The Ebb and Flow of Cryptocurrency

Economy Jun 02, 2021

The turbulent crypto currency market witnessed a major upheaval as the prices of major currencies, including  Bitcoin, Ethereum, and Binance coin crashed around 30% within 24 hours, after riding a bull rally for some time now. Various reasons, including China’s clampdown on the digital currency, have been attributed to this sharp slump.

What led to the plunge in prices?

The decline in the prices of  Bitcoin and Ethereum commenced a month ago with first, a power outage in China’s Xinjiang region and then a ban on crypto usage by Turkey’s central bank in the same week. Further, Tesla CEO Elon Musk’s decision of non-acceptance of Bitcoin as payment for its products, citing environmental concerns due to the increasing use of fossil fuels for bitcoin mining, led to a further fall in the price of currencies .This was a complete turnaround from his previous decision of accepting bitcoin as payment in February 2021.

However, what proved to be the last nail in the coffin was China’s announcement barring its financial institutions and payment companies from providing any services related to crypto currencies. As a result of this, the banks and online payment channels in China will not be able to offer clients any service involving crypto currency. This ban differs from the earlier one imposed by China in 2017 in terms of the scope of prohibited services which has been further expanded now.

Scenario in the cryptocurrency markets                                      

Though all cryptocurrencies fared poorly due to the slump in prices, with Ethereum and Dogecoin registering a downfall of 40% and 45% respectively, it was Bitcoin, the most popular cryptocurrency in the world, which recorded the sharpest dip. The rout wiped $500 billion dollars from Bitcoin’s peak market value leading to its value being downgraded more than 50% from its record level of $65,000 posted in April.

However, even this dramatic fall in the prices has been termed as a 'short-term correction' given the highly volatile nature of its market.Though Bitcoin has been able to rebound to some extent since the last exaggerated fall in price,this bloodbath in the cryptocurrency market has once again brought to the fore its biggest risk of vulnerability.

The legal status of cryptocurrency in India

India has been blowing hot and cold on its stand on cryptocurrency for a long time now. Cryptocurrency is not illegal in India however the important bit is that it is still unregulated. It implies that one can hold Bitcoin as an investment but in the absence of a governing body regulating the same, it poses a huge risk of frauds and scams.

While the Reserve Bank of India had banned cryptocurrency in 2018, the ban was lifted by the apex court citing it “unconstitutional” on the grounds of violating the rights of an individual under Article 19(1) g. The banks in India, though, are still wary of dealing with crypto exchanges.

The Government of India has also been on the fence regarding cryptocurrencies but it has always been in favor of using the Blockchain technology of cryptocurrency for rendering government services in this day and age of rapid technological advancement.

What lies ahead?

The fortunes of cryptocurrency are strongly tied to the risk appetite of the society dealing with it. In India too, though the recent slump resulted in a massive sell-off, the user numbers suggest a real crypto boom in the coming times. However nothing can be predicted regarding the movement of prices in future given the volatile nature of digital currencies.

This article has been written by Khanak Sharma for the Paradigm.

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