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The bubble of Bitcoin, like all bubbles, began with this kernel of truth. Cryptocurrencies were to mark a revolutionary moment in the financial history of our world.
What Central bankers often struggled with, smart software free of politics would do better. Satoshi Nakamoto, the anonymous coder who created the Bitcoin, launched his—or her?
The history of fiat currencies is full of breaches of that trust. But the vast majority who entered the Bitcoin market over the past few years did not do so to use this digital currency as a medium of exchange. They bought it in the expectation that someone else will come along and buy it from them at an even higher rate. Eventually, at some point, the supply of larger fools was going to run out. All of last year, the very concept of digital currency was marked by an irrational exuberance of buying.
Everyone wanted in on the action, even though there were multiple questions about its legality and how its trade was beginning to exhibit all the traits of a classic bubble, its value inflated way beyond what it could reasonably be worth. But its circle of fans continued to expand, from digital evangelists and cypherpunks to—more and more—the common Joe. At its peak, Bitcoin was worth over a quarter trillion dollars in market value. More than 40 per cent of its value has been wiped out in seven days since the Union Budget of February 1.
In India, it is believed that Bitcoin use shot up right after demonetisation, with people either discovering a new valuable to stash their black money in or losing their faith in the rupee as a store of value. Last year, during the Bitcoin boom, when I interacted with Saurabh Agrawal, one of the founders of Zebpay, perhaps the largest Bitcoin exchange in India, he told me that in the platform used to do transactions worth Rs crore annually.
By , it was doing over Rs crore a month. This mass adoption is going to happen soon A vast financial bubble had been blown, and then the inevitable slide slowly began. The Budget speech contained just two lines addressing cryptocurrencies. The Government will explore use of blockchain technology proactively for ushering in a digital economy. People, however, have interpreted that part of the speech in various ways. But in the volatile cryptocurrency market, it was not business as usual.
Prices of cryptocurrencies across the world crashed. At its peak, Bitcoin commanded more than a quarter trillion dollars in market capitalisation. More than 41 per cent of its value has been wiped out in seven days, according to CoinMarketCap.
Almost 47 per cent of its value was eroded within a week. The price graph of other coins looks similar. Over half a trillion dollars of value has been wiped off. Given the volatility of the market, who knows where prices will be next week.
There were other reasons too. Regulators around the world have begun to talk of dealing with cryptocurrencies more harshly. US regulators are investigating whether the spike in Bitcoin prices in was a result of market manipulation.
South Korea has been talking of a crackdown on digital currency trading; it may ban the opening of anonymous cryptocurrency accounts and bring in legislation to enable regulators to close coin exchanges if needed.
Facebook has banned cryptocurrency adverts on its platform. Meanwhile, many major banks in the US and UK have moved to block people from using credit cards to buy cryptocurrencies. In India too, banks have informed local cryptocurrency exchanges that they will no longer accept money for trades from customers via online modes such as National Electronic Funds Transfer, Immediate Payment Services and Real-Time Gross Settlement.
As a result, it has become difficult to buy and sell digital currencies in India. Express transfer features at several exchanges have been disabled, and the only option in some cases is a direct bank transfer, which takes longer to process. Additional charges are now also being applied for payment gateway transactions.
On February 6th, the chairman of the Central Board of Direct Taxes revealed that the Income Tax Department has issued around , notices to people who were found to have invested in cryptocurrencies but not reported their gains to the authorities.
Even if big countries do ban it, a small country will welcome crypto-entrepreneurs to base businesses there. Late in December, once banks started making it difficult to transfer funds to local exchanges for trading, one such exchange, Koinex, put up this statement on its website: These misgivings have resultantly affected the financial services community, who find it difficult to make up their mind about supporting cryptocurrencies.
Altcoins came into being because the Bitcoin, with its high valuations and mining difficulty, was believed to have reached its peak. Those who missed out wanted to catch the next wave. In Delhi, a youth in his late twenties, who we shall call Varun Singh—name changed on his request—is almost back to where he started. It was as a college student with an interest in new technologies that he first heard of the Bitcoin.
On a lark, he began to use his computer at home to mine the currency. For the next four to five weeks, Singh did exactly that. At the heart of Bitcoin is a technology called blockchain. Put simply, it is something of a public ledger. Miners are rewarded in the currency for this job. This is also the only way a new Bitcoin comes into existence. Singh was good at it. He would go to college in the morning and later hang out with friends and return to his room at night to check his computer, which he left on.
In all, he mined a total of 77 Bitcoins. For the next four years, it seems, he vanished under a rock. He woke up one day, sometime in , to the news of an incredible surge in Bitcoin value. He managed to retrieve 44 of his stash. He could not remember the private key to recover the rest. He used some to purchase other cryptocurrencies, while the rest he kept. Although Singh does not reveal the details of his current cryptocurrency portfolio, more than half his Bitcoin wealth has been wiped out over the first week of February.
While Bitcoin hogs the spotlight in the cryptocurrency rout, it is not the only game in town. A new cryptocurrency, it is joked, was born every day during the boom. CoinMarketCap lists over 1, digital coins on the internet. According to estimates, the Bitcoin itself now accounts for only about one-third of the overall cryptocurrency market. The rest are alternate coins or altcoins, as they are popularly known. There are some endorsed by celebrities like Paris Hilton Lydian Coin and new ones in the works being put out by old companies like Kodak KodakCoin.
Even Reliance Jio, it was rumoured, was working on its own version Jio Coin. The company has denied it since. Altcoins came into being because the Bitcoin, with its high valuations and difficulty of mining, was believed to have reached its peak. Those who missed out wanted to catch the next cryptocurrency wave at its onset.
In Gurugram, two cousins who set up a large Ethereum mining facility in their basement, Abhyajeet and Nikhil Yadav, just 18 and 20 years of age, appear to have gotten out just in time. Ethereum is considered the second-most valuable cryptocurrency after Bitcoin. The cousins had set up a facility of 55 rigs, which they called Foxtrot Infotech, thanks to a generous investment of Rs 75 lakh from one of their fathers.
These rigs are powerful machines with strong computational abilities. The two spent all of last year mining Ethereum and Zcash, another popular altcoin, but then the complexity levels rose. As the popularity of a currency goes up and more miners join in and transactions increase, the time and effort taken to mine coins also goes up. What it took for the cousins to mine Ethereum, Nikhil says, was no longer worth it. The duo had begun with a bang, though.
The monthly electricity bill alone would run up to over Rs 2 lakh. Over time, other expenses mounted, mining got difficult and power failures proved disruptive.
The Yadavs managed to sell their rigs to buyers just before the cryptocurrency bust. They still made a healthy profit on their investment, Nikhil says. The two now plan to move to Canada, where they expect to trade and set up rigs for other altcoins.
Called Authorito Capital, it invests capital pooled from several people into a portfolio of crypto assets. According to him, market volatility is the biggest challenge here. They are very high risk, but have very high returns too. You need to be able to tell the difference between them to bet on the right ones.
According to Mamoria, investing in cryptocurrencies is not as simple as buying the best performing or most famous.
It made us discover [the concept], but it is far from being the ultimate cryptocurrency. A software will let consumer devices lying around idle—like mobile phones and personal computers—talk to each other and cluster themselves in various groups, Mamoria explains, so that they can identify and mine what is identified as the most worthy currency at a given point in time. As for his fund, he says he is only keen on long-term investors.
We want people who are in it for the long haul. Santosh Kumar, a Bengaluru resident, started mining Ethereum late in He had grossly undervalued the potential of cryptocurrencies in the beginning, he says. Kumar began churning out Bitcoin and Dogecoin sometime in But once the Bitcoin fell in value that year, he began to spend his reserve indiscriminately. The Dogecoin started in as a Bitcoin parody, a joke on what it saw as a joke, and had as its mascot a popular internet meme, the Japanese shiba inu dog.