The permanent problem of crypto

I'm sorry to say that Bitcoin has not been cancelled. After the FTX collapse, I had written that I was happy that crypto had not been officially regulated in India. It's clear that apart from taxation-based measures, there won't be an actual crypto ban in India, unlike, for example, China. This is fine. Crypto should not be regulated, and those who dabble in it should be left to their own devices. They should be free to go bankrupt in the manner and time they choose.

At the same time, the FTX scam has not been proven to be the death knell of crypto, something that one could have hoped for. This implies that the cryptocurrency market may now be a permanent fixture in the global financial landscape. FTX has demonstrated that it's possible to attract billions from investors around the globe and squander it all, and yet, this doesn't fundamentally challenge the underlying basis of cryptocurrency. The potential for profit is simply too great and too easy to attain. The prevailing opinion is that cryptocurrency is a valid class of assets, and while there may be some regulatory hurdles, these will eventually be resolved. In time, another surge in value is inevitable, leading to a significant increase in the value of the surviving currencies and tokens, and consequently, a new wave of unsuspecting savers worldwide will jeopardise their finances.

While all kinds of fringe cryptos have become irrelevant, Bitcoin has survived and has actually been in good shape for people to start getting fooled again. This year, for example, despite recent drops, bitcoin is up 57 per cent. In fact, from its recent low in November to its recent high in mid-July, Bitcoin exactly doubled.

Any speculative asset that can randomly double and half is well-equipped to be exploited for luring in newcomers. Quite clearly, this is a role that Bitcoin will play nicely from here on. This could go on for the foreseeable future, unfortunately. Looking around at Bitcoin advocacy on social media, it becomes quite clear that the FTX crash and the post-FTX period have, in a somewhat paradoxical manner, benefitted Bitcoin. The Bitcoin advocates' argument now is that if Bitcoin has survived all this then surely it will survive anything.

On a logical plane, it is not possible to refute this argument in a manner that will satisfy the surviving cryptomaniacs. To them, it's just the line of the graph that matters. If someone's entire focus is on speculative trading without regard to the asset class, then Bitcoin serves perfectly well. In fact, it serves better than anything else because the more violent the gyrations of the price, the more exciting the speculation is. If something goes up a lot and then falls a lot then those who guess correctly will make that much more. This is like a drug to the addicted.

The crypto phenomenon cannot be understood without looking at the ordinary people who drive it. Some time back, I read a book named 'Cryptostorm' written by business journalist Sundeep Khanna. Unlike almost anything else about crypto, the book focuses almost entirely on narrating the stories of people who got caught up in crypto. It's a very diverse set, with many of them being quite unlike our normal image of the cryptomaniac. There's a small-town teacher, a hacker, a lawyer, a student and many others. In many of these people, one can see a kind of yearning, a wish that in a time where technology has created so many changes so fast, perhaps money can change too. The entire crypto propaganda is based on inventing and then exploiting this urge.

Unfortunately for all these people, the rules of money and investing don't change. That's why this story will continue. Beyond criminal activities and ransomware, cryptocurrency is perfectly designed to take advantage of savers who lack the fundamental understanding of why some investments succeed and why others seem too promising to be real. Human nature is invariably marked by greed, as well as the manipulation of that greed by others. That's not going to change.

Also read: The crypto meltdown