Cryptocurrency Investing in India: The Past, Present and Future
Few Indians may have heard of, let alone made, a 3500% return on investment (ROI) in their lifetime. However, it is the ROI that cryptic Bitcoin has produced over the last five years. In June 2015, the price of one Bitcoin was $257.06 (INR 19251.74), and in June 2020, the price rose to $9,143.58 (INR 6,84,780.99). These astonishing returns would be a fantasy for most Indians; yet, over the last couple of years, few have gone from marvelling over the numbers to investing in such cryptocurrencies.
In its initial years itself, bitcoins attracted Indians; in 2017, India accounted for around 10% of the global virtual currency (VC) trade, that is, 16,754.76 coins in trade volume. However, on April 6, 2018, the Reserve Bank of India (RBI) prohibited entities regulated by the RBI from dealing in VCs or providing services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, etc in VCs. This decision was not entirely unsurprising. The RBI had expressed concerns over buying and investing in cryptocurrencies since 2013. According to the RBI, storage of VCs in a digital wallet makes VCs prone to hacking, malware, loss of passwords, et cetera; there is a lack of alternatives for consumers in the events of any disputes (since VCs are traded without involving any authorised central agency); VCs are prone to huge volatility since no underlying asset backs them, and they are traded in various jurisdictions where the status of VCs is unclear (therefore, they bear exposure to legal and financial risk).
However, on March 4, 2020, the Supreme Court of India struck down the April 6 Circular on the grounds that it was outside the mandate of the RBI to impose this ban and the nature of cryptocurrencies - in terms of law - was such that it did not call for an outright ban. Due to the ban, several exchanges had shifted overseas or closed their business altogether in the last two years; the cryptocurrency sector in India had become stagnant. However, at present, the cryptocurrency sector and VC investments are booming. Cryptocurrency exchanges are seeing a considerable number of user registrations. Cryptocurrency start-ups are seeing extremely high activity: Unocoin says over 1,000 customers are registering daily while WazirX platform is adding 300 users daily. Also, global decentralized cryptocurrency exchange Binance Group has set up a $50 million block chain technology fund for India. Cryptocurrency start-up ZPX has also announced that it plans on ramping up operations in India. In general, crypto founders, investors and industry bodies say that the order would open up more avenues for a cryptocurrency ecosystem in India to be built.
Today, investing in cryptocurrencies has notable upsides for Indians. Primarily, investing in cryptocurrencies such as Bitcoin has the potential to yield massive returns. As mentioned previously, Bitcoin grew by 3500% over the last five years; Litecoin too grew from only $2.06 (INR 154.21) at the start of 2015 to $321.98 (INR 24102.52) in late 2017. The ROI for cryptocurrencies is one of the highest among asset classes. However, at the same time, cryptocurrency markets are subject to extremely high volatility. The constant speculation in the market creates significant uncertainties, while the absence of an underlying asset to back the cryptocurrency leads to increased volatility as well. Nevertheless, it is also essential to note that investing in cryptocurrencies allows for increased liquidity. Investors can easily and rapidly buy and sell VCs without having to navigate through complex procedures or processes. However, another drawback with VC investments is the potential for mismanagement of the cryptocurrency. Every cryptocurrency is a startup and has a team of founders running it; for the cryptocurrency to effectively reach the market, it needs a reliable founding team (which is not always available). But on the contrary, yet another advantage of investing in cryptocurrencies is the transparency of the investment process. Since block chain technology is decentralized and allows for a public ledger to be available on every computer that is a part of the system, integrity of investing increases and the complexity in understanding cryptocurrency investing reduces.
While the cryptocurrency sector in India is currently growing and is set to grow further, it may not reach its full potential because certain banks still refuse to provide services to individuals and businesses dealing in cryptocurrencies. Some of them have even frozen the accounts of owners who were found participating in peer-to-peer sales and blocked international wire transfers from blockchain and crypto-based companies. The banks defend this behaviour by claiming they are awaiting an official notice from the RBI, disregarding the judgment of the Supreme Court. Many countries around the world have taken a different approach to the management of VC investments. Countries such as the USA, UK, Russia and Australia do not leave the cryptocurrency sector unchecked but have not completely banned the exchange of cryptocurrencies either. State authorities do regulate the industry and ensure that legal and fiduciary standards are adhered to while the VC is also being used for fully lawful purposes. The authorities also define any applicable taxes and costs to be paid to the state.
If India takes a similar stance on its cryptocurrency sector, it may be able to preserve the growth of the sector while also ensuring the financial and social security of the users. India does face other issues such as the lack of information on the subject for the general public too; however, it can work towards simplifying its data and publications to resolve this issue. Nonetheless, the SC ruling acts as a catalyst to the growth of the sector. In the future, with the current growth rates, adequate availability of information and appropriate regulatory framework, cryptocurrencies may actively begin competing with other asset classes and bringing a lucrative investment option for Indians.
Definitions
Cryptocurrency (noun): a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
Return on Investment (noun): Return on investment is a ratio between net profit and cost of investment.
Asset Class (noun): A group of financial instruments which have similar financial characteristics and behave similarly in the marketplace.
Blockchain (noun): a system in which a record of transactions is maintained across several computers that are linked in a peer-to-peer network.
