With the value of cryptocurrencies nose diving, only to recover from it, Patriot look at the reasons behind the market drop and what it means for India

For those who have not been keeping track, the double whammy of Elon Musk raising concerns over the energy use that goes into mining and maintaining cryptocurrencies, and ban in its utilization by financial institutions including banks and online payment channels in China led to a rapid collapse in the values of cryptocurrencies. Losses were reported to be around 200 billion dollars according to a report by CNBC. 

The crash came on the heels of the sixfold increase in Bitcoin over the past year and the surge in Dogecoin prices after Elon Musk tweeted about it. The cryptocurrency market is not new to such volatility, however, what was initially seen as markets strength — its freedom from regulations from governments and financial institutions now seem to be its biggest challenge.

Acceptance for cryptocurrencies has soared over the course of the 12 years of its existence and the biggest driver in its growth has been the freedom cryptocurrencies have enjoyed since their inception. Now though, even as interest in the market is peaking, there are many things that investors young and seasoned should keep in mind.  

Fluctuation problems 

Today a single bitcoin is worth 38,367.29 USD while the less popular Cardano is valued at 1.54 USD. These prices are a testament to the wild fluctuations the cryptocurrency market has experienced over the past week. And these fluctuations are neither new nor does there appear to be any end to them. 

Cryptocurrencies are not subject to the intense scrutiny or regulations that guide the financial markets and as such they are open to manipulation and volatility. The response of governments to the currency has not been kind. While some countries like the USA have accepted the currency on a limited basis with transitions subject to checks and balances, countries like China have not been so kind. Even in India the future of cryptocurrencies is veiled, to say the least. Earlier this year there were talks of the Indian parliament initiating laws to regularise the use of cryptocurrencies with speculations of outright  bans doing the rounds as well. No such steps have however materialized. But that has further fuelled doubts in the minds of potential investors in the country. 

Also, when it comes to the cryptocurrency market, the lack of a regulatory framework has led to sharp increases as well as decreases in its values, a case well represented in the markets position this past week. These sharp fluctuations can in part be blamed on big holders (called whales), as well as to the steps being taken by countries for the currency. 

India’s stand

For investors back home, these market fluctuations and lack of framework are major points of apprehension when it comes to investing in the crypto market. Ranging from rumours that the government plans to not just ban but also penalise the use of cryptocurrencies after RBI launched its own online currency, to plans of regulating cryptocurrencies for streamlining its use — we have seen it all. 

Despite the uncertainty surrounding the future of crypto, organisations as well as individuals in India have either accepted its use or are looking at better integration of the currency into the mainstream. Many in the younger generation are interested in investing in crypto and are actively looking for openings. However for bigger players in the market, it is more of a waiting game. Waiting for a clarification on the steps the government plans to take on the future of crypto in the country for which “active consultation and interaction with people within the market is very important,” according to Akshay Agarwal, an industry insider. 

He further says that there were plans of shifting base of the Indian Crypto market to Singapore when there were talks of banning them in India. However due to lack of concrete steps by the government no such move had been made. In fact, the popularity of cryptocurrencies has soared to the extent that e-commerce sites like Flipkart have started accepting cryptocurrencies in the country. Still, a proper framework for its regulation is missing. 

The future of cryptocurrencies in India 

Looking at its wide appeal and international acceptance, cryptocurrencies do provide opportunities for growth, However for it to sustain itself, there needs to be a legal and regulatory framework that can streamline not only the transnational but also the investment side of cryptocurrencies in India. 

The second challenge for cryptocurrencies in India is the lack of infrastructure which is one of the key components in its use. With the relevant infrastructure in place, the cryptocurrency industry can be a big stimulus for the burgeoning youth of the country willing to invest and work in diversified fields. 

Further as Agarwal puts it, “The use of cryptocurrency, if and when implemented, can be a big stimulus to tax compliance as tracking transactions are a lot easier.” He also points to the fact that the Indian market, in terms of cryptocurrency, is going to follow the West rather than lead. This again he says is due to the lack of a framework, infrastructure and enthusiasm on the government’s part. He however, sees the future to be a positive one and hopes that with greater consultation with industry insiders — the government and financial institutions will be better able to tackle the growth of cryptocurrency in a structured and positive way. 

However, unless the legal and structural framework for the use and asset management of cryptocurrencies is brought into place, its value and market value will be subject to tumultuous fluctuations which can be a big problem for potential and current investors.