Finance Ministry cautions against bitcoin, says 'virtual currencies are like ponzi schemes'

Bitcoin took 834 days to reach past $1,000 from the time that BitStamp started to track the price in August 2011. It was another 1270 days to surpass the $2000 mark on May 20, 2017. However, the price surged in the latter half of 2017, crossing successive $1,000 milestones with ever increasing speed on its march toward the $11,000 mark. The move up from $10,000 to $11,000 took less than 12 hours, stoking concerns that a rapidly swelling bubble could be set to burst in spectacular fashion. Here are some facts that you might not know:

The Ministry of Finance has cautioned people against investing in virtual currencies and compared them to ponzi schemes.

"There has been a phenomenal increase in recent times in the price of Virtual 'Currencies' (VCs) including bitcoin, in India and globally. The VCs don't have any intrinsic value and are not backed by any kind of assets. The price of bitcoin and other VCs, therefore, is entirely a matter of mere speculation resulting in spurt and volatility in their price."

The announcement follows a string of warnings by both the Finance Ministry and the Reserve Bank of India against cryptocurrencies such as bitcoin.

Globally too, governments, regulators and experts have warned investors against jumping on the gravy train of cryptocurrencies, prices of many of which have multiplied several times this year.

The finance ministry also emphasised "the risk of the investment bubble in VCs of the type seen in ponzi schemes in which a sudden crash can mean that the investors lose all their hard-earned money."

Since VCs are stored in a digital format, they are also vulnerable to malware and ransomware attacks, the ministry added. "The encryption in VCs like bitcoin ensures anonymity which might boost illegal activities like terror funding, smuggling being carried out online."

The I-T department had turned on the heat on cryptocurrency exchanges earlier this month to check for tax evasion.

The RBI has already cautioned users of VCs three times in the past (December 2013, February 2017 and December 2017) about the hazards of trading in cryptocurrencies.

The statement issued by the ministry stated that "RBI has also clarified that it has not given any licence/ authorization to any entity/ company to operate such schemes or deal with bitcoin or any virtual currency. The Government also makes it clear that VCs are not legal tender and such VCs do not have any regulatory permission or protection in India. The investors and other participants, therefore, deal with these VCs entirely at their risk and should best avoid participating therein."

Further, the Securities and Exchange Board of India (SEBI)  intends to crack down on schemes such as so-called initial coin offerings that take advantage of investors who have little understanding of the risks of investing in such cryptocurrency ventures and those who are running outright fraudulent operations.