Background:
The first known cryptocurrency, Bitcoin was created in January 2009. The original intent of creating Bitcoin was to be electronic cash, but its volatility scrapped its original intent. As of now, there are more than 20,000 cryptocurrencies worldwide.
Definition of Money:
Cryptocurrencies aimed to mirror some or all of the uses of traditional money. Traditionally “Money” has always been defined in terms of the three functions or services that it provides, namely:
1. A medium of exchange
2. A unit of account
3. A store of value
But in course of time, a fourth function, namely that of being a final discharge of debt or standard of deferred payment was also added. This fourth function of money was acquired by money through the conferment of the legal tender status by a Government / Central Authority.
Crypto Craze:
When a cryptocurrency is released, the creator can set its parameters, which cannot be changed thereafter. You cannot duplicate it and neither recreate it. The limited supply of a particular cryptocurrency creates more demand due and consequently leads to inflated prices.
In recent times, similar to other assets like gold and diamonds, cryptocurrencies are bought to hold for its value rather than to be treated as electronic cash. Cryptocurrencies are easily transferable and can be easily stored compared to other assets.
Mining:
Mining is the process by which new cryptocurrencies are entered into circulation. It is also the way new transactions are confirmed by the network and a critical component of the maintenance and development of the block chain ledger.
Mining is performed using sophisticated hardware that solves extremely complex computation math problem. The first computer to find the solution to the problem is awarded the next block of coins and the process begins again.
Volatility:
The values of the cryptocurrencies are highly volatile mostly due to the immature market. New regulations and policies are constantly reshaping the market and causing drastic swings. More so, since cryptocurrencies are not confined to any geographical area, any relevant event in any part of the globe could cause an impact on the price and its trade-ability. With very little historical data compared to more conventional investments cryptocurrencies are considered as risky assets, but potential rewards come with higher risks!
Conclusion:
In India, investors have been caught in a crossfire between companies and exchanges promoting investments in cryptocurrencies and a lack of regulations for digital currencies. The Budget of 2022 and the proposal to tax the crypto earning is something that may change the scenario. But, that’s for another article.
The investors’ interest and enthusiasm in this new asset class have has been on the rise and it is here to stay for long…!!
(Rakesh K. Singh is an Advocate by profession and is the Founder Head of Law firm RKS Associate. He is also the Founder Head of NGO - Bharat Utthan Sangh. All views expressed in this article are his own.)
