This article is written by Bodhidipta Mandal, pursuing Diploma in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho. The article has been edited by Dhruv Shah (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Table of Contents
Introduction
Throughout human civilization, humans have faced one particular problem at all times i.e. what can be a perfect value transfer item?? For example, in ancient times buffalos were used in barter systems to exchange goods. Then we started using salt, followed by crop and then gold. And now it is money, not only do we consider someone who has more money rich but also which money/currency is more valuable we consider that country to be more wealthy and more powerful.
But think about this, you have “X” amount of money in your locker. And suddenly your government declares that they will introduce newly printed money and the previous currency will no longer be considered as legal currency. From having “X” amount of money you are down to 0. The bottom line is that until your state validates the printed papers in your pocket, it will hold no value.
In view of all this, consider a scenario where we have a global currency and that requires the global audience validation to be considered valuable???..No state interference, no Govt. regulations, globally accepted and most importantly secure. This is the thought behind the world’s first cryptocurrency, Bitcoin. This article will talk in detail about cryptocurrencies, their legal validity in India, things to consider before buying cryptocurrency and how they are emerging in today’s modern world. But, before we jump directly into cryptocurrencies, first let us understand the technology behind cryptocurrency.
Everything you need to know about blockchain
As the name suggests, Blockchain is simply a chain of blocks. Each of these blocks contains data that is secured by a specific hash key and the previous blocks hash key.
What is known as Hash Function?
In layman’s terms, a hash function is simply an identification number. Kind of like your Fingerprint. But, if any single digit, letter or even spacing changes in that data the hash number will change. If you think Hash Number is a security lock of your data stored in blockchain then it must have some key! Yes, a hash function has 2 keys, A private key (Which the owner only has access to) and one public key (if the owner wants to share that data with anyone, then he can give him this key). Now that we are clear with the hash function let us jump into the technical details of Blockchain.
As previously discussed, each block consists of three things:
- Data,
- Hash,
- Hash of the previous block.
Now the data in each case can be different and mostly depends on the purpose. In the case of Blockchain it is:
To: (Sender)
From: (Receiver)
Amount: (BTC)
Each data derives a specific Hash number and the last thing the block needs is the previous block’s hash number. By confirming with the previous Blocks Hash number each block forms a chain. (Only exception is the first block as it does not have the hash number of the previous block, it is popularly known as the genesis block.)
Here is a table presentation to understand this easily
| BLOCK 1 | BLOCK 2 | BLOCK 3 |
| Hash: QGHK | Hash: 1KXS | Hash: 06YP |
| Previous Hash:0000 | Previous Hash: QGHK | Previous Hash: 1KXS |
If you want to alter any hash value you have to alter all the later hash values as without that the system will not accept it. But is it not possible to do that quickly in future? With the help of better technology can we not change all the hash values in seconds?
The simple solution the engineers came up with was to slow the time. So, if one block has been created it will not accept another block for the next 10 minutes. Now here you can do a simple exercise: keep this scenario in mind, go to the e-wallet you use and calculate the amount of time it will take if you have to update each of those transaction numbers and you can only update the next number after 10 mins once you finish the first one.
Everything you need to know about cryptocurrencies?
From here we will focus less on technical definitions and focus more on real-life examples which will be a lot easier to relate. So, the main attraction of cryptocurrency is its decentralization. No central authority or government owns this, it is controlled by the people only and it is as useful as money, it holds its own value and you can use it to buy any good you desire.
Just take a small pause here. I want you to understand how having control over your money by any public or private authority can affect your life.
If I know you purchased a car yesterday, I’ll start recommending some car insurance.
If I have your Fixed deposit information, it will be easier for me to recommend some lucrative returns on mutual fund plans. Now in this scenario, your life will be a little bit easier as you get suggestions before you ask but the amount of profit I can generate will blow your mind.
To save you from this control is the original idea behind the origin of cryptocurrency. As we have discussed the security part earlier, I would like to take you to its other usefulness. There is a certain limit up to how many units it can exist (without mining). In the case of Bitcoin, it is 21million. The little to no transfer costs and no limits on purchases and withdrawals. And even quick international transactions.
It was originated to change the world’s payment system but with time cryptocurrency has also gained the status of an asset. As people understood the technology behind cryptos they started believing that crypto is the future of money. With that belief and with all the additional benefits people start buying cryptocurrencies. And the cryptocurrencies in its true sense didn’t keep their investors empty-handed for a long time. Even in a period of a few months some cryptos gave more than 250-900% returns to its investors. As the popularity of cryptocurrency develops, governments start questioning its legality and framework. In some cases, few states banned cryptocurrency for a short span of time, some started to focus on building their own state digital currency (China’s e-RMB) and on the other side some countries gave bitcoin the status of their national currency (El Salvador).
Legal validity of cryptocurrency in India
The popularity of cryptocurrency also raised a few questions around the globe. As no government authority has the power or ability to track the money, people start questioning if the money is being used for illegal purposes! Like funding the terrorist organisation. And very soon these imaginary situations became reality. All of us may probably remember when all the influential people’s Twitter accounts were hacked on the same day, and the hackers claimed money in Bitcoin. In a very recent case Dominos India’s customer data was hacked and hackers auctioned the whole data on the dark web for 2 to 10 Bitcoin (BTC).
Without a doubt, raising scenarios like these developed tensions and as an initial reaction, few countries banned cryptocurrency. For example, in India RBI (Reserve Bank of India) issued a press release in 2013, cautioning the public against dealing in virtual currencies including Bitcoin. In November 2017 the Government of India constituted a high-level Inter-Ministerial Committee to report on various issues pertaining to the use of virtual currency and subsequently, in July 2019, this Committee submitted its report recommending a blanket ban on private cryptocurrencies in India.
In 2018 RBI issued a circular directing Banks and NBFCs to not only stop dealing in virtual currencies themselves but also directing them to stop providing services to all entities which deal with virtual currencies. Till this time India had more than four to five cryptocurrency exchanges which suffered huge losses as the customer needed money from the bank to buy their cryptocurrency and again to convert their cryptocurrencies to real money.
However, in 2020, the Apex court of India in the case of Internet and Mobile Association of India vs. RBI, in a well-conceived judgment passed a decision quashing the earlier ban imposed by the RBI. The Hon’ble Supreme Court of India predominantly examined the matter from the perspective of Article 19(1)(g) of the Indian Constitution, which specifies the freedom to practice any profession or to carry on any occupation, trade or business, and the doctrine of proportionality.
However, in the recent amendment of Schedule III of the Companies Act, 2013, The Government of India directed the companies to disclose their investments in cryptocurrency. This decision will benefit the companies in multiple ways. Firstly, the crypto investments of the companies will reflect in their balance sheet. The stock investors who invest in Indian listed companies always do a detailed analysis of the company balance sheet. Now the same investors will be introduced to the cryptocurrency scene which in the long term generates more and more crypto participants.
Is buying cryptocurrency investing or speculation?
There is a huge debate around this. And the debate is not limited to the average human being. Greatest Investors of all time, Hedge fund managers, Top CEOs of best of the best companies have now become a part of this debate. And naturally, there is no conclusion where we can rest the case. Later in this article, I will give a few insights about how the best of the best minds are dealing with cryptocurrency.
The important question here is that if you put money in cryptocurrency, will it be an investment? Let’s just say you have an opportunity to invest in a start-up that has been on the scene for five years. And if you decide to invest in that start-up will that be investment or speculation?
The answer is simple, nobody knows, it can be a multibillion-dollar company or its valuation can become Zero within a month. Investing in cryptocurrency is quite similar.
Cryptocurrency at its core concept does not generate any value. It is merely a transactional instrument. But the possibility that it can potentially change our entire monetary system is what gives it value. A common example used in the crypto world is like you had an opportunity to invest in the internet (concept) before its popularity. Crypto lovers see crypto as Internet 2.0. This simple example is behind all the hype. Now that I have mentioned the hype, how can we end this discussion without mentioning the originator behind this hype?
Elon Musk and 2020-21 Crypto Boom
Elon Musk actually built a digital payment company when all our transactions were taking place on cash or cheque. When he planned to reuse the rockets, people doubted him for every second. But proving himself right again and again earned him the status that he can actually see the future technology development.
So, in 2020-21 after a couple of tweets about GameStop, Elon Musk put the Bitcoin logo in his bio. Which surprisingly moved the Bitcoin price. Elon Musk expressed his love for Bitcoin and the idea behind Bitcoin. And the Bitcoin price started to make record highs with each of Musk’s tweets. But the actual show began when Musk started promoting a meme coin, namely dogecoin (which price was actually around 0.0082 dollars). By this time people had seen the Bitcoin rally and no one wanted to miss this opportunity. Without judging the actual fundamentals of Dogecoin people started to empty their pockets and buy as much Dogecoin they could. What happened to these investors? Well, in short someone became a millionaire within 69 days. But at the end its value dropped quite a bit. But still, Elon and few investors believe in Dogecoin and they see a good potential in it.
Why billionaire investors like Mark Cuban, Robert Kiyosaki are betting huge money on cryptocurrency?
We all probably know Mark Cuban, who is a judge of “Shark Tank” and made billions from his investments. Just before we take a deep dive, Mark Cuban recently invested in an India Crypto start-up- Matic. Cuban has been very open about his Crypto investments and he firmly believes the upside potential of Cryptocurrency is unlimited. For now, he sees Bitcoin as nothing but a store of value. Much like digital gold. He believes as people start understanding the power of Decentralized Finance (De-Fi) people will jump into Bitcoin which will automatically increase the demand. Having a very limited supply (21.9 million) Bitcoin will have no other option but to raise in price. Though Cuban is very bullish on Bitcoin, he believes Bitcoin needs to have a more customer-friendly interface and also Bitcoin and De-Fi need to evolve in order to become a Bank Account without a Bank.
Cuban sees problems like this solving with ETHEREUM(ETH). Ethereum is nothing but a 2nd generation cryptocurrency. Which is a lot more advanced and gives a platform to others to build their series services on top of it. Let me give you an example, you have booked a cab on Uber, some driver came to pick you up. No matter whether you are paying the fees to the driver directly or to Uber, Uber will always deduct its fees and give the rest of the money to the driver. Ethereum has a technology called smart contract which allows You and the driver to do their part of the contract and there is no need for any third party. Upon fulfilment of the duties, it will automatically deduct ETH from your account and give it to the driver. In a way you both don’t need to trust each other but the system. Now as an exercise, You can think of the same example with Upwork or Fiverr. Cuban believes with proper developments Ethereum will disrupt big software companies.
If you have any interest in personal finance and anyone asks you to recommend one personal finance book to him, you probably will recommend “Rich Dad Poor Dad”. You will be glad to know that the author of “Rich Dad Poor Dad”, that is, Robert Kiyosaki, loves Bitcoin the most. Well, he has a different set of reasons, and definitely, that will open up a few benefits other than the technical aspect for you. Before we begin the discussion let me ask you something;
There is a currency
Which has an unlimited supply cap, already $2.1 trillion in circulation
Top 1% owns 30% of its supply and;
35% of it was printed last year.
If you haven’t guessed it till now. It is the U.$ Dollar. It might have given you a shock and most of the investors are also dealing with the same shock. Many investors believe this Act of Federal Bank will be a cause of massive inflation. Robert in his many tweets discussed that his personal reason to invest in Bitcoin is it’s out of any authority’s hand. In one of his tweets, he said, “Remember the problem is not Elon Musk or bitcoin. The problems are the Fed, Treasury, and Biden. Gold, silver and bitcoin are the solutions.”. In every Bitcoin crash, Robert urged his followers to buy as much as they could because “It is at a discount”. The reason can be the brilliant technology behind Bitcoin or other Cryptocurrencies or its decentralization. The fact is that investors are not only talking about this openly but they are actually putting their money where their mouth is.
How can you conduct proper research on any cryptocurrency?
If you want to invest in any cryptocurrency then there should be some reason behind it. Either you like the fundamentals or you see a huge upside potential or just because it has a dog face in its currency or maybe because Elon Musk recently tweeted about this. Whatever the reason maybe, you should know how you can conduct proper research before investing and mostly on what idea or project you are putting your money into.
Questions you must ask before investment
First of all, you need to know who is the founder, what is the history of this coin, the development team and most importantly why it has been created and what is the vision of the founder?
- If you are new to the scene, you can start your research from CoinMarketCap.com, here you will find cryptocurrencies in order of their market capitalization. Once you become familiar with the name of those cryptocurrencies you can start your research on individual coins.
- In CoinMarketCap.com if you click on any cryptocurrency, you will get a lot of details about it. Let me tell you the most important details you should look for. Once you enter into any particular coin (Crypto) first check out their website. You’ll find a little information about the coin, read their blog where they give updates about their currency, check their FAQ section to resolve the basic queries you have in your mind. Once you are done with the detailed analysis of the website come back to coinmarketcap.com.
- Look for the “Whitepaper” of the particular coin. “Whitepaper” explains to you the vision behind the cryptocurrency and explains other necessary details you should know including technical information and their plan to succeed with the coin in future. If you fail to find any “Whitepaper” of a particular Cryptocurrency on the website or in Google, you should consider that as a red flag. [You can check the whitepaper of Bitcoin here].
- Now that you have some information and understanding of the coin you should check what opinions others have about this particular coin. In CoinMarketCap.com itself you’ll find community links where people talk about the coin. You can also follow their social media account, which must be available on that coin’s website.
- If you are a techie, you can also check out their source code, which is also available in coinmarketcap website.
- The website also provides you with other basic information like what is the present price, historical price and charts along with the present coin circulation.
- Other than that, you must keep up with the upcoming events of that cryptocurrency or at least you can watch the same on YouTube or on other social media platforms. This information you will easily get on that coin’s website. Or on coinmarketcap website.
Now that you are done with the research, let me quickly teach you how to buy any cryptocurrency within seconds.
How to buy cryptocurrency?
Much like the stock market when you decide to buy or sell any cryptocurrency you need to visit any Crypto exchange. Crypto exchanges are of two types:
1. Centralized Exchange,
2. Decentralized Exchange (DEX).
- Each of these has its own advantages and disadvantages. In a Centralized Platform, someone or some company is the owner of that exchange and whether you like it or not they have control and authority over your cryptocurrencies. The same example can be used in case of a few stock broking companies, but the stock market has other regulatory authority to safeguard the customers in case of any mishap. Sadly, as crypto is decentralized there cannot be any authority to protect customer interest. Some exchanges with the help of their goodwill take undue advantage of their customers. Like in this year only, one Turkish crypto exchange ran away with $2billions of customer’s crypto assets [Here].
But also, if you are a trader or your purpose is to make some quick bucks from cryptocurrency, your best option is to use these centralized and popular exchanges as they have more liquidity than decentralized platforms. Some of the popular centralized crypto exchanges are Coinbase and Coinbase Pro, Binance. And if you are from India then Wazirx, Coindcx go, Zebpay. You can open your account with whoever suits you. Fill up your basic details and link your bank account and fulfil the KYC procedure. Then you are free to buy whatever crypto you like.
- The beauty of Decentralized platforms is, it has no authority or control over your assets, you have the private keys of your Cryptos. Just for an example, if tomorrow the state government bans cryptocurrency in your state, your centralized crypto platforms will face a hit in their operations and there will be a very high chance that it will have to shut down its operations legally and with that your cryptos will be lost and you will never get any money back (most likely). Whereas, when you have your private keys your cryptos are safe. No matter whoever bans it, they can never take it away from you. And remember, Crypto is globally accepted. So, it doesn’t matter if your country bans it, you can still use it for international transactions (if it is accepted).
But again, If your view is not for the long term, it is better not to use decentralized platforms as the liquidity is very low. Some of the popular decentralized crypto exchanges are, Uniswap (V3), MDEX.
Before you choose to use any centralized or decentralized platform, please do proper research on it. You can easily find popular Crypto exchanges names and other information on CoinMarketCap.com and in CoinGecko.com.
Why is the greatest investor of all time (Warren Buffett), Charlie Munger and the hero of the 2008 housing market crash, Micheal Burry, completely against cryptocurrencies?
How on earth can journalists stop themselves from asking about Bitcoin to the greatest investor of all time! But, both Buffett and Munger have a very different perspective to look at Bitcoin than normal human beings.
In an interview, Munger referred to Bitcoin as “Rat Poison”. In reply, Buffet said, “it’s Rat Poison square” [here]. Buffett’s view is that when you invest in an asset it should produce something for you so that at the end you own the asset itself plus whatever it has produced. Let’s just say you have invested in land and you are growing crops on it. So, at the end of the year, its gross value is {Land’s value (in rupees) + crop’s market price (in rupees)}. But in the case of Bitcoin, it does not produce anything, you are only buying in the hope that in future someone will be ready to pay more price for it. [You can check the full interview here.]
You have probably watched “The Big Short”. The story of the man who warned everyone about the 2008 housing market crash, Micheal Burry. Burry referred to crypto and Bitcoin as a “Speculative Bubble” and he again warned that a crash is coming[here]. Burry has faced several criticisms for his view on Bitcoin but he has been very upfront about it, many a time Burry tweeted his view on Bitcoin and why he believes that this will not end well! In one of his tweets, he said: “The problem with #Crypto, as in most things, is the leverage. If you don’t know how much leverage is in crypto, you don’t know anything about crypto, no matter how much else you think you know”.
To his followers, Burry also sent a strong message by posting “Knowing saves half the battle. Got it? It’s not hard. Analyze, think independently, be informed, find the data, and you’ll know a lot that no one else does.”[Link of some of the tweets are given here].
Conclusion : what can be a practical approach if you want to enter the crypto scene now?
If you have already done your research or the daily crypto news and announcement excites you way too much but you are also cautious about losing your hard-earned money! Then what can be a practical approach?
It is always suggested to start with your ‘WHY’. Do your own research. Try to find out if the particular coin has any real use or the fundamental strength required for the future. If the founders are visionary or not! And if you are investing in meme coins just because it is going up in price, nine out of ten times you will lose money in future.
Nobody knows whether investing in Crypto is actually an investment or mere speculation. So, the suggestion is to always invest what you can afford to lose. [Nothing contained here is financial advice, it is for education purposes only].
References
- https://guardian.ng/technology/what-will-happen-after-mining-all-21-million-bitcoins/#:~:text=Bitcoin’s%20Limited%20Supply,Bitcoin%20supply%20hits%20the%20limit.
- https://gadgets.ndtv.com/internet/news/dominos-india-data-breach-13tb-files-customer-details-credit-card-numbers-2416829
- https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR1261VC1213.PDF
- https://prsindia.org/policy/report-summaries/virtual-currencies-india#:~:text=A%20high%2Dlevel%20Inter%2DMinisterial,domain%20on%20July%2022%2C%202019.
- https://www.indiatoday.in/technology/news/story/govt-committee-recommends-ban-on-cryptocurrency-in-india-1572446-2019-07-23
- https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF
- https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf
- https://www.mca.gov.in/Ministry/pdf/ScheduleIIIAmendmentNotification_24032021.pdf
- https://www.republicworld.com/technology-news/other-tech-news/dogecoin-investor-becomes-a-millionaire-in-just-69-days-after-investing.html
- https://economictimes.indiatimes.com/tech/startups/polygon-crypto-gets-funding-from-billionaire-investor-mark-cuban/articleshow/82965262.cms?from=mdr
- https://decrypt.co/59759/mark-cuban-ethereum-disrupt-the-f-out-of-software-companies
- https://news.bitcoin.com/rich-dad-poor-dad-robert-kiyosaki-crypto-investors-buy-the-dip/
- https://bitcoin.org/bitcoin.pdf
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