If you're planning to invest in cryptocurrency, you should read this

The article is authored by Delhi-based criminal lawyers Mekhala Pande and Jayant Bhatt.

 |  4-minute read |   15-02-2018
  • ---
    Total Shares

“A concept is a brick. It can be used to build a courthouse of reason. Or it can be thrown through the window.” - Gilles Deleuze

Cryptocurrency has the dubious distinction of being more practical as an idea rather than a concrete economic system. As an idea, the blockchain is simply an open ledger, which allows the community (peer-to-peer network) to track the cryptocurrency transactions. This blockchain is not backed by any central authority or institution, but is operated by a group of "miners". Miners essentially perform two functions - firstly, they solve mathematical problems to generate cryptocurrency, and secondly, they also verify transactions which use such digital currency.

Thus, there is a high degree of speed, traceability, openness and even anonymity in such transactions.

The hype surrounding bitcoin and other cryptocurrencies is that they are the new technological gold rush. People inherently trust the very genesis of cryptocurrencies, that is to say, the fact that its not fiat money, its not paper, its created by mathematical formulas and should, in all likelihood, be more stable than paper money.

cryptocurrency_021518024133.jpg

However, bitcoins, in practicality, can be best described as a ticking time bomb or a bubble waiting to burst. This is due to the fact that there are a finite number of bitcoins which can be generated - 21 million to be exact. Thus, there is a limited supply of bitcoins as opposed to paper money which can be generated as per the needs of the economy.

The problem with paper money is that this printing of money leads to inflation and devaluation of currency. But in the case of bitcoins, its exclusivity may seem alluring as an investment and secure as a mode of currency without inflationary tendencies. However, the catch here is that its value will never be stable, it will keep on increasing. The problem with the rising value of bitcoins is that people will view it as an investment rather than a mode of currency. They will hold, maybe even hoard, instead of spending. This, speculation and anticipation surrounding bitcoins will eventually lead to a burst of the bitcoin bubble when less and less people will buy bitcoins and the people in possession will be reluctant to actually spend the bitcoins.

The problem with cryptocurrency is that it has fallen prey to its insular nature. It is completely dependent on its peer-to-peer network for it’s functioning.

As bitcoin gains popularity and the rate of transactions increase, it will take more time for the miners to verify such transactions. This, in turn, will take more time to generate a bitcoin, and as per the mathematical algorithm, less and less bitcoins will be generated each year, thus there will be a problem of slower transactions, increased transaction fees, apart from the basic problem of excess demand and limited supply.

Cryptocurrency is often described as a sophisticated pyramid scheme by traditional economists, or a "ponzi scheme", in the words of the World Bank chief. The older investors in a pyramid scheme benefit from new converts to the scheme even as the price of the crypto currency increases as more and more people invest in it. This scramble for a piece of the cryptocurrency pie, to be an early investor in the new kid on the blockchain, so to say, leads to an environment rich for scams. Many unscrupulous "ICO" (initial coin offering) companies have sprung up. These ICOs are akin to IPOs (initial public offerings), when it comes to investing in stocks of a company, except in this case people are investing in completely unregulated cryptocurrency ventures.

The money pumped in by the eager investors is never recovered and there is nothing of real value to account for it. No government or government agency is backing this currency. On the contrary, there is a caveat to the public at large that the money invested in such alternative currency would be at their risk only. Without the sanction of the government, it remains, at best, a risky investment, and at worst, a new mode of blood money.

Cryptocurrency’s anonymity is often misused to fund drug-trafficking, terrorism and various online transactions of illegal nature. In fact, it is often known as the currency of the "dark web". The dark web, is an area of the internet where illegal products and services are bought and sold using various forms of cryptocurrency so that the transactions remain anonymous. One such website was "Silk Road", the shut down of which, led to an abysmal fall in the value of bitcoins. This incident highlights the vulnerability and volatility of bitcoin as a crackdown on a website can lead to a complete collapse of this underground economic system.

A disruptive innovation is popularly defined as an innovation, which brings about not only novelty, but also something of value to an ecosystem thereby replacing the already existing market or network. Cryptocurrency’s goals are to be exactly such a disruptive innovation.

It definitely succeeds in the novelty aspect, but it lacks a great deal in substance and stability, which is important for the overthrow of any established idea or market system.

Also read: Why 'misguided' Kashmiri youth and 'misinformed' right-winger are made for each other

Writer

DailyO DailyO @dailyo_

Online opinion, analysis and blog platform from the India Today Group.

Like DailyO Facebook page to know what's trending.