PROJECT

TRENDS             2018-05-05

Cryptocurrency- Opportunities and Challenges

It is one of the technology from which new business models are evolving. It is clear that cryptocurrency will exist for foreseeable future but how the landscape might look like for India and the world, only time will tell.

Cryptocurrency was the fastest growing asset class in last year.Bitcoin surged more than 2000% whereas other less popular cryptocurrency like Ether and Dash went up by 5300% and 6700% respectively in 2017.

The price rise of cryptocurrency has been attributed to the alternate investment available after the traditional stock market 2008 financial crisis. According to a survey conducted byMarketWatch, over 82 per cent people claim their decisions of investing in Bitcoin is based on the economic crisis.

Recently in December, 2017, when South Korean Finance Minister Kim Dong-yeon said that the country may crack down on cryptocurrency trading to discourage speculation. It took one month for Bitcoin to fall 40% after announcement.

The entry of institutional capital, increasing regulatory recognition of cryptocurrency exchanges, and major technological developments are expected to contribute to the market's rebound and push cryptocurrency prices to all new highs in future.

Virtual Currency (VCs) Economics

Cryptocurrency economics is quite different from the rest.Bitcoin and digital currencieshave been incredibly resilient to adversemarket news. The growth of cryptocurrency is determined by demand and supply and speculation drives its prices.

There is no established valuation matrix for this asset. Liquidity is another issues with cryptocurrency. Despite all these challenges, it has remained an attractive option for many.

pie chart

Bitcoin - Bubble Just about to Burst

One School of thought onBitcoin boom is that it is simply part of a broad bull market. It is a bubble waiting to burst the same way as dotcom and housing market.

Cryptocurrency is the shadow side of optimism. Many are drawn to cryptocurrency because they see it as an alternative to the system that came crashing down in 2008, and their belief in digital currency has not been shaken so far.

One reason of Bitcoin crash canbe a successful hack of the blockchain which is the underlying technology that records and controls eachtransaction.

India and the world

Reserve Bank of India recently crackdown on cryptocurrency such as Bitcoin. It has decided that entities regulated by RBI shall not provide services to any individual or business entities involved in trading of Virtual Currencies. Entities must exit within three months if any such relationship exist. This will discourage the trading in VCs.

Finance ministry, India has repeatedly cautioned investorsto stay away from cryptocurrencies. It shows that the ecosystem for VCs in India is not mature and the level of confidence in cryptocurrency is very low due to its volatility and liquidity issues.

In September, Chinaalso moved to shut down exchange trading of the cryptocurrency but none of these permanently stopped Cryptocurrency rising the price charts. This hashelped digital currency to draw the attention of hedge fund traders and futures markets.

As evident, the cryptocurrency boom is driven by developed world and the participation from emerging world countries is very less.

Past data suggest that young generation has rode the wave of Bitcoin and prefer to put money in the new age investment asset class. This no. is ever increasing but older people see cryptocurrency as too volatile and wild for their taste.

Despite so many issues and doubts, Cryptocurrency remains an attractive option for many. Regulation, liquidity and utility of digital currency is still an unanswered question.

Many countries including India are planning to use Blockchain to create their own digital currency. It is one of the technology from which new business models are evolving. It is clear that cryptocurrency will exist for foreseeable future but how the landscape might look like for India and the world, only time will tell.

References:

https://www.bloomberg.com/news/articles/2018-01-17/what-could-kill-the-bitcoin-boom

https://www.express.co.uk/finance/city/916076/bitcoin-boom-cryptocurrency-explained-millennials-invest-latest-stock-market-sell-off

https://www.cnbc.com/2018/01/16/skeptics-say-bitcoin-has-no-value-heres-why-theyre-wrong.html

https://economictimes.indiatimes.com/wealth/invest/5-reasons-why-you-should-not-get-swayed-by-bitcoins-sky-high-returns/articleshow/61874770.cms

http://www.business-standard.com/article/markets/with-6700-return-so-far-in-2017-this-altcoin-has-trumped-bitcoin-117120600278_1.html