Why India Should Not Buy Bitcoin

by Venkata Jagannath - Feb 11, 2021 02:20 PM +05:30 IST
Why India Should Not Buy BitcoinThe government is right on being cautious about Bitcoins. 
  • Adopting blockchain technology is different from using bitcoin.

    The former has a strong case going for it. The latter hardly any.

"Bitcoin is rat poison," says investment guru Charlie Munger. His friend, Warren Buffet, is no fan either. He calls it, “rat poison squared". Bill Gates calls it "one of the crazier speculative things...". Closer home, Rakesh Jhunjhunwala also does not support bitcoin. These men are not wrong.

No one can foretell the future but I hope this article will at least be thought provoking to all the retail investors, who want to “invest” their life savings into Bitcoin.

What Is Blockchain?

First, let us talk about the foundational framework for Bitcoin, that is blockchain without too much jargon. Blockchain is a distributed immutable ledger.

  • Ledger: This is a well-known accounting term for a document/table that tracks transactions
  • Distributed: The transactions are not stored on one server. Rather, they are replicated on many databases. Every transaction is validated across the many machines on the network. Therefore, a hacker does not have a single point of attack
  • Immutable: If there was a transaction between A and B in the past, a record of this transaction was added as a block to the distributed ledger. This transaction would be like the first link in a chain. Any new transaction (between say, B and C) is added as a new block to the existing chain. Therefore, we have a record of how value changed hands between A-B-C over time.

I'm simplifying the technical concepts, but this broadly covers the main features for a non-technical audience.

These features put together ensure that hackers cannot change transaction records in databases. Even if they find a way to access all machines on the blockchain network, their transaction will be recorded as a new block (aka link) in the chain and can therefore be reversed. One other feature of blockchain is that it can facilitate anonymous transactions between two individuals from different parts of the world.

What Is Bitcoin?

Bitcoin is a solution created using the blockchain framework by an anonymous individual (or group of individuals — no one knows). There are apparently only 21 million bitcoins available to be "mined". Of the 21 million, 18.5 million have already been mined. We are apparently at the last stage.

Unanswered Questions

With this information, a few questions come to mind.

  1. Who owns these bitcoins? Why should each of the coins he/they allow for mining be valued at around $40,000? Why can I also create a new currency and become a trillionaire myself?
  2. How can I be sure that the individuals who hold the majority of these coins (1,000 people own 40 per cent of the coins) will not just dump it at a higher price and leave me holding these modern day tulips?
  3. If the transactions can be anonymous, how do I know for sure that the person selling me his bitcoin is not a bad actor that is terrorists, countries under sanctions etc?
  4. How do I know that this will not be another GameStop? Early adopters can dump their positions and crash the market thereby wiping out my investments.
  5. If the price keeps fluctuating (as it does), can commerce between individuals/countries be possible?
  6. If Bitcoin is the digital currency of the future, why are there so few respectable organisations (except Tesla) accepting Bitcoin?

Swarajya’s Recent Article About Buying Bitcoin

Recently, the Swarajya website carried an article that gave us 10 reasons why India should buy Bitcoin. Despite a BuzzFeed feel to the article, I figure it is important to examine these points critically before dismissing them.

Disclaimer: While going through the points mentioned in the article, I picked excerpts that best capture the essence of the argument made. In the interest of fairness to the author, I would recommend that readers go through the full article for more context. In addition, I’m answering to the major points and leaving out the ones that I find downright silly.

1. Crypto Is Now A Trillion Dollar Industry

The author makes the argument that crypto is now a trillion dollar industry and is therefore “kind of a big deal”. He uses “qualitative commentary” by authoritative figures such as the International Monetary Fund (IMF), World Bank and Larry Summers to drive home this point.

Ignoring the “it’s popular so it must be good” argument, we notice that the author uses the benefits of cryptocurrencies to advocate buying Bitcoin. One wonders, can we benefit from the cryptocurrency technology without investing in the multitude of currencies created by unknown non-sovereign individuals?

Even in this article, we notice that the statements from the IMF and the World Bank talk about the benefits of cryptocurrency technology. There is no support for buying Bitcoin.

2. National Security: Crypto Means India Can’t Be Deplatformed

Several troubling lines in this point are a whole discussion in themselves. In the interest of brevity, I will focus on some of the more ridiculous ones.

  • “Bitcoin is more akin to digital gold, and cannot be frozen or seized by any state”: If the government cannot stem the flow of funds to separatists in the Kashmir Valley (or) sleeper cells that wish to commit another 26/11. How does that help national security? It’s definitely important to put in safeguards so that the government does not abuse this power. But, to throw the baby away with the bath water is foolish.
  • “India should prioritise national support for digital gold as a financial rail of last resort in a situation like the 2008 financial crisis or the 2020 Covid crash”: Bitcoin was trading at around $10k/coin pre-Covid crash. By, March 16, it was trading closer to $5k. If this was our last resort, then god help us.

Deplatforming in itself may be annoying and make it difficult to win elections. However, it does not damage “national security”.

3. Foreign Investment: Crypto Brings Capital To India

The author makes the argument that a ban on cryptocurrency will cause capital flight.

Again, the Indian government wants to ban Bitcoin (and similar non-sovereign currencies). Not blockchain. To the point on Bitcoin not causing capital flight, let us consider a hypothetical scenario. If a shady bureaucrat or politician wants to collect a bribe, Is it not easy to collect it using Bitcoin and then deposit this money in a safe haven abroad? Does that not take money away from India’s financial system aka causing capital flight?

Besides, a motivated investor will still have the option of investing in US dollar (or) a cryptocurrency created by the US Federal Reserve.

Governments must consider both the benefits and risks of any policy. “Visualise(ing) billions of dollars in cryptocurrency landing in India” is not that appealing when we think that at least some of these funds could be used for nefarious activities by anti-social elements leading to… capital flight.

4. Remittances And Remote: Crypto Enables The Remote Economy

The author believes, remittances from remote work will be much faster using cryptocurrency.

I agree with him. Using sovereign issued cryptocurrency (not Bitcoin) for global transactions will be helpful. In the current scenario, it takes at least three-four days to send money to India from abroad. Faster transaction speeds using digital currencies will certainly speed up this process greatly.

5. Strengthened Monetary Policy: A Digital Rupee Backed By Digital Gold

“..a digital rupee may need to be digital gold-backed”, says the author. He adds in a later sentence, “Digitization of national currencies will be accompanied by digitization of precious metal reserve equivalents”.

No one, other than a handful of the global population (Bitcoin enthusiasts), consider Bitcoin to be anything more than 1s and 0s. A few other points:

  • There is already digital gold traded in today’s markets. It is usually backed by actual gold.
  • Precious metals are also traded digitally on futures markets (backed by actual metals).
  • A highly volatile currency like BTC cannot be a “strategic reserve” for any country.
  • It is a theory that BTC is “highly scarce”. How do we know that the unknown entities who created BTC will not get greedy and add more coins at a future date?

6. Deterring Financial Fraud: Crypto Means Mathematically Provable Accounting

The author makes some good points on the benefits of blockchain-based accounting and suggests that India should back this technology. I completely agree with the point that blockchain as a technology is very useful for audit, accounting, security and compliance.

A digital currency hosted on a blockchain network with open APIs can help provide all these features.

7. Technological Development: Crypto Is The Financial Internet

The author makes the point that “…if Indians can’t buy Bitcoin and Ethereum, let alone develop new smart contracts and crypto protocols, India will not be internationally competitive in the next generation of technology. ”

Bitcoin is a currency created using the blockchain technology. Bitcoin is not blockchain itself. Therefore, a ban on Bitcoin is not a ban on innovative use of blockchain. Innovation in areas of smart contracts, value transfer, decentralised crowdfunding etc, can still happen without speculative bubbles like Bitcoin.

On a separate note, it is important for analysts to disclose their own investment positions in an asset they recommend. It would have been proper for the author to disclose his own current investment position in the article. To that extent, I do not own any Bitcoin and do not plan to purchase any unless there is any new material information that changes the thesis above.

In general, I believe the bitcoin craze is fuelled by intense speculation by people who understand it only partly. On the other hand, professional traders in this market are watching all the excitement and do not want to miss using the volatility to make money. As Charlie Munger says of professional traders, “It is just disgusting. It’s like someone else is trading turds and you decide, I can’t be left out!

Take it from a man who has made many billions in the markets over the past 80 years — “(Bitcoin) will come to a bad ending”. For the sake of all the retail investors who have invested their savings in Bitcoin, I hope he and I are wrong.

India’s Policy On Cryptocurrencies

Finance Minister Nirmala Sitharaman just reiterated the government position on Bitcoin saying, “It was announced in the Budget speech for 2018-19 that the government does not consider cryptocurrencies legal tender or coins and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.”

She further added, “the government will explore use of block chain proactively for ushering in digital economy”.

I believe the government experts are heading in the right direction.

The author is a technology professional working in the field of distributed computing, artificial intelligence and cloud computing. He currently resides in New Jersey, US. He is NOT a financial adviser and requests that no investment decisions be made based solely on his opinions above.

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