Money has taken many different forms from ancient times, evolving from stones to metals to currency notes. But, did you ever think that technology would overpower physical banknotes and form a currency that can be used as any other currency? CRYPTOCURRENCY has made this possible!
Cryptocurrency is a digital currency that is created and managed through the use of advanced encryption techniques known as cryptography. The concept of cryptocurrency attracted attention with the introduction of Bitcoin in 2009. But, it wasn’t until 2013 that it captured a significant share of investor market and media when it peaked at a record $266 per bitcoin after surging 10-fold in the preceding two months. Bitcoin sported a market value of over $2 billion at its peak, but a 50% plunge shortly thereafter sparked a raging debate about the future of cryptocurrencies in general and Bitcoin in particular.
Thus, one major question that arises here is, How Feasible is it to have cryptocurrency in play?
To know the feasibility we have to study the challenges that come with cryptocurrency. Firstly, there is a lack of regulation. There is no established framework that takes us to customer problems because payments of cryptocurrency take place on a peer to peer basis without any central authority regulating the exchange.
Transactions are silent about the parties involved. As a result, the use of cryptocurrency sets the stage for illicit activities such as tax evasion, money laundering, and terrorist financing. Also, digital assets such as bitcoins are stored in “electronic wallets” that are prone to hacking and operational risks. The use of Bitcoin is limited to transactions unlike gold, which makes it more vulnerable to a bubble-like collapse. Additionally, the cryptocurrency’s energy-intensive verification process is particularly harmful than systems that rely on a trusted central authority like a central bank. Another drawback of using cryptocurrency is its highly volatile nature. An investor should have a strong stomach to invest in something with such high-value fluctuations. The risk is high, for example, Bitcoin plunged from $260 to about $130 within a six-hour period on April 11, 2013.
In India, The RBI has currently imposed a ban on any form of buying or selling or exchange using cryptocurrencies and will penalize those who will carry activities in cryptocurrency. This forced these gateways to shut operations or move to the peer-to-peer model of cash-based trading. However, they have said that the users of cryptocurrency will be provided enough time to switch. Alternatively, RBI has recently constituted an Inter-departmental group to explore the feasibility of introducing a rupee backed digital currency because of the rising cost of printing notes. According to RTI, the total cost of printing paper notes in India was Rs 636 crore for the financial year 2018. These huge numbers have led central banks around the world to explore the option of introducing digital currencies.
These limitations that cryptocurrencies presently face, it may be able to overcome in time through technological advances. What will be harder to surmount is that the more popular they become, the more regulation and government scrutiny they are likely to attract, which erodes the fundamental premise for their existence. While the number of merchants who accept cryptocurrencies has steadily increased, they are still very much in the minority. But an increase in the number of merchants does not ensure its growth. They have to first gain widespread demand among consumers but the complexity in operation of cryptocurrency bedevils its demand. It should be a combination of the complex mathematical system to avoid frauds and hacker attacks and at the same time, it should be easy to operate by customers. It would make a good currency once it is able to preserve user anonymity without being a conduit for tax evasion, money laundering, and other nefarious activities.
A big change in crypto is forthcoming as institutional money enters the market. The cryptocurrency market will get a great boost with cryptocurrency floating on the Nasdaq stock exchange. The operator is adding yet another cryptocurrency index – this time for the world’s third-largest cryptocurrency, XRP. This move will further add credibility to blockchain and its uses as an alternative to conventional currencies. The frauds can be prevented by deploying an effective task force to validate the transactions before putting them on the ledger. Even price volatility in cryptocurrencies ca be improved by trading in crypto futures. Moreover, Bitcoin’s success since its 2009 launch, apart from the recent issues, has inspired the creation of alternative cryptocurrencies such as Ethereum, Litecoin, Ripple, and MintChip.
Cryptocurrency might be a good candidate for a currency to be used by masses for investment purposes but it cannot be used as an official mode of exchange. A cryptocurrency that aspires to become part of the mainstream financial system would have to satisfy very divergent criteria. While that possibility looks remote, analyzing Bitcoin’s success in recent years, we can say that one day, if not Bitcoin then any other cryptocurrency may be able to turn this framework into a feasible one.