Home / The Crypto Saga Explained Part 1 by Satish Reddy

The Crypto Saga Explained Part 1 by Satish Reddy

There is no dearth of issues in the financial world with sharply dividing opinions. Please welcome the new entrant, Cryptocurrencies, rapidly emerging as the most prominent bell weather of the global economy.

For decades, market pundits have kept a hawk-eye out on four asset classes-- Stock & bond indices, Oil, Gold and Currencies. It has taken centuries, geographies, discoveries, inventions, complex supply chains, millions of jobs and hundreds of global financial institutions to build these markets, which are today valued in trillions. Suddenly, the world sees this new kid (read asset) on the block, built with a software code, authored by a mysterious and untraceable soul (Satoshi Nakamoto) driving their century old markets. Very few people understand cryptocurrencies. Even fewer have actually transacted in one. But today everyone has an opinion on it.

Globally speaking, the jury is still out on whether cryptos are a virtual digital asset or a digital currency. Even the most advanced economies are still to develop regulations or find a regulator for this industry. Leading financial doyens, for one, Warren Buffet, has gone on record to say that cryptocurrencies are not a productive asset and he wouldn't buy the whole of bitcoin even for $25.

European Central Bank President Christine Lagarde has said that crypto-currencies are "based on nothing" and should be regulated to steer people away from speculating on them with their life savings. On the other side of aisle, there is this huge momentum built by global icons like Elon Musk (Dogecoin), Snoop Dogg (Rapper) and Lebron James (US Basketball player), Mark Cuban (billionaire investor & Shark Tank icon) and Gwyneth Paltrow (film actress), who has been the face of Bitcoin since 2017. And of course, its not endorsements alone. Knowing that you could buy a Tesla with Dogecoin or shop for a meal at Burger King or Subway, or that Wikimedia Foundation accepts donations in crypto, makes one feel that Cryptos are well on their way of running alongside fiat currencies as a peer-to-peer electronic cash system. While one should not dare to forecast whether and how soon this could be a reality, the ongoing meltdown, more commonly being called crypto-winter (but not death), has shaken the faith of most.

It all began with the meltdown of Luna and TerraUSD, also called stablecoin, which meant that it was always supposed to be worth $1. However, Luna tokens, once worth more than $100, kept falling till they were below a penny. Within few days, wealth of US$ 60 billion had vanished. At one point in time, TerraUSD holders were offered yields of 20 per cent. Elsewhere, Coinbase Global Inc., a crypto exchange, which had made a grand debut on the stock exchange in April 2021 has seen its stock price shrink by 80 per cent, wiping out $51 billion. Incidentally, Coinbase describes itself as a distributed company; all employees (reportedly, over 3700 in 2021) operate via remote work and the company lacks a physical headquarters. It is the largest cryptocurrency exchange in the US by trading volume.

The Wall Street Journal has eloquently summed up the ongoing rout by reporting an evaporation of some $1.5 trillion from cryptocurrency markets in the past six months. That is more than 50 per cent of their value and effectively sets the stage for its biggest survival test yet. Bitcoin, the most well-known of cryptos (almost a synonym for crypto-currencies), had peaked at$67,802 in November 2021 and is currently trading at $28,350, having lost over 60 per cent of its peak value. Ether, the other big boy on the block, is currently trading at $1,501, having fallen from its height of $4,865. It is not to be forgotten that Ether's journey began at 42 cents, some five years ago

IANS (Satish Reddy is a former Commissioner (Customs & GST) and presently founding partner of SKR Tax & Technology Consultants LLP)

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