In our previous post on whether doctors should park their hard-earned money in cryptocurrencies, we saw the allure of this shining new thing. You make investments to provide for your children’s higher education, marriage, establishing your private practice, vacation, abroad, and retirement. The risk profile and behavioral makeup of every individual are unique – especially of doctors. (Also Read: Risk Profiling- the Blood Pressure Check before making investments)
Doctors are already working in a high-stress environment – with long duty hours, lives of their patients hanging in balance, and the added stress of the pandemic. If anything, you need less stress in your lives, not more. As you advise your patients to neither self-medicate nor check the Internet for medical advice, shouldn’t you follow it? (Also Read: IDIOT Syndrome and your Money Management)
In this second part of our three-part series, we try to clear some air on cryptocurrencies. As promised, we will talk about only the merits and risks associated with cryptocurrencies. (Click Here to Read the second part)
All Cryptocurrencies are not Same
The next question is if all cryptocurrencies – 8300+ of them – are similar, safe, and secure? The unequivocal answer is NO. Just like you would prescribe different treatments for similar symptoms because the underlying causes are different, not every cryptocurrency is the same.
On a crypto exchange app, all cryptocurrencies may seem to be exactly the same – a symbol with a price – that you can trade. The ease of a single-tap trade does not make cryptocurrencies a good investment – it is the proof of a good platform. Do not confuse the airport infrastructure with the airline’s services.
A cryptocurrency issued by a reputed organization – like Facebook’s (now Meta) Diem or Libra may be considered secure and relatively safer. Similarly, an established currency like BTC or ETH is any day more reliable compared to a new ICO (initial coin offering) – just like a company with a public track record of many years is a better investment compared to an IPO.
Stability and Volatility
Stable cryptocurrencies or Stablecoins (that use a reserve in physical assets to reduce price volatility) also offer some semblance of “stability”. The physical asset is maintained by a third-party custodian with full audits and disclosures. Stablecoins may use a fiat currency (like USD or EUR), or gold as their reserve asset.
Hacking and Theft
There have been many instances of crypto exchanges and wallet apps being hacked. The most recent being the hacking and theft of $150 million worth of cryptocurrencies from BitMart. In 2021 alone there have been more than 20 major hacking and digital theft incidents in which investors have lost at least $10 million/theft. Compare it to USA’s bank robbers in 2020 who netted a meager $5,000 per armed robbery on physical banks!
Offline Also has its Risks
You can try to keep your Crypto assets in an offline cold wallet, protected with a password and all. But that too has its share of problems. When a foreign Crypto-exchange CEO died in Jaipur, India in 2019, he left behind close to Rs. 1,000 crores of crypto-assets “safe” in his cold wallet. With the level of encryption, that money is lost forever!
Any currency – throughout human history – has one or more of the three features:
- It had intrinsic value like gold or silver – even if the government banned their use as currency, people would still use them and there are other uses for them.
- It was backed by the reserves of a commodity with such intrinsic values – the gold standard.
- It had the backing of the government of the day as legal tender – whether it was the Kaudi (कौड़ी or clamshell) or the demonetized currency notes of Rs. 500 and Rs. 1,000.
Cryptocurrencies neither have these values and nor do they plan to (except for a few Stablecoins). In fact, the very idea behind the formation of cryptocurrencies was to devise a currency that can remain unaffected by inflation and out of the bounds of the governments. This very notion has been turned upside down because of investor frenzy.
Investment Alternative or a Payment Tech?
Blockchain – the technology behind cryptocurrencies – is unique in that it offers the mechanism to create a cryptocurrency as well as a transactional platform. So, should you treat it as an investment alternative or a transactional platform? Always remember that you are Doctors, not some coding geeks, and your complete disinterest in Blockchain and its uses is completely understandable and acceptable. As the use case for blockchain increases, someday you may also have to deal with it, but until then there is no need to rush.
The primary attraction behind Bitcoin was its finite quantity ensuring its stability over time. The complexity of the algorithm to mine new coins also ensured this. Creating new cryptocurrencies becomes more viable with the hardware and infrastructure becoming affordable. There is no limit on how many cryptocurrencies can be created. An individual currency may have a finite supply, but the whole logic has inversed.
Today, blockchain is considered as the panacea for all problems faced by the Fintech industry and everyone is scrambling to have a share in this pie. But with new technology hitting markets every couple of years, there is no telling which new tech could disrupt blockchain. The most promising of them all is quantum computing, and when it arrives the need for blockchains might vanish in its entirety!
To gain acceptance as a currency, anything must be widely used as a medium of exchange among common folks. The BTC was recognized as a legal tender by El Salvador in September 2021 and many global companies now allow payment in a few reputed cryptocurrencies. Still, the adoption of cryptocurrencies is very minuscule for making & receiving day-to-day payments.
The volatility of cryptocurrencies makes them unfit and can lead to (ugly) disputes. Imagine you need to pay Rs. 1 million and you make payment in say BTC. If just a moment after the transaction the prices surge or crash, as it happens too often to ignore, either of the parties may feel cheated.
Another hindrance in the popular adoption of cryptocurrencies is the lack of financial acumen, reliable connectivity, internet access, along with financial infrastructure.
As residents of India, you are bound by the laws of the land. Including any legal provisions related to cryptocurrencies, taxation, and other such matters. What has been the position of the Indian regulators, government, and courts on this? The direction of the policy going forward will affect you and your investments. In the final part of this series, we will discuss these issues, and some more. (Click Here to Read the Part-3)