Cryptocurrency: An Unsustainable Rise | Herald Of The Deccan – Tech Tribune France

The sudden increase in the value of cryptocurrencies has caught the attention of investors and policymakers. Cryptocurrencies are convertible virtual currencies with a market value equivalent to real currency. Currently, there are around 9,271 different cryptocurrencies, Bitcoin, Ethereum, Tether, BNB, and USD coins are the top five cryptocurrencies.

Bitcoin is the first and by far the most popular cryptocurrency introduced in 2009 as an alternative to physical currency, as a peer-to-peer electronic payment system without the intervention of institutional authorities like banks and merchants. governments. Cryptocurrencies don’t behave much like currency and are, at best, unprepared to perform the same function as physical cash.

Physical currency provides a universal reference for value and a concise way to transfer it. The implementation of such a system requires having three important attributes such as a medium of exchange, a unit of account and a store of value. Cryptocurrencies fail miserably to meet these criteria. Around the world, an insignificant proportion of online merchants accept cryptocurrencies as a form of payment, and those who accept them face security issues such as delays in transaction verification.

Second, as a unit of account, cryptocurrency only works when valued in physical currency. With the skyrocketing value of cryptocurrency, especially bitcoin, people are trading in smaller units such as milli or micro bitcoins. Micro-cryptocurrency trading requires traders to quote retail product prices to four or five decimal places with leading zeros, a rare and impractical phenomenon.

Moreover, the price of crypto varies across exchanges, which is a clear violation of the law of one price principle. On the last attribute, cryptocurrency performs the function of storing wealth quite well, but its volatility makes it riskier and carries a greater threat of loss.

Cryptocurrencies lack additional features that are usually associated with modern physical currencies, they cannot be deposited in a bank and must be held in digital wallets, which are expensive to maintain and are vulnerable to security issues such as cyber attacks, hacking and ransomware. The bitcoin supply is fixed; it has an absolute limit of 21 million units that can be mined, with no possibility of supply expansion after the year 2140.

Theoretically, to maintain stable price levels, it is imperative that the money supply can grow at the same time as macroeconomic activity; otherwise, it can only be solved by increasing the velocity of money or by a structural fall in prices. This could plunge the economy into a depression.

The artificial scarcity of bitcoin is an advantage for investors: growing demand with an inelastic supply leads to a higher price. In addition, every day new cryptocurrencies are launched if each private entity issues its own currency; this results in monetary instability. Similarly, the absence of a central regulator makes investor protection impossible and poses a broader stability risk.

The exponential growth of the cryptocurrency market can inflict greater damage to the economy, people invest in these markets assuming that cryptocurrencies will appreciate in the future; presumption promotes speculative activity, and a sudden change in presumption can send the market plummeting, hurting many naïve investors.

The extent of damage to the economy depends on the interconnection between crypto-assets and the conventional financial sector. Economists believe that direct exposure could be transmitted from crypto assets to the financial sector and indirect effects could spread to other asset classes. The RBI Financial Stability Report (2021) indicates that crypto assets pose long-term challenges for the management of capital flows, financial and macroeconomic stability, and the transmission of monetary policy.

Governments around the world have taken different views on crypto-assets; China has completely banned them and El Salvador has declared them legal tender. In India since 2018, the Reserve Bank of India (RBI) has banned financial institutions from supporting crypto transactions – but the Supreme Court overturned it in 2020. Resting speculation in crypto assets, the finance minister has announced in the budget a tax rate of 30% with surcharges applied, and to track the crypto footprint, 1% TDS on the payment made for the transfer of virtual assets above a monetary threshold was also announced .

Cryptocurrencies lack strong operational, governance and risk practices, currency with no intrinsic value adds no value to the market. The new fiscal policy could, however, mop up additional revenue for the government; however, the surge of speculative investments without value creation can inflict greater damage on the economy. Policy imposing restrictions on cryptocurrency is the sooner the better for the sustainable macroeconomic health of the economy.

(The writer is an assistant professor at a college based in Bellary)

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Cryptocurrency: An Unsustainable Rise | Herald Of The Deccan – Tech Tribune France


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