Since centuries, physical tokens are being used as a means of payment (e.g. shells, gold coins, bank notes). In such a market, a direct exchange of sellers’ merchandise and buyers’ tokens permits them to realize a fast and final settlement. This option is inaccessible, however, when the two parties are not present in the same location (e.g. ecommerce), necessitating the usage of digital tokens. This downside may be solved simply when there’s a trusty third party (e.g. PayPal) who manages a centralized ledger and transfers balances by crediting and debiting patrons and sellers’ accounts. Within the absence of a 3rd party, however, cryptocurrencies like Bitcoin are used as a digital means that of payment in a highly distributed network. Cryptocurrencies work through a distributed verification of transactions, changing and storing a record of dealing histories. This necessitates that accord between the users is maintained regarding the right record of transactions. This trust in the currency is established by having a contest for the right to update records. This competition can take various forms. In Bitcoin, this is through a method known as mining. Miners (i.e. dealing validators) vie to solve a computationally expensive problem (proof-ofwork). The winner of this mining method has the right to update the record and be the first to propose a brand-new history to the network. Cryptocurrencies are engineered on cryptography. They are thus known to be secure as a result of the consensus-keeping method is secured by sturdy cryptography. They are not secured by people or by trust but by mathematics. Describing the properties of cryptocurrencies, its convenient to separate them between transactional and financial properties. A few of them are:
Irreversible: Once confirmed, a transaction can’t be reversed. If you send cash, you send it. Nobody can assist you if you sent your funds to a scammer or if a hacker stole them from your computer. There’s no safety net.
Pseudonymous: Neither transactions nor accounts are connected to real-world identities. You receive Bitcoins on supposed addresses, which are randomly seeming chains of around 30 characters. Whereas it’s sometimes possible to trace the transaction flow, it’s not essentially attainable to attach the real-world identity of users with those addresses.
Fast and global: Transactions are generated nearly instantly in the network and are confirmed in a few minutes. Since they happen in a world network of computers, they are indifferent to your physical location.
Secure: Cryptocurrency funds are locked in a public key cryptography system. Only the owner of the personal key can send cryptocurrency. Sturdy cryptography and the magic of numbers makes it impossible to interrupt this theme.
Permission-less: You don’t need to consult anybody to use cryptocurrency. It’s just a software that everybody can download for free. Once you put in it, you’ll be able to receive and send Bitcoins or different cryptocurrencies. Nobody can prevent you. Monetary properties
Controlled supply: Most cryptocurrencies limit the provision of the tokens. In Bitcoin, the provision decreases with time and will reach its final number someday round the year 2140. All cryptocurrencies manage the supply of the token by a schedule written in the code. This suggests the supply of a cryptocurrency at each given moment in the long term can roughly be calculated. There is no surprise.
No debt but bearer: The fiat-money on your checking account is formed by debt, and therefore the numbers you see on your ledger represent nothing but debts. It’s a system of promissory note. Cryptocurrencies don’t represent debts. they simply represent themselves.To understand the revolutionary impact of cryptocurrencies, we ought to take into account both properties. Bitcoin as a permission-less, irreversible and pseudonymous means of payment is an attack on the management of banks and governments over the financial transactions of their voters. You can’t hinder somebody to use Bitcoin, you can’t command somebody to settle for a payment, you can’t undo a transaction. (Jonathan Chiu, 2017) (Granger, 2018)
Factors affecting volatility
No Intrinsic Value: Despite the sized valuations, cryptocurrencies (including Bitcoin) don’t sell a product, hire thousands of individuals or earn revenue. They often don’t generate dividends and just a small amount of the entire price of the currency goes into evolving it. Thus, it’s exhausting to value. Unlike paper money it has no intrinsic value.
Lack of Regulatory Oversight: Cryptocurrencies are a worldwide recognized and acknowledged development in digital money. Whereas governments are clamping down on this business, regulation remains in its adolescent stages. With restricted regulation on this market, investors are discouraged to invest. As an large sum of the fund has no assurances that the capital is really secure or protected against bad actors, many folks realize it to be unsafe and due to this uncertainty to invest, the costs fluctuate heavily.
Lack of Institutional Capital: It is indisputable that some venture capital companies, hedge funds, and high networth people are investors in the cryptocurrency world. However, most of the institutional capital remains on the sidelines. Most of the banking heads also admit that there’s some validity in the crypto space, but have yet to commit a significant amount of capital or participation in public.
Thin Order Books: Cryptocurrency investors are educated to never keep coins on an exchange. This is because there’s a high risk of getting hacked. As a result, most of the tradable supply of coins isn’t on an exchange order book but in off-exchange wallets. On the contrary, most the tradeable stock of a in public listed firm is transacted on one exchange. Thanks to the capability of giant traders to maneuver the cryptocurrency market in either direction and implement fruitful ways to encourage this, volatility mark of cryptocurrencies goes up.
Short Term vs. Long Term: Cryptocurrencies could also be a decent choice for short-term investors, but for someone who is investing in something that promises returns after a decade or more (long-term investment), they are of very little interest. They cannot be bought while you’re retiring from accounts and are sometimes unapproachable to financial advisors and retail brokers, thus a complete system of investors is left out.
Low Liquidity: Various analysts have declared that bitcoin suffers from liquidity issues, which could successively be contributing to bitcoin’s sharp volatility. Having less liquidity – instead of more – can doubtlessly exacerbate value fluctuations, making it so the digital currency’s inevitable declines are more severe than they might be otherwise.
Sensitive to Market Sentiments: If the sentiment encompassing bitcoin becomes more positive, this may result in a sharp increase in demand and notable upswings in price. Further, price gains and optimism can combine to form media hype cycles. Basically, these present itself when ascension values provoke larger media coverage, which successively spur extra purchases and price appreciation. Changes in sentiment can have the precise opposite result on price in addition. If an asset bubble bursts, and investors begin fleeing an asset like bitcoin, the plunging prices can prompt widespread media coverage, causing even more market participants to either sell the asset or just avoid purchasing it.
Inequality of Wealth: Another factor that could potentially fuel bitcoin’s price volatility is how unevenly it is distributed. If a single individual procures a notable amount of bitcoin, he/she can trigger price fluctuations by selling just a minute fraction of his/her bitcoin holdings. Also, these individuals could potentially coordinate and work together to cause sizable shifts in bitcoin prices.
Key Role of Speculation: When thought of as a payment instrument, cryptocurrencies seem likely to be attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions. The current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment. This speculation makes the currency volatile and not as stable as conventional forms of investment. There are many different factors that help fuel volatility in bitcoin. Variables including the digital currency’s small market size, low liquidity and immature regulatory environment can all help contribute to bitcoin’s sharp price fluctuations. As a result, investors who are interested in the digital currency may benefit significantly from conducting thorough due diligence before getting involved.
Crypto Currency and its Future in India
The latest thing in the technological world which gained most of the limelight in past 2-3 years is what’s called “virtual currency” or “cryptocurrency”. The most popular is “bitcoin”. Not only individuals but even large organisations have started accepting payments in the form of cryptocurrency. But in February 2018, our Finance Minister Mr. ArunJaitley announced that the use of Bitcoin will not be promoted in our country and they want to get rid of this decentralised form of currency. On April 6, 2018, RBI made an announcement that “…any bank or financial institution regulated by RBI will not deal in virtual currencies.”. Even countries like Russia, Bolivia, and Taiwan posed the restriction on usage of Cryptocurrency.
It has been nearly 6 years as of now since cryptocurrency entered our country’s market. Indian exchanges are planning to launch cryptocurrency which will not only supports bitcoins but other digital currencies like Ethereum, Ripple, Bitcoin Cash and more. There are nearly 1000 different types of coins in the market.
But now cryptocurrencies are no longer considered legal in India and if you trade bitcoins you cannot convert it into Indian currency.
There are some reasons because of which the use of cryptocurrency is banned in India. Because of the intangible nature of cryptocurrencies, it is very difficult to trace the location of its transactions. Cryptocurrencies can also be used by terrorists. Also it can lead to tax evasion as the transaction cannot be perfectly evaluated
Bitcoin and other cryptocurrencies are outstanding technological innovations. By using the block chain method, the transactions can be secured. But there is a need of a regulating government body to study and overlook all the ongoing transactions. Cryptocurrency organisations along with the Policy makers can create a significant and secure currency exchange and hopefully it will not lose its charm.
Nevertheless, the “block chain technology” can be used by banks or other regulators to create decentralized platforms and secure the transactions. There are many records in India which are centralized kept in the offices of banks or real estate offices or government offices. These registers or papers or documents can be easily altered or tampered. With the use of block chain technology, the documents or transactions can be decentralized and can be more secured.
In short, the legitimate use of Bitcoin or other crypto currencies in near future is doubtful, but the use of block chain technology certainly has a long way to go.
Cryptocurrencies are decentralized digital assets that have taken the world by storm. However, as financial instruments, they are poorly understood and the general lack of awareness has prevented their mainstream adoption.
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The Entrepreneurial Board
College of Vocational Studies, Triveni, Sheikh Sarai-II, New Delhi 110017