Anonymity –the state of having your identity hidden, in spite of normal everyday functioning. It’s a convenient boon offered to us by the internet; but it could be employed for better or for worse. On one hand, there are tales regarding the deep web which we’re well aware of –a platform, more often than not misusing the powers of anonymity; while on the other, it ensures personal and data security.
Lately, in the past quarter or so, crypto-currency has emerged as a frequent headline-making topic of discussion, owing to one of its main features: anonymity. It has taken many forms such as bitcoins, litecoins, ripple, etc. Its prices rocketed to unimaginable heights, causing a widespread debate about the opportunities it presents, its safety, and its viability.
A currency created in the wake of the 2008 financial crisis, it is free of every kind of policy and restriction which defines a free market, and thus has been the cause of happiness among enthusiastic capitalists.
The idea portrays economics at the grass root level and brings to light the most talked about fundamentals of the subject –the forces of demand and supply. Prices of bitcoins are solely dependent on the invisible hand and not at all influenced by those in power, which is one of the reasons why there’s hardly any uncertainty regarding the price fluctuations.
For the rational economists out there sniffing the impossibility associated with the last statement, let’s clear the air: The supply of bitcoins in this world is also limited and fixed; hence fall in value due to increase in supply is not a possibility.
Sounds too good to be true, doesn’t it? Well, let’s not forget the fundamental principle of finance, and the world in general – “There is no free lunch.”
The catch here is that even though it is free from economic uncertainty, it is the political uncertainty which brings in the risk-factor. Make no mistake; there are justified reasons towards not backing the currency politically. Crypto-currency, as the name suggests, is created and protected by multiple layers of encryptions making it almost impossible to trace and track. Even though this makes it more secure from risks associated with cyber-crime, the fact that it cannot be traced is a major issue and due to the same, from a government standpoint, it most definitely won’t ever come into legal adoption to gain recognition as a currency.
Its strength is characterized by its weakness –lack of government recognition and regulation.
The reason investors have been apprehensive about investing in such opportunities is because of the constant threat surrounding it –lack of knowledge. We’re all aware that people are averse to what they don’t completely know and crypto-currency is a technical concept which requires time to be understood. But that’s a hurdle which can be overcome rather effortlessly. Owing to the human mind and its easy grasp on learning new concepts, more and more people will be extensively aware of the mysteries and complexities looming around the matter of crypto-currency in the near future, which may indeed contribute towards a further appreciation in its value.
But the question remains; if it has been in existence for such a long time, why the sudden spike? Some experts attribute it to the global WannaCry attack since the hackers demanded payment in the form of bitcoins, while some are of the belief that its due to the market trying to correctly evaluate it.
But let us now present a different opinion, a different perspective –the belief that it’s due to the uncertainties surrounding the global economy. We’re all aware that the recent economic and political happenings, be it Brexit or the appointment of the 45h President of the US, have created a wave of distrust and apprehension about the system. And during this time, anything which is independent of all such forces is highly sought after; even if it’s something with no intrinsic value whatsoever; even if it holds lesser value than a non-replicable piece of paper; even if it’s not recognized by the government; even if it isn’t circulated with a printed picture of someone significant. And that’s precisely why digital currency is being seen as the go-to for those uncertain about the future. The situation has escalated to such an extent, that digital currency is widely coming to be known as ‘digital gold.’
Before coming to what the future holds for bitcoins and crypto-currencies in general, let’s get rid of certain misconceptions associated with it, and also learn a few truths in the process. Firstly, it’s important to realize the difference between the following three words – ‘legal’, ‘recognized’ and ‘regulated’.
Most are of the opinion that crypto-currencies are illegal which is thoroughly incorrect. The best and perhaps the only way to sum up the legal status of crypto-currencies is, however complicated and technical it sounds, that they are neither legal, nor illegal (at least not globally). They operate in a gray area and its legality primarily depends on its usage. If bitcoins are used to make legal transactions, it is very well legal. However, since it allows semi-anonymity to users, it is widely used to make illegal transactions and that’s when it is deemed to be illegal.
Talking about the taxation policy regarding bitcoins and taking the IRS as an example, bitcoins are treated similar to other financial market instruments and are viewed to be legal as long as they are not tied to any illegal activity.
It must be noted that crypto currencies are, however, unregulated and unrecognized. Hence, they are always over-exposed to risks associated with malpractices and frauds.
Note that in some countries like Iceland, crypto-currencies are outright illegal and banned.
This gives rise to another question. Why invest in something which may become null and void at any second?
Well, the answer is simple: since a logical analysis depicts it to be a low risk, high return option. Declaring the Bitcoin or any other popular crypto-currency as legal tender, poses a major threat to the local currency of that country. This is of course based on the realistic assumption that there will always be at least one country which won’t declare it illegal and in doing so, the country would allow its domestic currency to heavily appreciate owing to its high demand. This follows the fall in demand and consequently, the value of other currencies.
Hence the chances of the Bitcoin plummeting are possible only if all the countries, with not a single exception, together decide to recognize it as illegal which, to say the least, is highly improbable.
To conclude, questioning their identity as an official form of currency is only fair, since it isn’t quite likely to happen in the near future. However, as an asset, the future for it seems extremely promising, for crypto-currencies, since new and emerging currencies like ethereum, are taking the market by storm.
It is essential to identify them as a form of asset than as a currency; that is to say, look at them solely from the point of view of an investor than as a citizen. And of course, invest accordingly & wisely. An initiation has already taken place with Japan legally recognizing bitcoins as a form of asset. Interestingly enough, Japan houses the world’s largest organized crime Syndicate-Yakuza. This certainly sparks speculation regarding the dubious connection. While we’re at it, hey, have you given our article, “Yakuza –The Winning Hand” a read yet?
THE RATIONAL ECONOMISTS 