BITCOINIZATION-- ITS RISKS AND CRAZY VALUES – WHY?

BITCOINIZATION-- ITS RISKS AND CRAZY VALUES – WHY?

Extensive media reporting on the ambiguity of abrupt spike in value of Bitcoin—about Rs $4000/bitcoin in September 2017 to $17000/bitcoin on 14th December 2017— has evoked responses of it either being a bubble or babble or blessing—depending upon how one believes in the new invisible cyber-currency of 40 or more letters code. Experts say just as email is an application of internet---likewise Bitcoin is an application of Blockchain technology. Enough has already been written on Blockchains that it is well distributed crypto ledger of highest transactional security invented around 2008 that cannot be manipulated by any single desk or a computer.

Bitcoin owners can access it through select platforms/exchanges by logging into certain websites. No governments or central banks control flow of money linked to Bitcoin. The confusion internationally on Bitcoinization arises from this novel and least understood technology—that is a mind blowing invention since the internet. It is a “Future Shock” of sorts-- in the words of Alfin Toffler--"too much change in too short a period of time". The challenge before the governments is how to use it constructively. Since Bitcoin gets coded in a protocol of multiple computers, money can be transferred through QR to any address worldwide like Paytm and all transactions can be seen/monitored in the Block chain.

 Legal aspect of any crypto currency is unclear but many may consider it as hedging instrument just as people do in gold. The term used for production of Bitcoin is “mining”—just as they do in ore of Gold.   If the beneficiary pays tax on profit or premium earned on the amount rightfully invested through banking channels it cannot be termed money laundering. Otherwise it is illegal transfer of money. The market risk is not merely from the pricing of Bitcoin but also from the genuineness of trading platforms. There is also risk of Government’s intervention.

Why price of Bitcoin is ascending so steeply in short time? Only hazy explanations can be given. As a thumb rule, gold/precious metals’ value is prone to rise steeply in the wake of economic crisis in the world.

There is a lot of strain globally in financial sectors. There is no respite from the arbitrariness of USA by which it declares financial sanctions on other nations. USA has imposed trading prohibitions on countries like Russia, Iran and may do so on others in the foreseeable future. China too have strained economic ties with USA.

 Entire Middle-East (and more so after arrests of Saudi princes in S. Arabia and Jerusalem controversy) is having very disturbed relations with USA and Euro Zone. EU has recently banned 17 tax heavens including UAE and Bahrain. Unpredictable volatility in crude oil prices can create severe economic crisis in all OPEC nations and some of the stakeholders may try to move their assets via cryptocurrencies--where neither the banks nor governments are involved.

Countries like Syria Iraq, Turkey would like to have freedom from Nostros accounts settlements in USA. Citizens of the countries like Brazil, Argentina, and Ukraine where rapid currency depreciation can erode the basic value of savings, will also prefer crypto money.

One of the imagined ideas is that there is a lot of cash lying in the world that needs to be absorbed or maintained in safe heavens. What could be simplest way if large amount can be codified and accessed at will through internet? Then no one needs safe tax heavens BVI (British Virgin Island) Panama, Bermuda or Cayman Islands or Isle of Man  etc.

Though Japan and South Korea are officially supporting trading of Bitcoins, China is dithering—off and on. In US, CME is now trading futures of Bitcoins while the position of US Federal Reserve is unclear. The very fact that cut off trigger at CME is plus/minus 30% shows daily speculative sentiment and margin money requirements are around 40% though commodities trade with volatility margin of 5%-15%. To go short or long depends upon speculators. RBI has been warning that individuals can buy and sell at their own risk in Indian exchanges.

The said open source program of Satoshi Nakamoto (pseudo inventor of Block Chain and Bitcoin) can give birth to 21 million Bitcoins and this number cannot be increased or multiplied, the way, governments or central bankers print paper or electronic money. Here is a case where supply is limited while demand is open. Demand exceeding supply, also makes a currency bullish. However there are reportedly hundreds of other crypto currencies like Ethereum. Ripple, Litecoin and  many more—but Bitcoin is the most traded recently.

Can Bitcoin replace Gold as an investment and savings in India? But that is a very far-fetched notion.  Indians like physical precious metal/jewllery as their savior and cannot be content with invisible software. Accessing Bitcoin through intricacies of internet is another limitation for common man in India. Some marginal reduction in gold imports may be feasible if crypto become acceptable mode of investment. For that to happen, Indian Government needs to officially acknowledge crypto trading and put a regulatory frame work in place soon.

As of now about 2/3 of total 21 million Bitcoins have been mined. Miners say that cost of production of Bitcoin rises with every additional Block chain-because solving the “algo riddle” takes more power and computers. As the count of mining goes up-- so does time and cost. That is also one of the reasons attributed to rising value of Bitcoin.  China is the major miner while South Korea, Japan, USA, Russia, Ukarine, UK ,parts of Euro are also mining both Block chains and BCs.

Many prominent investment advisors have opined that Bitcoin is a worthless asset, as there is no underlying commodity or corporate performance to support its value----like many penny stocks. If that happens then all the cash money will disappear in seconds from the surface of this globe when the bubble bursts. That will amount to worldwide demonetization—the day like 8^th November 2016 in India.