Amusing cipher: A Reverie on the Markets
By Vaishnavi Agrawal
April 1, 2018, 09:32 IST
Amusing cipher: A Reverie on the Markets
On the evening of January 3, 2009, when an uncannily talented computer coder Satoshi Nakamoto pressed enter on his keyboard, we realized one thing for sure that there are lots of ways to make money. If you can’t earn it, find it, counterfeit it, steal it or if you are a computer Nazi- you can invent it! Well, it was all bit and no coin when he created a new currency called BITCOIN. Nakamoto stated that he spent more than a year writing the software, driven partly by the anger over the recent financial crisis. He wanted to create a currency that was immune to uncertain macroeconomic policies as well as too unreliable bankers and politicians. The invention is entirely controlled by a software which would release a total of 21 million bitcoins in almost over next twenty years. Frankly speaking; its distribution would be no less than that of a lottery. Miners-people will play this lottery again and again and the one with the fastest computer will win these coins. No doubt, decentralized cryptocurrencies will revolutionize the way we live by eradicating the need of exchanging values with the middlemen- if it were legal!
A cryptocurrency is a virtual currency that uses a number of cipher codes for security. Perhaps the currency’s most fascinating charisma is its organic nature; it has not been issued by any of the central authorities which makes it impervious to monetary policies and manipulations. This anonymity of the currency and their transactions makes it well-suited for hideous activities such as money laundering and tax evasion. Interest in Nakamoto’s invention built steadily and in no time, there were cryptocurrencies such as Litecoin, Namecoin, and PPCoin circulating with a total market value of $3.4 billion competing Bitcoin’s success. The virtual currency boom has gotten so heated that merchants have gradually begun to accept bitcoin as more and more computers are dedicated to mining them. The price for bitcoin hence has been rising continuously for some time now irrespective of the doubtful legitimacy and the future of bitcoins. Bitcoin’s value has increased from $775 to $19000 over the past year and had made several investors wealthy. However, Bitcoin and other virtual currencies have been crashing recently. It is evident from the dotcom boom which led the broader market to a painful crash in 2000 that even the bitcoin bubble damage is sure to spill over the stock market. We need to understand that this market does not work like a share market and the investment process is a little tricky. These aren’t currencies or stocks, it is virtually impossible to predict their worth eventually. If it were a currency, it would have been widely accepted by the buyers and the sellers but due to its salient feature of volatility and disapproval by the banks, merchants are running away from it rather than toward it.
A number of retail investors in possession of these cryptocurrencies have been left in a bind as banks are not allowing them to deposit the money earned from their trading on exchange platforms. That is obvious too, banks or other monetary institutions cannot risk the economic balance. Ever since Barter System has been demolished, the currency has been the one and only medium of exchange whether in the cash form or the financial assets. Barter has established the essence of trade- Give and Take, one cannot defy the sole purpose of exchange and trading. In no way cryptocurrency replaces currency. Vast interests in mining the Bitcoin has paved the way to darknet markets and for online gambling. Despite similarities, they aren’t stocks either. Investors have explained the parallelism between stocks and cryptocurrencies oddly by defining a phenomenon “Market Capitalization”- a number derived by multiplying the number of tokens in circulation by its current selling price. There is definitely no parallel between share trading and market cap.
On December 24, 2013, the Reserve Bank of India warned the holders and traders of virtual currencies about the risks they are exposed to- since they do not have a central repository, they are prone to losses arising out of hacking or loss of password etc. Also, because exchange rates depend on supply and demand variables, the rate at which a cryptocurrency can be traded for another currency can fluctuate drastically. Bitcoin trading also lacks any authorized central agency to regulate payments. Yet, many observers hope that a currency can exist that facilitates exchange and is immune to the influence of market uncertainties.
Like it is said- When the real food is no longer available, everyone subsists on processed synthetic food. Here is the same case. To some it is just another currency like gold, bonds, cigarettes and anything can serve as a medium of exchange- provided we all agree on it. After all, it’s the investor’s call. One thing is for sure- pragmatics like Warren Buffet wary investing in the virtual cryptocurrency. To them, this is no more than a speculative hype which will crash in the long term and stand no chance against the fiat currency.