Moneycontrol Pro Weekender | Happy Bitcoin Pizza Day!

Cyrptocurrency is far away from being used as regular money, thanks to its wild volatility. Imagine selling your house for Bitcoins only to find that its value has fallen 30 percent the next day! Stability is essential for cryptocurrencies if they are to act as a unit of account and a medium of exchange. Moreover, the transaction costs of Bitcoin are high.

It’s not surprising that in its Financial Stability Report earlier this week, the European Central Bank said the cryptocurrency price surge eclipsed previous financial bubbles like the “tulip mania” and the South Sea Bubble in the 1600s and 1700s. “Its price volatility makes bitcoin risky and speculative,” the bank said.

The fact that it plunged so much when it was supposed to act as an inflation hedge (remember that global fund managers have cited inflation as the biggest tail risk for equities) is another dampener.

Cryptoanarchy

When Satoshi Nakamoto wrote his now famous paper in 2008 about using blockchain technology for a new payment system, the idea was that Bitcoins would be a replacement for government issued fiat currencies. It was a potent idea at a time when the world was suffering the after-effects of the Global Financial Crisis and disgust with bankers was high.

At its heart, the Bitcoin idea is anarchic -- a means for people to escape the government controlled banking and economic systems. Imagine you want to run away from an oppressive regime – would it be easier to take your life savings in gold or US dollars or Bitcoins? (Of course, with gold or US dollars for that matter, you can be comparatively certain that the value of your savings won’t plunge 30 percent in a day).

But this nature of crypto (libertarian derp in the words of Nobel Prize winner Paul Krugman) means that governments and central banks don’t take to the idea of private cryptocurrencies very kindly. What doesn’t help the cause of Bitcoins is that they are being used for ransomware. The largest pipeline operator in the US, Colonial Pipeline Inc, said it paid $4.4 million in cryptocurrency to hackers who had broken into its computer systems and blocked its network. As the Wall Street Journal pointed out, using data from Chainalysis, merchant transactions using cryptocurrencies in 2020 were $2.8 billion and illicit deals, including ransomware attacks, around $4.9 billion.

Thus, we have China not only banning financial and payment institutions from providing cryptocurrency services but also ordering a crackdown on crypto mining. In the US, the treasury department has called for stricter compliance of crypto transactions with the internal revenue service. Earlier, Treasury Secretary Janet Yellen had expressed concerns about cryptocurrency being used to finance terrorist transactions.

As we wrote yesterday, the worst nightmare for crypto evangelists is coming true. Reporting cryptocurrency transactions and asset holding to the government would negate the big idea of using them in the first place.

If that weren’t enough, central banks around the world are lining up challengers. A Bank for International Settlements survey said 86 percent of the world’s largest central banks are planning their own digital currencies. On Thursday, Fed Chair Jay Powell said the US central bank is accelerating the development of its digital currency.

All these pretty much threaten to negate the perceived benefits of cryptocurrencies.

Environmental concerns

Sidenote: Cryptocurrency mining is an energy guzzler. So bad that, it has forced even crypto evangelists like Elon Musk to say so – he tweeted that his company won’t be accepting cryptocurrencies as payment for Tesla cars.

That couldn’t come sooner as this was also the week when a big chunk of ice broke off from Antarctica to form the largest iceberg – seven times the size of Mumbai. It was also the week when the International Energy Agency unveiled a road map for the energy sector to drastically cut the use of fossil fuels to combat climate change. We had a piece on how you could position your portfolio to take advantage of these changes and how Indian cities can meet their environmental challenges. Solar energy mergers and acquisitions are also hotting up in India and we told you why.

Economy hits an iceberg

While the world was running after Bitcoins, COVID-19 continued to be the main topic in India. We wished that data be used in fighting the pandemic and procuring vaccines. Our economic recovery tracker showed unemployment levels hitting the levels of June 2020. This is mostly due to the series of lockdowns which have adverse effects for securities like REITs. Economic activity has slowed and RBI warned of a demand shock. While high wholesale price inflation is unlikely to affect RBI’s accommodative stance, increasing exports could be one way to get the economy back on track. Finally, we need innovative ways to fund vaccinations and the GST meet this week should focus exclusively on COVID care, we argued.

In equities we trust

Indian stock markets, which seem to be in a different world altogether, recorded their biggest weekly gain since the Budget week. The Sensex gained 4 percent and the Nifty 3.4 percent. The banking index was the biggest sectoral gainer – We have had pieces on Federal Bank, Mas Financial, and Home First Finance. Metal stocks too have been beating the broader markets hollow for some time.

The markets are buoyant, because the number of COVID cases is coming down and the economy is bound to bounce back over the medium term just like it did after the first wave last year. Some like the L&T management see the second wave as only a blip (read here and here). Does this mean it is time to get rid of defensive stocks? Perhaps, not.

We have the following notes and commentary on Gland Pharma (here and here), Colgate-Palmolive (here and here), Aarti Industries,  Dr Reddy’s, Cipla, and Jyothy Labs.

We have also written on consumption plays like Relaxo Footwear, Safari, Tata Motors and SBI cards and GoAir’s proposed IPO.

Our independent research team believes this is the year of bottom-up stock picking. So take your eyes off crypto and read our research and commentary based on good old fundamental analysis.

Stay Safe!

Cheers,

Ravi Krishnan