I am astounded by the kind of misinformation that exists about crypto currencies, especially in India. There are sweeping statements that it is a den for black money holders, drug dealers, terrorists and basically the dishonest of the society. It is important to step back and think through things logically, then parrot the scaremongering by the media and others, who are fed by people who feel threatened by the decentralization of money that crypto currencies like Bitcoin promise.
Of course, a small minority of the deplorable of our society will use this, but these deplorables of the society existed even before bitcoin ever came into existence. It is not the fault of this technology, just as it not the fault of the USD and INR and gold, such people existed since the birth of humanity.
Bitcoin is at its infancy, people compare it to when Internet came into being in the early 90’s. The young internet was deemed to be a failure or of just limited use by many experts. It was also then just a den of porn and drug dealers, but we know better now. The internet made many many industries like travel, publishing etc. redundant.
However, this is bigger because we are talking about a fundamental change in how we deal with money and that will lead to a cascading change to things like governance. We have a long way to go.
I think it is more important to understand the concept of bitcoin, either you get it or don’t. Don’t get bogged down by the technical aspects of it, after all we all use the internet and use all the top level applications and we really don’t need to know how TCP/IP is supposed to work.
Bitcoin is a trustless decentralized system, and that means it is beyond the control of a single authority. It is not only India, most governments and central banks globally, don’t understand it and thus dont know how to deal with it. If they could have they would have controlled the network by now.
If banks and governments feel threatened, can they shut the system? It is next to impossible, because unlike centralized systems which we are used to, there is no single point of failure, there are hundreds and thousands of nodes globally and in space, which will be relevant even if a single node fails. If the Internet collapses then there is adequate redundancy in space, block chains can even be broadcast through radio waves.
It is also robust because it has existed in the dirt of the Internet for eight years, it has been hacked and hacked but no one could break the block chain and its security has just grown stronger. Yes exchanges have been hacked and will be hacked, just like in the real world credit card data are regularly stolen, but that is nothing to do with the underlying technology.
This brings us to the crux, this is a decentralized system and thus we are in complete control of our own funds but we are responsible for are own funds. We do not outsource that responsibility to a bank or a government. It is just on us, to must make sure that we keep our coins secure in wallets that are not hackable. We should only share our public keys not our private keys, and there are many trusted solutions in the market now, which do that for us. For now, if we loose our coins it is nearly impossible to recover it, unlike in traditional systems.
Valuations? Bubble? I don’t understand that, PE Ratio? P/B? You first need to understand that none of the valuation metrics matters here. This is very different from a stock market crash or bubble and traditional valuation metrics. We are talking about a fundamental change in how we deal with money in the future, and this happens once every century or many centuries.
What can governments do, by this disruption it faces? Those countries who embrace it early on will lead the next few centuries, those who resist will lag behind. I think for now most governments should do not much till the technology matures. There should be some clarity on how profits in Crypto currencies should be treated. Also majority of the initial coin offerings (ICO) which are coming are mostly scams and probably should come under the preview of SEBI, to protect investors. Think of ICO’s as a new way for companies to raise capital, and their valuations (price of coins), left to the market to be determined. We are talking here of a real disruption to Stock Exchanges and Custodians itself.
What is disappointing is that India is again lagging behind, we could easily be taking a global lead here because of our software assets. But there is tremendous scepticism and disinterest all around. It is again the western world and the Chinese, Koreans and Japanese who are at the forefront of everything. I do hope the popular media as a whole can report about this more holistically.
A bit about Bitcoin itself.
Though Blockchain might be the buzzword right now, it is important to remember that Bitcoin is the original Blockchain and thus also the most evolved and tested and robust.
Also there will ever only be 21 million coins, that makes it anti inflationary a bit like Gold, unlike normal Fiat currencies which can be printed endlessly. Thus supply is limited and demand could be unlimited. This is along with increasing global acceptability is what gives it its perceived value.
There are terminal Bitcoin price valuations on both sides of the spectrum based on money supply, from Zero, to a Million USD or even 10 million USD. However, till the Bitcoin price discovery carries on, it will remain extremely volatile and its not for the faint hearted. This volatility for a new type of asset is not new, Oil in the 18th century too was extremely volatile.
I can only imagine that there be one or two dominant global crypto currencies like a gold or silver of today followed by a long tail of other crypto assets. Either countries will follow this new global currency or come with their own crypto currency that will be valued based on the dominant global crypto currency
Fears about misuse of bitcoins is also unfounded, a Blockchain is an open ledger and each transaction is recorded for posterity, and thus it is possible to trace any transaction if required.
Finally, as an investor you would also be more comfortable in this space if you don’t just enter it for price appreciation which is a given, but if you could look beyond biased news and terms, and start believing in the fact that these technologies will change the entire financial networks and the way we function as a society as a whole quite significantly in the medium to long run.