Cryptocurrency: A New Investment Alternative

Abstract

Virtual currency is a type of unregulated digital currency that is only available in electronic formThe term came into existence around 2012, when the European Central Bank (ECB) defined virtual currency to classify types of "digital money in an unregulated environment, issued and controlled by its developers and used as a payment method among members of a specific virtual community". The legality of Virtual Currency varies from country to country. Since Virtual Currency has little to no supervision from a third party jurisdiction such as a Central Bank, which is the case for regular currencies, it has not ruled in favour of many governments organisations. One of the main reasons why financial regulators are choosing not to accept Virtual Currency as a mode of transaction in their countries is because it poses certain unique threats such as terrorism funding, threat to market integrity, severe lack of consumer and investor protection, etc. which may damage financial stability.("Cryptocurrency and security", n.d.). The United States of America allows the trade of Virtual Currency, only under strict supervision and regulation by The Commodities Futures Trading Commission. The European Union has not granted Virtual Currencies the legal status of currency, nor money. It depends on the status of digital assets in the EU or a member state("list of countries where Bitcoin/ICO/Cryptocurrency is legal & Illegal", 2019). In India, The Reserve Bank of India has completely banned the usage of virtual currencies, both directly and indirectly, by the entities regulated by the RBI. However, this ruling was challenged by The Internet and Mobile Association of India, due to which the end result reflects no clarity on the aspect of cross border virtual currency trading.(NEWS & News, 2019). Cryptocurrency is a digital or virtual currency in a digital medium of exchange. It was launched in 2009 by an individual or group, who refer to themselves as Satoshi Nakamoto. It was created in the wake of the 2008 Global Financial Crisis as a way for people to control their money without relying on any company, bank or government, owing to a newfound lack of trust.("The Evolution of Cryptocurrency", n.d.). Bitcoin was the first Cryptocurrency which was created in the year 2009.Bitcoin makes up 63.8% of crypto's market value. Cryptocurrency uses cryptography which is a method to encrypt and decrypt financial data to secure communications in the presence of third-parties with ill intentions.There are currently 5,201 cryptoassets.The crypto market has a total market capitalization of over $155 billion ("Crypto in Numbers: 50+ Cryptocurrency Statistics and Facts | Finivi", 2020). Security is one of the major concerns for cryptography users and investors. While cryptographers claim that each unit of currency is encrypted with the help of highly advanced coding to ensure safety, there is no denying that there have been numerous attempts in the past wherein hackers have hacked digital wallets of investors, and partaken in crimes such as phishing, supply chain hacking, and scamming, resulting in the loss of millions of dollars. In the first quarter of 2019, the amount of losses due to hackers in the virtual currency system amounted to USD 1.2 billion, further stimulating the already existing fear of virtual currency amongst the general public. In terms of legality, in 2020, the Supreme Court of India has lifted its initial ban on cryptocurrency, thereby rendering it with a legal status in India. Cryptocurrency had been banned in 2018, and after two years of Indian enthusiasts fighting in favour of Cryptocurrencies, their case against the RBI was finally won, and the Supreme Court of India passed a judgement declaring that the trading of Cryptocurrency would now be legal in India. Despite its variations in legality, there is no denying that Cryptocurrency is fast growing in terms of popularity, with a current market evaluation of USD 1.05 billion, with a projected growth to USD 1.40 billion by 2024. This study addresses the volatility of cryptocurrency. The market itself is unpredictable in nature owing to the fact that any relatively small transaction would impact the whole currency. While this results in consumers hesitating to invest in cryptocurrencies, speculative traders, on the other hand, depend on the volatile nature of cryptocurrency to invest big, and earn bigger profits, even while risking major losses at the same time.