In the last few months according to crypto research firm CREBACO, Indian investments in cryptocurrencies have hit the $10 billion mark. In addition, approximately 10.5 crore or 7.9% of Indian citizens have invested in cryptocurrencies through Indian exchanges according to recent research data. While this doesn’t necessarily mean that there are 10.5 crore, unique holders of crypto in India (as many investors have accounts across multiple exchanges), there is no doubt that crypto is being rapidly recognized as a viable asset class by a number of investors.
However, unlike most asset classes, there is still a lot of hesitancy around crypto as a viable investment class with institutional investors still unwilling to fully commit to crypto (bitcoin in particular). Here are a couple of reasons for this:
Uncertain Regulatory Environment
There is much uncertainty around the regulatory environment in India with the government’s long-delayed crypto bill yet to make an entrance. Furthermore, it is also rumored that the RBI is also due to launch a central bank digital currency (CBDC) which, unlike other cryptocurrencies, will be allowed as legal tender in the country.
It is no secret that the RBI is and has always viewed cryptocurrencies through a veil of skepticism, having pointed out on numerous occasions that cryptocurrency poses a threat to the Indian financial system. The reality, however, is a little more nuanced. There are significant concerns around the use of crypto for financing terrorism and other illegal activities because ofthe degree of anonymity that crypto allegedly provides. That being said, no matter how decentralised crypto pretends to be, there will always be ways to rein in and provide some degree of scrutiny over crypto transactions. Today, all exchanges require you to go through pretty detailed KYC including providing copies of your ID. In addition, you can only fund your crypto account via bank transfers from traditional banks. Exchanges are also limiting where your crypto funds can be sent to. In other words, it is no longer possible, in India at least, to send your crypto to a random wallet outside of the Indian financial system. While rumors abound around the government crypto bill, the consensus appears to be that crypto will be treated as an asset class rather than as a medium of legal tender and that it will come under the purview of the relevant regulatory body such as SEBI. Even the RBI seems to slowly be getting on board with the recent announcement of the creation of a new department to identify challenges and opportunities in financial technology, particularly around cryptocurrency.
Price Volatility
Cryptocurrency cannot and will not ever be accepted as legal tender unless the issue of volatility can be sorted out. It just doesn’t make sense to allow a method of payment which is worth Rs. 1,000 one day and Rs. 5,000 the next. By its very nature, crypto is highly volatile, but it should be pointed out that the industry is still in its infancy. The total market cap of cryptocurrency globally is around 2 trillion US dollars. Compare that with the market cap of Apple which is almost 3 trillion dollars alone! It is clear that crypto, as an industry is still in its early stages of development, and trying to compare it with traditional financial systems that have been in place for hundreds of years, is a bit disingenuous. What’s even more interesting is that for years, crypto, and in particular, bitcoin enthusiasts claimed that bitcoin was a hedge against inflation. What’s notable to see is that crypto prices have been falling in tandem with increased inflation numbers in the US, similar to the US stock market. It will take some time for crypto prices to become less volatile and I argue that as more institutional players enter the space, the fewer dramatic swings in price we will see over time. This process has already started with several large companies such as Tesla, Microstrategy and Square buying Bitcoin for their treasuries. The launch of the first Bitcoin futures ETF also showedthat hedge funds aren’t far behind in deploying assets into crypto. It is notable, however, that even Elon Musk stated that Tesla would no longer be accepting bitcoin as a method of payment as ‘bitcoin is still environmentally unfriendly’ but I strongly feel he is using this as a euphemism for “the price of bitcoin is just too volatile”.
Despite the two primary issues with crypto above, retail investors in particular have been ploughing money into crypto particularly since towards the end of 2020, when it became clear that the COVID-19 pandemic wasn’t going to destroy global economies. With the world awash in liquidity, billions of dollars started flowing into crypto and the price of bitcoin shot from $10,766 at the end of September 2020 to an all-time high of$68,000 in November 2021. And, it was just bitcoin. Ethereum and several other alt-coins such as Solana, Binance Coin among others made gains of over 10X in a short period of time. And let’s not forget the so-called meme coins such as Doge coin and Shiba Inu coin which made early investors millions of dollars.
All these factors have made cryptocurrency a bit like the gold rush in California in the 1800s with multitudes of investors rushing into this space in an attempt to secure huge profits in the space of a few months. But this is extraordinarily risky. People tend to forget that crypto went through a 2-year bear market in 2018-2019 with several coins dropping by almost 95% in value. In 2021, everyone predicted that bitcoin would reach $100,000 by the end of the year but this did not happen. And ‘Alt Season’, a phenomenon in which altcoins blow through the roof on the back of all time high bitcoin prices didn’t happen either. The first two weeks of 2022 have also underperformed. Let’s also not forget the issue of fraud which is rife in cryptocurrency. Hacks and dubious get-rich-quick schemes have caused several investors to lose their moneybecause they’ve invested using unsecure wallets or unsafe exchanges. A crypto meme coin launched on the back of the success of the Netflix series ‘Squidgame’ called the ‘Squid Game’ coin was launched with great fanfare but turned out to be an elaborate rug pull with the value of the coin crashing from $2800 to $0 in five minutes.
The issue of trust and protection for retail investors is paramount to the future success of cryptocurrency as an asset class. I strongly feel that regulation is sorely needed by the industry, not to thwart innovation but to protect investors and their money. Once the regulatory environment is made clear, crypto investors will no longer need to deal with the threat of waking up one day to find that all their crypto investments have been frozen by regulators or their crypto stolen by unscrupulous actors. Once regulation is made clear, it will also positively impact price volatility making it easier for institutional investors to invest in crypto en masse, thereby assuring widespread adoption of crypto as an asset class.
Article is authored by Kunal Chowdhry, Angel investor and CEO, Apollo Singapore Investments.
