MANY THINK CRYPTO is a hedge against inflation as it has limited supply. Let's take a look at the oldest and the largest cryptocurrency — Bitcoin, with just 21 million supply. Nobody can print more Bitcoin, and because the market size is so small, there has been volatility in the price.
But we have seen stability in Bitcoin prices in the last five-six years. Earlier, it used to go up and down by 8-10% every day; now, it moves in the range of 1-2%. As more and more people use it, the ecosystem will become more robust, and one person's move will not leave a huge impact. We are yet to reach that stage. Once we get there, the trust levels in this asset class will change, and it will achieve more stability.
Also, there is a difference between price and value. Currently, what we are seeing is price based since we have this cognitive psychology of ascertaining the performance of anything by its price. In the short term, price is motivated by market sentiment, whereas value depends on the technology, adoption and the problem it is solving. For example, Bitcoin prices have come down from $64,000 to $16,500. Still, the value or the fundamentals of Bitcoin — the network difficulty, the transaction speed, adoption, transaction fees, etc., have all improved and are at their all-time high (December 2022). Earlier, one transaction used to take about eight hours to settle. Now it takes 10 minutes.
So, is crypto a wealth destroyer?
Microsoft is $1.8 trillion, Apple $2.3 trillion, whereas Bitcoin, or the entire crypto industry, is just $1 trillion. Putting all your wealth into something smaller than Apple or Microsoft would be an illogical decision.
Investing in assets calculated on the basis of market cap is the right way. The smaller the market cap, the more volatile that asset is, like penny stocks, which move 10x, 20x, 50x or even more quickly.
So, when you see crypto as a wealth destroyer, it is the lack of understanding of the investor that he is putting all his money in an asset class which is so tiny, nascent and volatile. It lacks strong regulations, hence, frauds are bound to happen. That is one argument.
The second is that it is an unregulated market. You cannot regulate Bitcoin or Ethereum. What you can do is regulate the use of Bitcoin, how you pay taxes, and how you send money overseas.
Also, many people launched their own coins. Suppose I want to start a sugar factory, I come out with Sidharth coin, raise money, and never start the factory. I give my coins and tell you that whenever you need sugar, you can come back and redeem those coins. Now, if I do not start the factory, I'm scamming people. And in an unregulated market, governments cannot sue me since such projects don't even have a legal basis. You only need a website, social media and a smart contract-based token!
There was a coin based on Squid Game! It had nothing to do with the series, but people thought so and invested in it; later, a rug pull happened! It means the person who had the maximum holding of the coin sold at market price. Then there have been meme coins like Shiba Inu coin, Dogecoin, Baby doge, etc. Their fundamentals are weak, but communities are strong. That means many people trust it and manipulate the price. There is a lot of social media action to pump these projects.
Today, many accept Bitcoin, and in some places, there are proper regulations. Despite so many frauds, probes and objections, Bitcoin is an unprecedented store of value, an alternate with a different fundamental. If I have to invest ₹1 lakh, I will see the fundamentals.
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