Before discussing whether to ban private cryptocurrencies, it is prudent to first understand what cryptocurrencies are.
Virtual currencies created using blockchain technology have been the subject of much speculation and discussion lately.
Legendary investors Charlie Munger and Warren Buffet have gone so far as to call Bitcoin and other cryptocurrencies “rat poison.”
Before debating whether to ban private cryptocurrency, it is prudent to first understand what cryptocurrencies are.
Cryptocurrencies are encrypted digital tokens that can be transferred between two parties without the need for a centralized regulator.
Transaction Facilitators strive to verify a transaction individually and keep a public ledger open to everyone.
No intrinsic value
The elimination of a centralized entity is why we very often see the word “decentralization” in all senses. Cryptocurrencies are not “hard to find” as most believe; in fact, it turns out to be more traceable than banknotes due to the public ledger leaving a clear trail.
In addition, when discussing the merits of cryptocurrencies, it should be understood that they do not have any intrinsic value. Stocks provide partial ownership of a company that produces goods and services, bonds provide a stable source of income, and gold has inherent metallic value. Cryptocurrencies are non-performing assets that are simply traded because there is a demand for it.
Former RBI Governor Raghuram Rajan recently said in a TV interview that “a lot of crypto is only valuable because there is a bigger fool ready to buy.”
Cryptocurrencies look eerily like the Tulip Madness of 1636, when tulips were traded for the purpose of generating profit. Another key point to note is that while there is theoretically a shortage of Bitcoin and other cryptocurrencies, this does not mean anything in economic terms as there has to be a particular focus that will support demand for the asset. .
Some claim that Bitcoin and other private cryptocurrencies are a new revolution in currencies and the monetary system. No central bank or government in the world would be interested in relinquishing power over the money supply. Private cryptocurrencies adopted as legitimate currency in the country will mark the end of central bank regulation and economic intervention. Indeed, central banks need the ability to manipulate the money supply to intervene in the event of a crisis. Private cryptocurrencies rob the central bank of this power, effectively leaving it unable to fix interest rates and effectively control the money supply. In a crisis such as the COVID-19 pandemic, it would become difficult for monetary regulators to step in and help an injured economy.
Therefore, a notable government is unlikely to favor and encourage private cryptocurrencies for these reasons. Moreover, due to speculation, cryptocurrencies guarantee that they can never be used as a measure of the value of goods and services. In order for a cryptocurrency like Bitcoin to be accepted as a currency, it needs to price the goods. Bitcoin, an extremely volatile cryptocurrency (like its counterparts), cannot act as a currency in a stable economy.
While a particular country may choose to ban private cryptocurrencies, the fact that this means nothing for the asset as a whole is not true. The important advantage of cryptocurrencies, which is decentralization, is leading to its downfall. Any government with enough pockets can decide to do away with cryptocurrency by destroying its monetary value. The incentive for minors and other participants to maintain the system is financial.
If the price of a cryptocurrency like Bitcoin were to drop to 0, that would be devastating. The act of a major government announcing its intention to cut cryptocurrency would leave a huge dent in the price. Additionally, cryptocurrency mining uses a substantial amount of a country’s resources that could be used for more productive purposes.
It is crucial that governments around the world decide on a course of action for this growing technology and equip themselves accordingly.
The longer it takes for regulators to implement a plan, the more there is to lose as the amount of money funneled into the asset further increases. Sadly, all bubbles end abruptly, leaving many financially helpless.
Those who invest in cryptocurrencies should understand that they are speculating rather than investing. It follows that in speculating, one takes great care to know what one is getting into. Therefore, it is essential that an individual does not bet their financial security on this new asset.
(Anand Srinivasan is a consultant and Sashwath Swaminathan is an associate researcher at Aionion Investment Services)