nearly 20 per cent of Indian ultra-high-net worth-individuals (UHNWIs) invested in crypto assets last year amid rising popularity of cryptocurrencies and NFTs, according to a Knight Frank report. UHNWIs are those who have a net worth of USD 30 million (about Rs 226 crore) or more.

Among Indian tech companies, crypto startups are hiring big. More than 50,000 professionals are working in the Indian crypto industry, and the sector is likely to create 30% more jobs in the coming months, according to Nasscom and WazirX report.

Further, the total risk funding in Indian crypto and blockchain startups has touched over $587 million this year, compared with just $37 million in the previous year, as per Tracxn. Volatility is also a significant concern, although for many traders that is the main attraction.

But the concern is when crypto is spreading like wildfire then why is its regulation delayed?  Secondly, In the proposed law, if cryptocurrencies are not accepted as legal tender, then how will it be treated as an asset class and who will be its regulator. 

Crypto investors are anxious as the world’s largest cryptocurrency, Bitcoin, and other digital coins continue to plunge. The entire crypto market now has a market capitalisation of $1.2 trillion, less than half of the $2.9 trillion it was worth in November. The crypto plunge is likely to scare off some of the retail investors who poured money into crypto during its surge.

According to sources at various exchanges, approximately 2.3 Lakh Indians had invested in crypto token LUNA which has lost nearly all its value.  Most of the leading Indian crypto exchanges had listed LUNA on their platforms, while late entrants like Unocoin had negligible numbers of investors in LUNA. Following its crash, Indian exchanges delisted LUNA from their platforms.

Experts say Crypto should be classified as an asset class investment in India. It is similarly regulated in many other countries, and almost all use cases of crypto as investment and not payment.

Today, India has close to 15 million crypto investors officially, however this number is on much higher side and is the second-largest in global crypto adoption as per Chainanalysis and over $500 million in investments has been done from marquee investors, including Andreessen Horowitz, Sequoia Capital, Tiger Global, among others.

Investors should understand how a transaction is recorded in a distributed database, and how different blockchains support different crypto coins. What is important to understand is the technology that drives these coins.

For instance, in the recent case of the Luna stablecoin crash, while stablecoins promise to stay steady even if the crypto market fluctuates, due to technical anomalies, the price of Luna dropped by more than 99 percent.

Don’t get shocked if you see the value of cryptos going up or down by a significant margin. In fact, cryptos are known to rise and fall by double-digit percentages within a span of hours. Volatility is driving investors to bet big on crypto. This is caused by a range of factors including supply and demand of the coin, user sentiments, government regulation and sometimes even a tweet from Elon Musk.

The value of digital currencies is dependent entirely upon the value that other owners and investors ascribe to them; this is true across all currencies, digital or fiat. Without a central authority backing the value of a digital currency, investors may be left in the lurch with complications when transactions or ownership arise.

One thing is clear that cryptos are risky investments and could result in significant financial loss. If you are not able to withstand the likely full loss of your crypto investment, that means you cannot afford the risk of investing the amount you are considering.