In 1931, Aldous Huxley envisioned a brave new world in his eponymous novel, in which he anticipated huge scientific advancements in reproductive technology, sleep learning and psychological manipulation to create intelligence based social hierarchy. It seems, with genetic cloning, gene editing with CRISPR/Cas9 for designer babies and genetically modified foods, space travel, Artificial Intelligence, Internet of Things, Blockchain et al, we are already in a post Huxley world. And with financialization acquiring a life of its own, almost delinked from the real economy, we are groping in a world where bubbles seamlessly mingle with real assets. When in the wake of sub-prime crisis, Warren Buffet, the legendary investment guru wrote that derivatives are financial weapons of mass destruction, the value of all derivatives then in existence was $ 142 trillion. But 12 years on, derivatives have become more popular than ever. Now, new virtual instruments in the form of cryptos (like Bitcoin, Ethereum, etc.) NFTs (Non Fungible Tokens), SPACs (Special Purpose Acquisition Companies) and algos (algorithms) are intruding into the world of finance, triggering fears ifsavings and investments are being overtaken by these weird creatures and leading us as in Huxley’s novel, into a dystopian world of bubbles and bankruptcy.
Of these new instruments Cryptos are hogging the limelight. Although there is no established measure to value this outlandish asset, it is increasingly drawing speculators’ and even investors’ fancy. One is reminded of the Dutch tulip bubble of 1637. When rich citizens of Netherlands enjoying a golden age were searching for a “profitable” avenue to invest their wealth, they didn’t have Bitcoins or NFTs. But they had tulips of a rare kind – tulips infected with a virus (not Corona) that gave them beautiful flame like patterns. But cryptos, particularly Bitcoin, the first crypto currency harnessing blockchain technology, which was conceived in 2008, have survived far longer than the tulip mania. As Bitcoin’s popularity is growing, governments and central bankers feel threatened with terrorist funding and money laundering finding a convenient, albeit unregulated channel. Both the GOI and RBI have been trying to contain, if not ban, Bitcoin. Only recently Ms. Janet Yellen, the US Treasury secretary, has red-flagged the dangers inherent in the adoption of Bitcoins for widespread payments. It is reported that 95 per cent of the Bitcoins in the world, is controlled by just 2 per cent of the accounts in existence and this makes it very vulnerable to the fickleness of the so called “whales”. In spite of this, the last couple of years have seen a heightened interest in Bitcoins and the surge in activity is currently lead by institutions. VISA for instance, has announced settlements using cryptocurrency. PayPal allows its users to buy,sell and hold cryptocurrency. Tesla has announced a $ 1.5 billion investments in Bitcoins as also willingness to accept Bitcoins as payments for its cars. Even the multinational Financial behemoth Morgan Stanley has added Bitcoin exposure to 12 of its mutual funds’ investment strategies. And notwithstanding Ms. Yellen’s croakings of doom, Securities Exchange Commission has received eight applications for the launch of Bitcoin Exchange Traded Funds in the US.
What then justifies the above abiding interest in the cryptos? Essentially, it is the blockchain technology which enables transfer of value across the internet without requiring an intermediary. Traditionally, regulated intermediaries such as banks or stock exchanges had to intermediate such transactions driving up costs with the risk of single point of failure. Bitcoin aimed to reduce these costs and decentralize the risk of any potential failure. It also allowed transactions to be cryptographically verified by any one as transactions are recorded on a public ledger. Even as Bitcoin focused on value transfer, new blockchains such as Ethereum extended the same concept to all manner of computer applications like file storage, voting and decentralized exchanges. There is no denying the fact that cryptos and blockchains bring in many advantages including cost saving, decentralization and transparency. So governments and regulators are gradually veering round to the view that regulation is better than a ban which would drive the activity underground or beyond borders. Even the Supreme Court, in March 2020, found that the RBI circular prohibiting virtual currency transactions through regulated banking channels was disproportionate, violated fundamental rights of cryptocurrency exchanges and was not justified as RBI did not establish the harm, if any, caused by cryptos nor did it explore the alternative of regulation. Even China, which was one of the few countries like Bangladesh and Iran, that barred financial institutions from facilitating transactions involving cryptocurrencies, seemed to have realized that it is better to join the cryptos if you can’t beat them, with Mr. Li Bo, the recently appointed Deputy Governor of Peoples Bank of China, proclaiming that cryptos do represent an asset and offer an alternative investment avenue. According to some estimates there are about a crore of Indians with cryptocurrencies such as Bitcoin and Ethereum, worth about ten thousand crores of rupees.
Time to take a plunge? May be the cautious investor could wait for the outcome of the Cryptocurrency & Regulation of Official Digital Currency Bill, 2021 that is to be tabled in the next Parliament session.
Fancy for crypto assets has now spilled on to NFTs. An NFT is a unit of data representinga unique digital item which can be collectibles, digital art, audio file, tweet, GIF and so on. The owner pays a fee to put his creation on the blockchain, where it is available to others to buy and sell with cryptocurrencies. But unlike cryptocurrencies, NFTs are unique and not fungible and the buyers gets bragging rights and the pleasure of exclusively holding the digital file. The most talked about NFT sale was: Everyday – The First 5000 Days, a collage of 5000 crypto artworks done over 13 years by Mike Winklemann, also known as Beeple. This was auctioned for $69 million and was reportedly acquired by an India origin cryptophile.
SPACs are a new fangled vehicle through which almost $83 billion was raised in 2020 equaling the amount raised through regular IPOs . SPACs are nothing but shell companies which are created with specific purpose of acquiring and other companies. While they come with nothing but a promise and reputation of the “experts” at the helm, some of them have been successful in acquiring and merging with profitable or promising start-ups. It seems, it will only be a matter of time before SEBI approves this new vehicle with due safeguards to protect investor interest.
Algos are a set of logical and iterative steps programmed to be run on computers. They have become all the more powerful with the advent of artificial intelligence, with powerful computers mining and processing data to recognise patterns and quickly predict a set of outcomes. Among other things, much of the trading on Stock Exchanges at present is driven by algos.
Bubbles or billions, we do have a cocktail to relish or perish?
