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Decrypting cryptocurrencies: The basics of investing in Bitcoin and others

The journey of cryptocurrencies is quite interesting. (Reuters Photo)

Many people want to invest in cryptocurrencies after looking at the popularity of Bitcoin and the significant returns it has given investors in a short period of time. It’s not just Bitcoin, but other cryptocurrencies are also following suit. However, not many people know how to navigate the world of crypto, as it’s called, and hence we have to bring in the experts. Financial Express Online spoke with Atul Chatur, co-founder of Antilles Cryptocurrency Ecosystem (ACE-X), who is an investor and expert in cryptocurrencies. Atul is an alumnus of the Insead school as well.

The journey of cryptocurrencies is quite interesting. A decade ago, there was the famous story of Laszlo Hanyecz, an early adopter of cryptocurrency who paid 10,000 Bitcoin for two pizzas! Today, those two pizzas would be valued at $580 million, at the current value of Bitcoin. The way the value of Bitcoin has shot up is attracting a lot of interest. Yet, there’s a PwC report that says that only about 6% of investors understand what cryptocurrency really is. We ask Atul Chatur to weigh in. 

FE: Why do you think there is so much interest in cryptocurrency now? 

Atul Chatur:
The inventor of Bitcoin was really Satoshi Nakamoto. In 2009, he came out with a white paper on Bitcoin, which is seminal. According to me, it is the most significant FinTech innovation that I have ever come across in the last at least 12 years or so. A lot of the FinTech that you see currently is not really innovative, if you ask me, as it is based on the existing payment ecosystem, if you may. But Bitcoin was truly seminal in the white paper that Satoshi came out with. Even before 2009, there were various efforts for 15 to 20 years to create what is called electronic cash. I would define Bitcoin, in very simple terms, as the first peer-to-peer (P2P) electronic cash, transacted without an intermediary and nearly in a trustless manner. That’s really the way to look at Bitcoin. In a layman sort of definition, if you may, it is electronic peer-to-peer cash done without the internet.

FE: Bitcoin is the bellwether cryptocurrency out there, but there are so many others that are following suit now. Bitcoin now has probably gone out of the reach of many people who want to get into it, because it has suddenly become so expensive. Now you’ve got Ethereum and XRP, and others, which are within reach, and all of these are rising. So, what is the base for these cryptocurrencies, when compared to fiat currency which is valued against assets or bullion? What is a cryptocurrency based against?

Atul Chatur: First, let me be very clear that fiat currency is based on nothing. It’s based on paper money. A lot of us actually end up feeling that fiat currency is based on something, but it actually is based on nothing. It’s actually just a promissory note by the government. If you look at a Rs 100 note or Rs 500 note it is all just printed on paper and really backed by nothing. If you look at that current monetary system, about 50 years back, was the first time the entire world moved to paper money. If you look at even historical movies, all these movies always had gold, diamonds, or copper coins, or metal coins, right? I mean, do you ever remember a movie where they pulled out a piece of paper and you saw Cleopatra saying or Shivaji Maharaj saying, you know, here’s a Rs 100 rupee note or whatever, right? It never used to happen because you always had money backed by precious metals. This is the first time in history where it’s actually an aberration that we live in a period where fiat money is actually backed by nothing.

Now, cryptocurrencies are actually based on a combination of mathematics, computer science, economics, game theory, and incentive mechanisms. That is also the most important reason that a lot of people are not really able to get their heads around it. In a world where we are totally connected, just consider this Zoom call or a WhatsApp chat – whatever I see is what you hear, and not for a moment, is anyone watching questioning the fact that I mean, are you hearing what I’m saying? Right? So that’s really the transfer of information over the internet. 

What Satoshi really saw was the transfer of value over the internet. That is incredibly valuable the moment you have something moving in seconds or minutes at best. That’s basically the internet. And without really asking anyone. I do understand certain countries have capital constraints, and you can’t move capital across borders so freely. But to the developed world, this is an incredibly powerful feature. You are able to send money instantaneously, in minutes or seconds. I mean, this is not like a bank settling a transaction two days down the line.

Watch: Decrypting Cryptocurrencies

FE:  How stable is the crypto growth with respect to other investments like stocks, mutual funds, etc?

Atul Chatur: There are a couple of ways to look at it. So if you look at the historical track record, look at it from two sorts of perspectives, let’s call them time periods. One is since 2009, Bitcoin, specifically, it being the oldest cryptocurrency has given a compounded annual growth rate (CAGR) of about 200%. So it’s basically grown from zero to about $60,000 in 12 years. If you look at the CAGR of your mutual funds’ portfolio, you look at your equity portfolio over years, you always look at this metric called CAGR. I’m taking a longer time period, just so that people get a better perspective.

Then, of course, there is a shorter time period where Bitcoin is volatile, as are the other cryptocurrencies as well. But you have to understand this is the first time ever, that the world has seen a global asset class trading 24 x 7 x 365 across a majority of the countries in the world. So which is why you see a lot of volatility in the prices from a short-term perspective. If I look at it long-term, the returns are fantastic. So Etherium, for example, has given even better returns in assets. It’s gone from zero to about $2,000. Now, $3,500, as we speak. Those are the two ways I would really look at it.

If you’re comparing it to, let’s say, equity, then I would just say, think of it in two ways. So one is the gold rush that happened. This is like the modern digital Gold Rush. The second is, I would probably look at the 2000 era when you had the dot-com companies coming around. If you had invested in Google, Facebook, Yahoo! – a lot of those businesses were just doing crazy sort of numbers in terms of growth every single day. So Yahoo! was growing for a year at 5% every day and it hit the circuit limit every single day for years. So if you did absolutely nothing, and you put Rs 100 in, by the end of the year, you had about Rs 1,000 in return. I would say any new emerging technology tends to have both volatility and high growth features. I would say in the short term, it’s volatile. In the long term, I have told you the track record of Bitcoin which has a 200% CAGR consistently in 12 years.

FE: What is the volatility factor behind cryptos? Other than just demand and supply – Bitcoin supply is finite, there’s only supposed to be 21 million Bitcoin, right? So what is bringing in the volatility factor?

Atul Chatur: Let me put it this way. If you actually look at equity investments in India, there’s hardly about, I think, 2%-3% of the population that invests in equity. The big bull, Mr. Rakesh Jhunjhunwala, keeps on saying equities in India will keep on growing. However, remember, there is still 98% of the population that thinks that even the equity market itself is a gambling market. Obviously, anyone who invests in equities follows it very closely to see what’s really happening in that space, right? What’s happening with the company, the cash flows, the revenues, any other developments, etc. Bitcoin is very similar. Just to give you an example, apart from the demand and supply angle, recently Bitcoin was applying an upgrade to its network called a taproot upgrade, which is one of the most significant in the last four years. Now, anyone who’s followed Bitcoin closely would know that it is a very significant upgrade, which adds a lot of features to the underlying Bitcoin network or the codebase.

So apart from the demand and supply, there are a lot of fundamental developments happening, which you need to track. For that, you do need an understanding of technology and software as well. But for sure, there are various events happening which result in Bitcoin being volatile as well. Because these developments are tracked mostly in the tech world, there is a lot more apart from just supply and demand.

FE: Readers are asking about the Indian government’s plan to ban Bitcoin. I think this is a very real fear that investors have in India. What’s your take on that?

Atul Chatur: Let me be very clear. I’m saying this categorically that the Indian government will not ban crypto. Now, let me get into why it won’t ban crypto. First, crypto is really about foundational technology. We just look at one use case of crypto and we end up thinking cross-border stuff – investors are running away with crores and converting that money into Bitcoin and taking it across borders. That is just one use case. Cryptocurrencies blockchain is basically foundational technology. It’s also what is called Web 3.0. Anyone with only an internet connection and a smartphone can buy and sell crypto. It doesn’t matter who bans it or not. Even if the government does end up banning – and I said it categorically I don’t think they will ban it – but even if it does, if you have a smartphone, if you have an internet connection, you can still transact.

Second, as I said, it is also foundational technology. India is a technology hub. I used to work for Infosys for eight years. I used to report to Nandan Nilekani for about three of those eight years. I have worked with the founders of Wipro also quite closely. I’ve had these chats with the tech industry. There is just no way that the government could or would ban it and it is very clear now. If you look at 2017 when India first banned crypto – that ban was just the RBI saying that the banks cannot deal in crypto.

They never said that a citizen cannot own cryptocurrency. In most parts of the world, it is a designated digital asset or a commodity. So for example, let’s say there are 10 people and all 10 of us decide to buy a stone and give a value to the stone.  Let’s say the stone is Rs 1 crore and we are going to trade it amongst the 10 of us. There’s no way the government can stop us. Fundamentally, the government cannot stop anything, just because we are trading between the 10 of us and we decide to trade this stone. Unless it is proven that it is harmful.

Last year, when the Supreme Court overturned the ban, it made exactly the same argument that if there is no harm to the economy, you cannot arbitrarily just ban something. By the way, that stone example that I gave is basically a diamond. What is a diamond? It is actually a stone. People pull it out of the ground, polish it and we trade amongst ourselves all the time. It’s not as if the government has gone ahead and banned it. What value can be given to an asset or a commodity is really up to the people. Of course, if tomorrow someone just converts it into Bitcoin and runs away with the money, then obviously it’s bad. But you can’t just say arbitrarily let’s ban this.

FE: This is an interesting point you bring up. Anybody can start a new cryptocurrency and we’ve seen that recently with Dogecoin, which Elon Musk has been promoting. It’s again like your stone example. It’s been given a Dogecoin stamp, though it started off as an internet meme. And now that’s become a cryptocurrency. What’s your take on this?

Atul Chatur: Dogecoin is a representative and sort of a kick in the guts for the traditional ecosystem. There’s Elon Musk, there’s Mark Cuban, there’s Snoop Dogg, and there are a bunch of other celebrities and the entire wall street batch. It is a  movement as well, which is just saying, sorry for the word, but f*** you guys! Our doggy is going to beat the likes of Barclays. So for example, just a few weeks back, Dogecoin market cap crossed the market cap of Barclays. When it hits $1 or so that’s about double from the price today, it will cross the market cap of Goldman Sachs. To the traditional finance world that is unbelievable. There is nothing they can do about it. They can’t stop it. As I said, it’s electronic peer-to-peer cash credit without an intermediary. So it doesn’t matter what the US government thinks like if they want to ban it, etc. You just can’t ban it.

Anyone with a smartphone and an internet connection can trade Dogecoin and take it up to whatever levels. Now let’s get to that price thing. Why is it going up? Apart from being a meme coin, it’s being supported now by Mark Cuban and his NBA team as well. The Dallas Mavericks are accepting Dogecoin payments. Snoop Dogg actually changed his name to Snoop Doge. This is the sort of support coming in. These are things that are visible to the larger world. There’s also a fundamental underlying theme, which a few people associated with the tech world would understand.

What’s happening is that Ethereum is actually moving from a proof-of-work to a proof-of-stake consensus mechanism. So which means that the Ethereum miners will not be able to mine Ethereum anymore. Ethereum is not stable currency anymore. Some of the mineable coins are the coins that you can mine using mining rigs, even using normal laptops. Dogecoin is actually a mineable coin. That’s the technical answer to why is Doge is going up. The simple sort of answer from a layman perspective is more Mark Cuban, Elon Musk, Snoop Dogg, and a bunch of other people pumping up the coin. Again, it has got to do with supply and demand. Remember that Doge is actually inflationary tokens. There is unlimited supply. It’s actually the other way around, while Bitcoin is capped. Etherium is deflationary where supply reduces over a period of time. With Dogecoin actually, supply goes up over time, but it’s just a crazy coin.

FE: In fact, related to Dogecoin, we are also seeing interest in NFT’s or non-fungible tokens. What’s your take on that? Doesn’t that work in exactly the same way?

Atul Chatur: So NFT’s are a very interesting sort of phenomenon. When I was younger I used to follow cricket a lot. I went about collecting cards of sports stars of Sachin Tendulkar – trading cards. And the same with movies like ‘Maine Pyar Kiya’, which had all sorts of photocards one could collect. It is exactly the same phenomenon except done on an electronic platform. So it could be your favourite movie, it could be your favorite sports movement, you can now collect it in a digital format. These digital collectibles, as they’re called, are again, incredible because you can collect them and you can trade them on a marketplace. You can showcase them. You can read it on the blockchain and it makes it verifiable. So that sort of trend is going to just increase over the next few years. It’s already taken off in the Western world.

FE: Another thing we are seeing is the so-called cryptocurrency exchanges coming up with their own currencies or tokens as well. Like Binance coin. Like Wazir-X. Is it a good option or not? What’s your take on cryptocurrency exchanges coming up with their own coins?

Atul Chatur: Binance is a global juggernaut, the likes of which no one has seen and no one really understands. It’s an incredible organization, it is secretive. To that extent, people don’t really fully understand it. It’s not based out of anywhere. It started in China, went over to Japan, from Japan it went to Malta, and finally, Binance is now what is called a DAO or a decentralized autonomous organization, which means like any cryptocurrency out there it lives on the internet. Now, that’s very difficult for people to understand. It essentially means that the organization is spread across various countries, of course, run by people, but then sitting in various countries, various jurisdictions, and everything happens over the internet. It’s all internet play.

These exchange tokens are used as utility tokens or discount tokens. So whenever anyone trades on Binance specifically, they can use the BNB coin to really get some sort of trading discounts. I mean, let’s say you want to buy a currency, you’ve got a BTC or Bitcoin USD tether pair instead. There are a couple of other crypto exchange tokens that I think are valuable. So for example, a token of a crypto exchange based out of South Korea. FTT of FTX token as it’s called is quite valuable because it seems more like a pump and dump sort of a token. FTX also is actually a 100% subsidiary of Binance. It suddenly pumped about 15-20 times. Some of the exchange tokens are valuable. Others are just pump-and-dump schemes. Binance is a very valuable coin. What are the other tokens that I would recommend? Wazir-X. If it dips a little bit, I would buy it as well.

FE: Can we consider cryptocurrency as money? If it is not yet recognized as legal tender then can it be considered as a commodity? Can it be taxable under GST? How are other countries treating it from a taxation perspective?

Atul Chatur: Russia and China have basically said that Bitcoin or cryptocurrencies are digital property or digital assets. The US classifies Bitcoin as a commodity as well. So Bitcoin and cryptocurrencies as commodities, apart from Japan, which has explicitly said that Bitcoin is legal tender, so which means it can be used as money.

Most countries across the world are treating Bitcoin and crypto as digital assets or commodities. When it gets to taxation in India, I’m not clear as I’m not a taxation expert.

FE: Another question from our readers – is there a regulator or a licensed broker for Bitcoin in India?

Atul Chatur: Everyone’s washing their hands off it right. Fundamentally, one of the biggest problems with regulating cryptocurrency is that there is nothing to back it. With fiat money, the government has control over it if something goes wrong. For example, your fixed deposits in the bank are now insured to the tune of Rs 5 lakh per depositor per bank. The government can do nothing of this sort with crypto. Fundamentally, crypto does not lend itself to regulation in that manner. Of course, the government will still try and regulate this because of the cross-border use case that I described earlier. That’s the only reason they would want to regulate it. They cannot control it because there is nothing to control. There is no Bitcoin note. Have you ever seen a physical Bitcoin? It’s all digital. You can’t touch it, you can’t feel it.

FE: Is that probably the reason there have been so many scams associated with Bitcoin? What about the Elongate token? It’s called a charity token. There have been others that turned out to be Ponzi schemes.

Atul Chatur: My honest answer really would be to just look at normal fiat currency. Just look at gold. There’s a lot of smuggling happening there. Bitcoin, like any other cash scheme, like any other gold scheme, does lend itself to something like a Ponzi scheme. So it could happen if you’re not careful. Whether it’s cash, whether it’s gold, whether it’s Bitcoin, at least in India, it is much more likely to happen. Even with things like gold and diamonds. Look at Nirav Modi. It’s a fantastic example. I do agree there are a few scams out there so you need to be very careful.

FE: A basic question from another reader – how do they go about buying Dogecoin in India and what’s the best way to go about investing in crypto?

Atul Chatur: If you’ve got a bank account and there are crypto exchanges that you can use. I will give you five names. I like CoinDCX, Wazir-X, Coinswitch – which by the way has been advertising in the IPL – they raised a $25 million round. Then there is Unocoin and Zebpay. So these are these five platforms. Buy on any one of them. They all are legit, good platforms run by legit sort of engineers and IITians. I like Wazir-X and CoinDCX. If you’ve got INR in your bank account, link up the bank account with a crypto exchange account. Opening an account on a crypto exchange is like opening a bank account with your KYC details. Then you transfer your INR onto the crypto exchange wallet and buy Bitcoin or Etherium or whatever else.

FE: How liquid is Bitcoin? How easy is it to convert to get your money from an investment in Bitcoin back into INR?

Atul Chatur: Bitcoin is the most liquid cryptocurrency in the world. So is Etherium. I don’t think you should have any issues with even Dogecoin because it’s one of the top-five cryptos right now, which was valued at about $62 billion last I checked. Dogecoin has again touched an all-time high. It is quite liquid as well. Bitcoin, Ethereum, Dogecoin are all very liquid. Converting them back into INR is like buying and selling a stock or equity. Of course, if the Indian government ends up banning it or does something weird with it, then the liquidity might be a problem. That’s something that you have to watch out for.

Also read: S&P Dow Jones takes Bitcoin, Ethereum to Wall St; launches 3 crypto indexes to track digital assets

(The suggestions and recommendations around cryptocurrencies in this post are the opinion of the respective commentators. Financial Express Online does not bear any responsibility for their advice or views. Please consult your financial advisor before dealing with or investing in cryptocurrencies.)

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