By Dr. Jaijit Bhattacharya
I had developed notoriety as a crypto basher, and therefore, as a consequence, I was widely labelled as a luddite, a technology illiterate and many other sobriquets. For the ardent fans of crypto, my statements were blasphemous. Crypto is not to be questioned and anyone who questions it is a pitiful-tech ignorant creature. All my education from the top engineering schools in the country seemed to be a waste of my time and a waste of taxpayers’ money.
My tango with crypto started pretty late when a popular TV anchor, Chaiti Narula, invited me to her TV channel in the second half of 2018 to explain to the viewers what crypto is. Given my years spent as an Adjunct Professor at IIT Delhi, I promptly dived right into the heart of crypto and laid it out that crypto actually does not have a heart. Years later, the RBI governor very aptly validated the statement by pointing out that there is not even a tulip backing the cryptos, referring to the 17th century tulip mania, which saw the prices of tulips soaring up, without any rhyme or reason.
Now, what happened a week after that TV discussion was even more striking. Cryptos, led by their flag-bearer, the Bitcoin, lost a massive amount of value, which in total exceeded the entire GDP of Pakistan. The sheer coincidence between my TV discussions and the enormous crash in the value of cryptos the very next week made me look like a seer, and Chaiti called me over again the next week, for a follow-up discussion on why the cryptos look like a Ponzi scheme. It was an “I told you so moment”. The price of Bitcoin in that year went down from USD 20,000 to USD 3,000. A tremendous loss of value by any standards.
While in 2018, the loss of value of cryptos was more than the GDP of Pakistan, by July 2022, the loss of value of cryptos has been near to the value of the entire GDP of India. This is a humongous loss. India is the fifth-largest economy in the world.
This loss has been ascribed to many reasons, such as high inflation in the US and the world over, extreme market conditions and so on. At the core of the issue is that cryptos of all kinds, stable coins or not, do not have anything of universal value backing it. Crypto flag-bearers have argued that so is the case with gold or art or any other traditional holder of value. Commodities such as gold also do not have any intrinsic value. And multi-million dollar paintings also do not have any intrinsic value. However, these arguments are superfluous and cannot be the basis for drawing a parallel with cryptos. A painting is of value to a select set of people and, therefore, is never used as a legal tender of exchange. It is not a currency. So, a few people believing that a painting has value is not a basis for drawing a conclusion that a painting can be used as currency. On the other hand, it has taken millenniums for peoples and nations to consider gold as a universal holder of value and therefore, gold coins were a legal tender of exchange. Do a majority of people on this planet see crypto as a universal holder of value? Clearly, the answer is a resounding no.
However, as I had mentioned in one of my articles last year, the US Dollar also has the characteristics of crypto, in the sense that it is also not backed by any asset. The US Dollar was delinked from Gold in 1971, as there was a run on the US Dollar and there wasn’t enough gold to pay off the demand. However, the US Dollar continues to be a store of value as it is backed by the massive US economy and its global trade, as well as the entire energy trade happening across the world, which is largely done in the US Dollar, which also leads to the term “petro-dollars”. Thus, if any other country needs to buy oil or gas to fuel their economy, they would need to have US Dollars in making their purchase and that drives the value of the US Dollar.
Do cryptos have any such economy backing them? Surprisingly, the answer is yes. And I am not referring to El Salvador and the Central African Republic who clearly lack mature central banking institutions and hence rushed in to adopt Bitcoin as a legal tender. I am referring to the massive e-commerce of all things dark, happening in what is referred to as the Dark Internet. When e-commerce took off and one could buy anything and everything from the internet, imagine the plight of those selling guns, drugs and hacking bots, who could not do transactions over the internet using regular fiat currencies such as the US dollar as it would leave a trail in the regular financial systems. They, therefore, needed an alternative to fiat currencies which need not feed off a central system and hence operate in a decentralized manner which does not leave behind any digital trace. And lo and behold, Bitcoin was invented that supported this requirement providing e-commerce facilities for the trade of drugs, guns and all things illegal that required the trade to stay away from the more efficient fiat currencies. This economy is extremely large. And this economy cannot function without cryptos. Add to it the gaming industry where many games require cryptos, and voila, we have a large economy backing cryptos.
So, against the doomsday predictions for cryptos, I officially stick my neck out again to say that crypto will actually retain its value, albeit not as high as it was in the winter of 2021, but it would still hold value, primarily backed by the illegal trade, money laundering, terror financing and gaming across the world. Is this good for the economy? That is a discussion for another day.
This article first appeared in India Today, https://www.indiatoday.in/opinion-columns/story/opinion-columns-story-crypto-crash-cryptocurrency-bitcoin-1974808-2022-07-13