Bitcoin came into existence in early 2009, with little to no value. But over the years, it has amassed a market capitalization of over $600 Billion with the complete crypto-industry; sitting at a combined market capitalization of $1.07 trillion. Bitcoin had recently hit another all-time high, which even prompted Coinbase, a major Cryptocurrency exchange, to announce its IPO

With this bullish run finally coming to a halt with an almost 11% drop to a price of $34,409 from a $40000 high, we have decided to take the time to give some method to the extremely technical madness that is Cryptocurrency and understand the slowly receding, yet visibly prevalent resistance of global governments and financial institutions, towards the unregulated digital medium of exchange.

Bitcoin Ends Choppy Week As Price Drops Below $37,000
Image: Bloomberg: Bitcoin’s record-breaking rally hits a wall

Bitcoin and the origin of Cryptocurrency

The origin of Bitcoin can be traced back to the paper, “Bitcoin: A peer to peer electronic cash system” written by a mystery author/ authors, back in 2008, under the pseudonym Satoshi Nakamoto. The reason why it captures people’s fancy is that it’s the owner of the biggest chunk of Bitcoin; which has remained largely untouched over the years. Whether or not this makes the script for a movie, it has ended up as fodder for conspiracy theorists to churn out their little versions to explain the enigma. Now let’s move on to the relatively technical details of this Cryptocurrency

Traditional Fiat money is legal tender with a face value exceeding the commodity value, and not backed by precious metals. Satoshi Nakamoto’s paper begins by drawing our attention to how our modern-day commerce is based purely on ‘trust’ that we hold in our financial institutions. Bitcoin proposed as an alternative to the existing system. The paper introduced Bitcoin’s as, “An electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”  With blockchain technology, the transacting parties can confirm their final transactions without the interference of a financial institution certifying it. While the applications of blockchain can go way beyond Bitcoin and Cryptocurrency, for this peer to peer network, the blockchain acts as a decentralized ledger.

How blockchain works

Image: PWC: Making sense of Bitcoin, Cryptocurrency, and blockchain

Miners and Blockchains:

Bitcoin exchanges act as the server which converts fiat money to Bitcoin and vice versa. Some of these exchanges have inbuilt Bitcoin wallets that are used to store your complete corpus of Cryptocurrency. A digital private key protects these Bitcoin wallets; losing which one can be forever locked out of their crypto-wealth.

Let’s understand this through an oversimplified example. A person ‘A’ decides to transfer some Bitcoin from his wallet to ‘B’. ‘A’ places a transaction request which goes to peer-to-peer (P2P) computers called nodes. Miners, who are responsible for securing the network; perform heavy calculations to verify the transaction, combining it with others to create a new block of data for the ledger.

These miners are then rewarded for fulfilling the arduous calculations or hashing puzzles in the form of Bitcoin. However, it is only the miner that completes the transaction first and mines a block, within a 1Mb limit, that gets rewarded for the same. This new block is then added to the existing blockchain. Once the transaction is verified and complete, Bitcoin exchanges exchange the Cryptocurrency for traditional coins; while each party involved within the transaction remains completely anonymous, making the whole transaction fairly cyber-attack-proof.

The reason behind the Crypto-Volatility 

Bitcoin is a fairly volatile asset. Volatility is the measure of the price variance of an asset over a given period. It helps quantify the risk of change in the financial asset’s value. Higher volatility would imply that the price of the asset is subject to change significantly within a short burst of time. Often, the Volatility Index, like the one given below keeps track of the price volatility of Bitcoin.

Bitcoin Volatility
Image: Bitpremier: The Cryptocurrency volatility index

In a mere 3 month span from October of 2017 to January of 2018, Bitcoin so the most volatility (twice the most recent rally) it has ever witnessed over the years.

Factors affecting Bitcoin’s Value

Several experts have time and again, warned against the risks of investing in such a volatile asset. Unlike the traditional forms of currency that are directly impacted by the fiscal and monetary policy as well as the overall economic condition of the country; bitcoins’ value depends more upon its availability, the demand as well as massive investment influxes, along with the value of other currencies on the exchange.

The price of bitcoins further depends upon the number of bitcoins mined. The mining of bitcoin is effectively capped at 21 million, beyond which, mining activity will be discontinued. Once all of these bitcoins have come into circulation, the only factor determining the prices will be the demand

The marginal cost of production is another reason for the fluctuation in the prices of bitcoin. On average, Bitcoin’s algorithm only allows for one block of Bitcoin, once every ten minutes. This implies that the greater the number of miners that compete to solve the hash puzzle, the greater will be the difficulty of that problem, in effect making the currency more expensive to solve. Thus making hash rate a key driver of the price shift of Bitcoins.

Several industry experts have given their two cents on the reason they believe is responsible for the recent Bitcoin rally. The reasons vary from the recent PayPal dive into the Crypto-universe, to increasing hash rates, to the US federal reserve printing more than $3 trillion for stimulus. But none can point conclusively to a definitive cause at the root of this sudden spike.

Changing Indian stance over the years

S&P Dow Jones Indices will come out with a Cryptocurrency index this year, in collaboration with the virtual currency Company, Lukka. The US isn’t the only country that has had a change in its stance towards Bitcoin. Several other jurisdictions are starting to grow less vary of digital currency.

India has been extremely skeptical of Cryptocurrencies in the past. In 2018 the Central Bank had barred, regulatory authorities like Banks from dealing in Cryptocurrency. It was only last year, that the Supreme Court of India, in the Internet mobile Association of India v Reserve Bank of India, struck down the Reserve Bank of India’s (RBI’s) circular that had prohibited banks and financial institutions from regulating the Cryptocurrency ecosystem, on grounds of proportionality. The recent bullish trend observed in Bitcoins value has further contributed to some degree of interest in the otherwise skeptical Indian audiences. 

A recent development was the Government mulling over the proposal to impose 18% GST on Cryptocurrency transactions; this could mean an additional INR 7200 crores in revenue for the Government.

Looking into the Future:

While these might seem like positive indicators for crypto-enthusiasts and hopeful investors; of a changing environment it is still far from turning India into a Crypto-friendly landscape. The ambiguous regulatory setup has already resulted in multiple Cryptocurrency related scams which might have further cemented some pre-existing inhibitions. The case of a Cryptocurrency trader from Bhavnagar, Gujarat, involved in an INR 1000 crores Cryptocurrency Scam; the Bangalore based Hacker was found with INR 9 crores worth of Bitcoins he had obtained by hacking into several exchanges and Ethereum (Cryptocurrency) websites, are only some of the most recent additions to the list. 

Despite the high volatility, and regulatory vacuum; several new investors continue to flock to the Cryptocurrency hoping for a once-in-a-lifetime shot at amassing a great fortune. While the future of this digital asset might be just as unpredictable as the extent of its volatility, the one thing that we can say with some conviction is that the outlook of governments across various jurisdictions as well as financial institutions have softened over the years.

These governments across the globe shift their stance towards Bitcoin, ever so slightly; we can only sit and wait for the next season of crypto-frenzy, as the Bitcoin seesaw takes yet another swing.