Team ulaunch sheds light on the steep crash in the Cryptocurrency market that wiped off more than $1 trillion in investor wealth.
What has happened?
After reaching a peak of about $2.5 trillion at the start of May, the cryptocurrency market crashed to about $1.4 trillion in a span of 11 days. This unprecedented drop has led to loud rumblings about the cryptocurrency market riding high on speculations and huge losses for investors. Bitcoin, the most popular cryptocurrency, touched a high of $65,000 in April 2021 and is trading around $35,000 at the time of writing this article. In a matter of 24 hours, we saw a swing of 10-50 % in about 4,000 cryptocurrencies.
What is Cryptocurrency?
As technology is marching ahead, the current approaches are being revamped, and we are witnessing numerous drastic changes. With the global adoption of cashless payments, a new era rose wherein we came across a rather interesting way of payment system i.e. the cryptocurrency.
Cryptocurrency is a digital asset that is created with the help of cryptography and therefore, it is impossible to feign it. It is a digital asset that doesn’t depend upon any bank to verify the transactions. It allows peer-peer transactions anytime anywhere in the world. Cryptocurrency is a decentralized digital currency based on blockchain technology. Blockchain is a ledger that works digitally by duplicating and distributing these transactions over a network of computers.
The cryptocurrency market has been in existence for over a decade now. 22 May 2021 was the 11th-anniversary of a milestone in the cryptocurrency known as Bitcoin Pizza Day. In 2010, for the first time, a person used bitcoin in a commercial transaction, as the name suggests, to buy pizzas.
There are 9,000+ types of cryptocurrencies that are being circulated as of now while new coins are launched every day. They are digital tokens that allow people to pay money to each other through an online system and exist purely as entries in an online database. When one transfers cryptocurrency funds, the transactions are recorded in a public ledger. Like traditional currency, crypto is also valued on units.
The most famous cryptocurrency is Bitcoin and has the highest market capitalisation as well. It occupies a whopping 50% share of the over $2 trillion cryptocurrency market. However, these figures keep changing rapidly due to the volatility of cryptocurrencies.
What led to the birth of Cryptocurrency?
The aftermath of the 2008 credit crisis sparked the need to curate a system to democratise our currencies. Acting on that idea, set out in a whitepaper by the mysterious Satoshi Nakamoto invented Bitcoin as an attempt to decentralise financial transactions. This was done in full throttle to bring about a shift in financial power to the hands of the people rather than depending upon the banks and government. However, a limit was imposed on crypto coins. For instance, there are only 21 million Bitcoins in the world.
The cash and other traditional payment methods that we use in our day to day lives are subject to a lot of rules and regulations. The central banks of various nations regulate their domestic currencies. They do this by controlling exchange rates, deciding how much money is to be printed and intervening regularly in forex.
Digital money permits distributed exchanges without the requirement for a bank. The utilization of digital currencies can significantly reduce the requirement for national banks to deal with the inventory of cash since banks will in general diminish the worth of cash by means of expansion.
Likewise, cryptographic forms of money are fairer in nature. One can purchase them as per their need and use them anywhere across the world. Besides, its inherent decentralized nature makes cryptocurrencies censorship-resistant and secure.
What fuels the volatility in the Cryptocurrency market?
When compared to the traditional financial market, cryptocurrency volatility is in a different league altogether. A plethora of explanations for the unpredictability of cryptocurrency is provided. News, hypotheses and speculation fuel value swings in the crypto and share market. However, the absence of regulatory oversight of institutional financial backers and hegemonic crypto exchanging firms result in breakneck swings in crypto coins.
Lesser Liquidity, Higher Inflations: In the vast ocean of crypto, not all coins are made, showcased or acknowledged by the public similarly. Some digital currencies are mainstream while others are not. It is just the well known cryptographic forms of money that appreciate high liquidity
Fluctuating Perceptions: Another overwhelming variable is the fluctuating view of the natural worth of the digital currency. Since it is rarely backed by any physical asset, crypto’s worth can swing wildly depending on the news.
Billionaire influencers like Elon Musk can cause an immense effect on the crypto ecosystem. Elon Musk refusing to accept Bitcoin as an instalment for Tesla assumed a significant part in the drop in worth of the two most prominently exchanged digital currencies. Besides, a series of tweets added to the disarray that whether Elon had disposed off the property of the money.
Dogecoin, a digital currency that had initially begun as an image, had reached its peak recently because of the predictable development by Elon Musk. In this way his unexpected U-turn and abandoning of digital currency resulted in an enormous fall in Dogecoin’s worth, bewildering its financial backers.
Around the same time, Chinese banking and industry regulatory bodies gave articulations, cautioning financial organizations against directing any trade in cryptographic forms of money. They even shut down trading fiat cash for crypto. This cleared out the Chinese merchants that shaped a major piece of the crypto market. The unexpected diminishing in financial backers is accepted to be a significant justification for the latest downfall.
With the decrease in Covid cases after the first peak last year, a tremendous measure of traffic was driven towards digital money. As crypto acquired notoriety, individuals began considering it to be an approach to large and quick returns. Anybody with a couple of bucks and an internet connection can begin trading in a flash.
Are there any regulations by the government?
As cryptocurrencies rapidly expanded their footprints across the world, countries responded to them in different ways. On one side of the spectrum, Japan, USA, Germany, etc. have made laws regulating their trade and usage in the economy. On the other side of the spectrum, countries like China, Egypt, Ecuador have gone to the extent of banning their citizens from using digital currency exchange.
In India, one can purchase, hold, and sell digital forms of money, rather than trading them for labour and products. The absence of guidelines implies that a financial backer ought to be careful. The public authority faces the test to permit fintech space to thrive in India while ensuring it is managed without wellbeing concerns. The Ministry of Corporate Affairs has ordered organizations to reveal crypto exchanges/speculations during the monetary year. It is being viewed as a positive sign for directing digital forms of money in India. The bookkeeping of crypto resources is focused on controlling criminal operations and the dissemination of dark cash through cryptos. Likewise, it can improve corporate administration with more straightforward exposures.
The crypto market is a wild ride for a large number of financial backers across the globe. Much like the securities exchange, crypto speculation is abounded by hazards. Many have made millions on the meteoric rises, and others have suffered drastic losses during bursting speculative bubbles and unexpected market declines.
The recent clarification by RBI that banks can not block customers from trading on cryptocurrency exchange, provided they are carrying out due diligence in the form of KYC, Anti Money Laundering, Combating of Financing of Terrorism, and other stipulated guidelines have provided more assurance to the investors.
Cryptocurrencies are here to stay and will see higher adoption by people, firms and integration into the economy. It’s best to tread with caution and analyse the different aspects and then indulge in it. As an aspiring global leader, India can not afford to miss the crypto train. Thus the policymakers should be on top of the developments of this dynamic and nascent sector.
Article by Shruti B, Disha Shinde & Ayushi Kulshrestha, Team ulaunch.