It is commonly assumed that every person buying bitcoin is attracted by the great price rush the cryptocurrency is currently going through. This sort of behaviour is seen as a classic indicator of a bubble and such buyers are assumed to eventually come to grief. This may well be true especially in respect of an asset that has gone up a whopping 20 times in just one year. However, the reason for bitcoin’s enduring popularity goes deeper. I outline five reasons for bitcoin’s popularity in India below:
The sudden move to withdraw notes of Rs 500 and 1000 from circulation in November 2016 led to many investors losing faith in the rupee as a store of value. The move was well intended and the overall debate about whether it was successful or not is complex and not one that I want to get into. However, one of its side effects was a willingness among investors to look for alternatives.
Bitcoin and other cryptocurrencies are not issued by any central bank or a centralised authority. Hence they cannot be ‘withdrawn’ or ‘demonetised’ at will. In case of bitcoin, currency units are created when computers owned by ‘miners’ solve complex mathematical problems. The record of ownership of the currency is held simultaneously by thousands of computers in the network and is updated continuously. Hence nobody can ‘tamper’ or ‘eliminate’ your ownership of bitcoin merely by making a computer entry to that effect.
2) FRDI Bill
The recently introduced Financial Resolution and Deposit Insurance (FRDI) bill has a provision that allows depositors’ money to be taken if the bank is in severe financial distress. As we explain here, safeguards such as government ownership, RBI regulation and deposit insurance, make this unlikely. However, the mere possibility that bank deposits are vulnerable has pushed investors to look for alternatives.
Bitcoin or other cryptocurrencies are often held with cryptocurrency exchanges or wallet providers and this exposes them to a similar sort of risk. However, they can also be held on computers, hardware or simple printer paper with code which is not in the possession of the exchange and is hence not exposed to problems with the exchange.
Inflation has been the bane of Indian savers for many years. Governments have time and again, financed spending sprees by simply forcing the RBI to print more money. This has lowered the value of money over time and served as a hidden tax on citizens, called ‘seigniorage.’
Most cryptocurrencies including bitcoin have limited units by design. In other words, only a fixed number of bitcoins can be created in the world, just as there is only a fixed quantity of gold. In addition, the creation of bitcoins slows as more and more bitcoin comes into existence because the computing power needed to create them becomes more and more demanding.
4) Property rights
In countries where property rights (cash is a form of property) have been historically weak such as China or Russia, bitcoins are perceived as a safe alternative because they cannot easily be confiscated. India’s record on property rights is mixed. Its democracy and robust judiciary act as good checks on the arbitrary deprivation of property. However as incidents such as Singur and Nandigram have shown, governments do have the power to seize the property of citizens when the situation calls for it.
Bitcoin and other cryptocurrencies cannot be easily confiscated because they neither have a physical existence (and hence cannot be physically taken by force) nor do they have to be stored with a licensed intermediary (such as a bank) which is subject to the laws of the state.
The Indian rupee is only valid in India. It cannot be used to buy goods and services in the USA, Europe or Australia. This is true for most national currencies. Fluctuations between currencies and the hefty transaction fees for currency conversion impose costs on those who are travelling abroad or buying goods broad.
On the other hand, bitcoin is bitcoin anywhere and everywhere in the world. Thus a bitcoin you buy in France can be spent in China or Australia or Argentina without paying conversion fees. This makes it an attractive asset for travellers, consumers and investors.
The stellar returns that bitcoin has delivered in the course of its short history (it was conceived of in 2008) are a big reason for many investors to buy bitcoin. However, the reasons outlined above are also important factors. This doesn’t mean that you should go and buy it right away. The price gains of 2017 may not be sustainable. However, do not dismiss it out of hand. The story of cryptocurrencies is only beginning.