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Cryptocurrency mania gripping India: All you need to know

Wildly fluctuating bitcoin prices, trillion dollar assets, billions riding on memes and no one is quite sure what is happening. The cryptocurrency mania has gripped India, and the world. Moneycontrol decodes the craziness.

Mumbai / May 21, 2021 / 09:11 AM IST
The meme currency has grown by more than 130 times this year.

The meme currency has grown by more than 130 times this year.

Dogecoin, b=Bitcoin, Ethereum...words that were used mostly by financial geeks or Reddit nerds have suddenly made their way to the mainstream. Social media is abuzz with the rapid rise and and fall in crypto prices, exchanges are seeing record volume, and yet the legality of all this is under question. What exactly is happening in the crypto world? Moneycontrol explains.

How did all this start?

It started in a couple of different ways, depending on how you look at it. While bitcoin and other crypto assets have always had their fair share of fans and people who have made astonishing wealth from it, it has rarely been mainstream, like say stocks or mutual funds. In 2021 though, this has changed. US-based crypto exchange Coinbase went public and was valued at $100 billion. A niche asset class was finally in the limelight.

Simultaneously in India, crypto exchanges saw users flock to them in record numbers. One crypto executive told Moneycontrol that he is seeing upto a million users at the same time- a figure he did not see even at shopping giant Amazon. WazirX, CoinSwitch Kuber and other exchanges ran high profile advertising campaigns during the Indian Premier League (IPL)- further boosting their growth.

Did crypto prices rise?

Like you would not believe. A single bitcoin was worth $9500 (users can however buy small fractions of a coin to invest) in May 2020. There began a meteoric rise, with prices touching $40000 in January- something many thought insane- until it touched $65000 last month. Bitcoin’s market cap was at over a trillion dollars- making it more valuable than Facebook and Tesla. Mind you, this is for an asset much of the world is still waking up to.

Bitcoin and Ethereum, the two largest traded currencies saw their prices jump but that wasn’t the real surprise. Dogecoin, a meme currency started as a joke, saw its price shoot up as celebrities like Elon Musk talked about it. Dogecoin was worth $70 billion- more than Uber, as of last week. It even spawned joke-on-a-joke Shiba Inu Coin, which also promptly saw its value rise and then fall.

Who is using these currencies? And for what?

Crypto’s two main uses are as a mode of payment, as opposed to rupees or dollars and as an investment asset, as opposed to gold or stocks. The investment use case has worked spectacularly, with millions of customers purchasing coins, holding on to them, and selling them to make a killing, or in other cases, investing when prices are high, and holding on for the thrill of being invested in crypto.

While it has been used for payments in some countries, this has been met with skepticism, and downright rejection in India. Governments do not want a substitute to official currency, and the volatility of these prices do make them unsafe for payments. Imagine paying a million dollars for pizza.

Prices have also risen because crypto has become more legitimate in the last year as large global institutions embraced its use and value. Auction house Sotheby's says it would accept bitcoin payments, Tesla customers can buy a car with bitcoin, the S&P Dow Jones launched a crypto index, and Morgan Stanley gave its wealth management clients access to bitcoin funds. People even bought Non Fungible Tokens (NFTs)- digital works of art with a unique crypto identity that can be worth millions of dollars.

This kind of large scale adoption led even some skeptics to wonder that crypto may not just be a speculative bubble. it a bubble?

It is a valid question. Two crypto enthusiasts who Moneycontrol spoke to, and have been investing since 2017, said they were worried about prices rising like there is no tomorrow. In fact, as prices have fallen over the last one week, many long term investors have been relieved, thinking that a correction proves that it is not a bubble. But the nature of the beast is such that it could again rise to a record tomorrow if Elon Musk were to promote it subtly.

Investors say that the older currencies such as Bitcoin, Ethereum, Litecoin and Cardano are solid long term bets, and have enough business uses globally to stay relevant. The newer meme coins though, such as Dogecoin, Shiba Inu Coin and a host of others have been dubbed irrelevant currencies by many, only riding a temporary boom. These coins have no commercial uses currently.

Why did prices fall?

In April, a power outage in China’s Xinjiang region- responsible for more than a third of global bitcoin mining- led to prices falling. Further, Turkey’s central bank banned crypto usage the same week. Earlier in April, Elon Musk - an unofficial crypto cheerleader so far- said that Tesla would stop accepting bitcoin payments because bitcoin fueled further consumption of fossil fuels- the opposite of Tesla’s renewable energy mission.

Experts have also said that, after the record surge, a fall was expected anyway and that no asset’s price can go on rising forever. Over the 11 years, bitcoin has seen a price change of over 5 percent 750 times, a price change of over 10 percent 250 times, and a price change of over 20 percent 50 times. Volatility is seemingly the name of this game.

Is any of this legal in India?

Ah, the trillion dollar question. While the RBI banned crypto in 2018, the Supreme Court quashed the order recently, calling the ban “unconstitutional”. The crypto industry has steadfastly maintained that regulating, not banning, is the way out. Regulators and ministers have ruled out bitcoin being used for payments in India, something the industry has accepted. They are fine with it being only an asset class. Crypto as an asset class is legal as per the Court.

Banks, however, have taken a cautious view and detached themselves from crypto exchanges, fearing action from the RBI. This also happened at a time when crypto exchanges were seeing record activity, exacerbating the issue. Exchanges cannot function in the long term without banks.

Then, how are users investing and withdrawing?

Users are certainly able to invest and withdraw for the most part, although not at will. Exchanges are sometimes giving more features to new users temporarily, so that their first experience is smooth, while existing users bear the brunt of regulatory uncertainty. Some small banks are still working with exchanges, who are also working on alternate payment mechanisms, including peer-to-peer payments and an offline mode.

So, where do things stand now?

A lot of things are happening simultaneously. As prices fell in the last few days, it led to a massive selloff, but millions of Indians still seem excited by crypto. Exchanges are lobbying and working with regulators to get clarity as soon as possible. New domestic currencies are being traded, crypto is hailed as both incredible and fraudulent, often on the same day, but if user numbers are any metric, the crypto boom in India so far looks real.
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M. Sriram
first published: May 21, 2021 07:21 am