A cryptocurrency is a digital currency designed to work as a medium of exchange. With the help of cryptography, it secures and verifies transactions, and also controls the creation of new units.
Cryptocurrencies are backed by blockchain – a system where information is shared and consistently updated.
Whenever a transaction takes place, its details are broadcast throughout the network by the spending party, ensuring that everyone has an up-to-date record of ownership. Periodically, all transactions get bundled together into one “block” and added to the historical record.
Are we in a bubble?
Cryptocurrencies facilitate secure peer-to-peer transactions and may have enormous future application in terms of security of data. They serve as a medium of exchange, and a store of value, just like regular money.
The core argument for Bitcoin is that central banks are unable to control it or print it. Like gold, Bitcoin has no inherent value, there is no income stream and no guarantor. So it isn’t an investment. It’s a perceived investment, driven by supply and demand.
For a bubble to propagate, it needs a compelling story. Bitcoin has it. It is revolutionary, a new digital currency with significant future applications. There is urgency in price action, scarcity in availability and a shroud of secrecy. Then there is fear and greed.
Why we’re not yet ready to invest in Bitcoin
Bitcoin today is valued by the greater fool theory or the hot potato theory. Should Bitcoin achieve a level of mass acceptability, it may gain legitimacy. But, governments are unlikely to hand away from their currency to a digital competitor.
To add to it, the volatility that comes with cryptocurrencies such as Bitcoin is enormous, driven in large part by varying perceptions of the intrinsic value of the cryptocurrency, regulatory treatment, and its limited acceptability.
Regulators worldwide are investing time to understand the concept, and therein provide a legal framework to regulate it. Concerns continue to abound about cryptocurrencies’ appeal to the traders of illegal goods and services and for activities such as money laundering and tax evasion.
India’s central bank, The Reserve Bank of India, has a group studying whether digital currencies backed by global central banks can be used as legal tender. However currently, the use of cryptocurrencies is a violation of foreign-exchange rules.
In his recent Union Budget announcement, India’s Finance Minister Mr. Arun Jaitley clarified that cryptocurrencies are not legal tender and cannot be used as a substitute for currency. However, this does not restrict the holding of cryptocurrencies.
The future of cryptocurrencies thus remains largely undefined.
The risk of more regulators worldwide declaring them illegal is a strong possibility. South Korea recently took a call to ban the use of anonymous bank accounts in cryptocurrency trading, joining the likes of China and Russia.
Bitcoin, by all means, is a fascinating speculative investment. However, as investors, we prefer assets we can value using dividends, income or earnings.moneycontrol