Know before you invest in Bitcoin boom
The recent trading cryptocurrency boom becomes the center of the interest of all trade, why it shouldn’t be? This single subject seems to cover all important avenue to success; it is based on new idea and state of the earth technology, depends on finance and banking and the law is still struggling to decide what to do with it. To understand this highly complex idea let’s dissect it and look into it to understand the nature, scope and evaluate legal position of Cryptocurrency (used as an interchangeable word with Bitcoin and similar Cryptocurrency)
Let’s start with two very unique features of Bitcoin
1. It is decentralised; no one directly controls it rather a bunch of machines manage the whole system with precise accuracy. Basically, every machine continuously transact each other’s state and information, the system keeps track of every single process so that any error can be detected and fixed in case of mismatch. There is no central governing body or authority, the stakeholders maintain the system by their own.
2. Anonymity; All the process is done by following highly secured protocol, this system is known as cryptography (From where the name “cryptocurrency” is adopted), this unique method sends and received data in a very mathematically complex way so that no one can understand it or hack it. The user become anonymous to the system so does to the sender or receiver unless the individual declared it openly.
Now this process is very power hungry and needs a good investment to run those special computers (Known as “ASIC”/”miner”) and the process is known as mining, those who maintain and run the machines are rewarded with Bitcoin as an incentive of their effort and that’s how the currency grows internally without inflation.
At this stake, questions arise that, whether the system is self-generating its own value or not? Or whether any value is attached to it at all or not? the question comes because fiat money is always backed by some real value calculate with a very complex method which includes a wide range of variables like, GDP, Reserve, Export, Import, Demand etc. so the answer can be given in both way “Yes” and “No”.
First “Yes” because it has some value attached to it (by mining) but the problem is it depends only on their system with the help of demand which is not sustainable in reality. So, “No” becomes the answer if the currency is declared redundant by the public outside the Bitcoin system.
This influx of cryptocurrency is based on market demand, which is very similar to dotcom bubble phenomenon of 1997, this type of history warn us again and again, people invest heavily even when the market value is on the apex point, hoping for future profit, thus an overwhelming amount investment is made to that particular product which has no relation with real value (but has market value) this type of investments are destined to fail because market become saturated with investment and no one to buy that investment, on the other hand, competition reaches to the top so everyone tries to beat each other and only few product lasts at last.
If we give a look at Bitcoin chart then we can see it valued around 0.06$ at 2010, in December 2017 it rise up to 17687$ now it worth around 13650$ with many ups and downs and this is an issue to be concerned with investment otherwise an event like share market crash can occur at any time.
Chart-1 : Chart Source: CoinDesk
Now see the ups and downs in January 2018
The rate is not growing as it used to be in 2015 – 2018 rather falling and this is an issue to be concerned with investment otherwise an event like share market crash can occur at any time. Of course, cryptocurrency will hold its value in the market but this hype based investment would put the real investor at huge risk. Contrarily fiat money is way too safer from this type of gambling as states regulate them with active measures.
From another perspective, a legitimate question arises, with all these deficiencies can cryptocurrency function properly? Or can we consider it as a real currency at all? Followed by the question of status and legality. Well things are yet to be decided, states are still providing their opinion or assessing the situation around the world but that doesn’t necessarily mean that cryptocurrency is illegal for sure (despite few country), generally, technology comes first then Laws regulates them depending on the situation, to protect their citizens from foreseeable extraordinary risk, it must be mentioned nor it is approved by all countries too.
So the closest accurate answer would be, it is a commodity (product); for better understanding, it can be compared with gold, that has market value, can be used in a financial transaction, can be converted into money easily etc. This Cryptocurrency is an approved product U.S. Commodity Futures Trading Commission (CFTC) and the Internal Revenue Service that virtual currencies are not legal tender even though they can be used to pay for goods and services. They are not currency in the eye of law but their easy accessibility and exchangeability let it (legally) work as a commodity. As held US Bankruptcy Court for the Northern District of California.
Though this stake is also challenged in another part of the world, China. A customer challenged that Bitcoin is not a commodity suing his exchanger arguing that “According to Karl Marx’s The Two Factors of the Commodity: Use- Value and Value, the commodity should have the use-value and value, and the bitcoin has no value and use-value, and cannot be identified as a commodity . . . so bitcoin does not exist. Therefore the previous trades should be invalidated.” Though the Beijing district court disagrees with the plaintiff and confirms Bitcoin as a commodity. On the other hand, like many other an Indian economist disagree to provide any status to Bitcoin as it fails to fulfill any category of the previous two.
This digital currency has both pros and cons.
Anonymity, decentralization, secure are the main pros of Cryptocurrency but the same pros can be used in a way that may turn into corns. For example, Hyperinflation may occur, hackers or extremist are using this currency to be undetected. Government would unable to detect tax defaulter. Though government is not regulating the cryptocurrency they are regulating the e-wallet services who are the main hub for cryptocurrency exchange. Anonymity can be compromised when a coin is exchanged using e-wallet (e-banking service). E-wallet Company might be bankrupt and as they do not follow banking rule the user shall have a huge loss. If the owner loses his data (like a digital signature/key) then the currency is stack and locked forever, no one can use it.
Maybe the time has come to put it in a new category that really fits with demand. It is a high-tech creative concept to adopt but whether we want to take that risk must be calculated with precise cost-benefit analysis of the applicability. The government should come sharply to regulate these systems before it too late to control.