Current crypto craze has the makings of another Tulip Mania

Illustration by Suneesh K

As a first-hand witness to, and victim of, the turn-of-the-century dot-com boom and bust, the present crypto craze is seriously alarming. The ingredients are similar enough to evoke a strong sense of déjà vu. Now, as then, there was the early and extraordinary success of a handful of investors which set off the mad rush in which people were in a hurry to leave well-paid jobs and plunge themselves into the newest lottery in town. It is the same with the current craze about cryptocurrencies. This week, the value of a relatively obscure token, KokoSwap, rose 70000 percent overnight.

Also read: Genuine opportunity or plain greed? What attracts retail investors to cryptocurrencies?

Its consequences could be equally disastrous, for when this bubble bursts, it will hurt the most vulnerable, not the venture capitalists and the well-paid executives who mostly extricate themselves from such busts with their fortunes intact even if their egos are a bit bruised.

CoinSwitch Kuber, a cryptocurrency exchange that, along with CoinDCX, is one of India’s two unicorns in the segment, had over 10 million registered users as of October this year, all added in the last 15 months. What’s more, 55 percent of its users come from tier-2 and tier-3 cities. Extrapolating those numbers, it would appear that over a 100 million Indians are invested in this new asset class. Already, that’s the highest among all countries and the number is rising every day.

Also read: More Indians join NFT gold rush; experts warn of legal pitfalls, uncertain future

The exuberance is irrational enough for Reserve Bank of India (RBI) governor Shaktikanta Das to declare that “Cryptocurrencies are a serious concern to RBI from a macroeconomic and financial stability standpoint.”

Try telling that to the 25-year-old in Jaipur or the 17-year-old in Haridwar who have made lakhs over the last few months trading in crypto and are now betting all that and some more borrowed funds, in the hope of even higher returns. When public consensus starts defying rationality, you can bet your last dollar a ponzi is building up.

Indeed, if there is one thing that the hoary history of such events, from the 17th century Tulip Mania to the Housing Bubble in the previous decade, teaches us, it is that this time isn’t different. It always ends in grief.

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What’s fuelling the current crypto craze is the usual combination of an ambivalent regulatory environment, a global bubble and low or no barriers to entry, all of it magnified by the ubiquitous smartphone and cheap data availability. In March last year, the Supreme Court quashed the ban that the RBI had imposed on trading in cryptocurrencies like Bitcoin in April 2018. That’s turned the arena into a virtual Wild West, with investors ignoring words of caution by men like Das and making a beeline for the digital currency which has, as yet, no legal sanction.

After all, the endorsement comes from top Bollywood stars. Surely the likes of Salman Khan, Ayushmann Khurrana and Amitabh Bachchan can’t be wrong when they appear every night promoting the various start-ups facilitating these investments.

Also read: CoinDCX signs Amitabh Bachchan as brand ambassador to raise crypto awareness

Psychologists are drawing deeper meanings in this new craze. They see the wild gyrations in the prices of various cryptos providing an adrenaline rush for many of the young buyers. Unlike other markets, the crypto world never sleeps, so prices can change at any time and violently so. Waking up at two in the morning to see your holding is up 500 percent in the last three hours since you went to sleep, is a special kind of high, particularly for a 20-something.

Read more: Decoding the surge of cryptocurrency trading

The problem is the environment itself is irrational. In the stock market, some highly visible shares are booming. Many no profits, no cash flows, no assets, startups are notching up multibillion dollar valuations. Against that background, it is futile to expect others, often younger and certainly more naive, to exercise restraint.

Crypto and blockchain are genuine technological advancements and will definitely disrupt the current financial structure by disintermediating many of the holy cows of the system. But as the crypto casino rolls through India’s tier 2 and 3 towns, it needs moderation and oversight.

Regulation on the issue in the form of the Cryptocurrency and Regulation of Official Digital Currency bill is likely to come up before Parliament in the coming session. But any decision by the government will be hamstrung by the crores already in circulation.

Read more: A beginner's guide to cryptocurrency