scorecardresearchWhat happened to Bitcoin as the ‘future of currency'?
Cryptocurrencies' market cap declined to $1.26 trillion from its peak of $3 trillion it hit in November 2021, decline of 58 percent.

What happened to Bitcoin as the ‘future of currency'?

Updated: 17 May 2022, 06:33 PM IST
TL;DR.
From levying of capital gains tax to halting of UPI payments, investing in crypto assets has increasingly become a challenge rather than an opportunity

When the year started, bitcoin was trading above $47,300. Today, it plunged to a little lower than $30,000, a fall of more than 34 percent in fewer than five months. We try to explore what happened to this pioneer of digital currencies — an asset class which proponents believe is slated to alter the face of entire banking system in the world.

On February 1, Union Finance Minister Nirmala Sitharaman announced that 30 percent tax on capital gains will be introduced this fiscal along with one percent TDS to be implemented from July 1 onwards. This announcement merely brought the trading volumes down by as much as 78 percent.

This also triggered a decrease in the overall sentiment for cryptocurrencies as an investment instrument in India.

Soon after, UPI payments were discontinued on crypto exchanges leaving investors with little room to buy cryptocurrencies at these platforms. This also led to considerable fall in trading volumes at crypto exchanges.

Overall market volatility, growth of global inflation after crude oil prices went through the roof in the wake of Russia-Ukraine war and declining reliance on risky assets cumulatively brought the entire asset class down.

The latest setback was seen last week when Terra Luna lost nearly 99 percent of its market price.

Terra blockchain was halted last week after its cryptocurrency Terra Luna crashed by 99 percent. The stablecoin token fell sharply from a high of $118 last month, to $0.09.

The Federal Reserve’s monetary tightening also caused investors to flee the cryptocurrency market. In just one month alone, crypto currencies have lost close to a trillion dollars in market cap from $2.16 trillion in April 2022 to $1.17 trillion in May 2022.

In past seven days alone, bitcoin has lost 11.7 percent to trade at $29,500, ethereum lost 18 percent to trade around $2,000 and BNB lost 14 percent, ripple lost 23.6 percent, cardano lost 18 percent and solana lost 28 percent, according to CoinMarketCap data.

Bitcoin lost 34 percent from $47,345 on January 2 to $31,300 on May 15, as per CoinMarketCap data. Photo: Blooomberg
Bitcoin lost 34 percent from $47,345 on January 2 to $31,300 on May 15, as per CoinMarketCap data. Photo: Blooomberg

If we talk about past five-and-a-half months since the start of the year, bitcoin lost 34 percent from $47,345 on January 2 to $31,300 on May 15, as per CoinMarketCap data.

Similarly, Ethereum lost 44 percent from $3,829 on January 2 to $2,145 on May 15.

A similar trend was seen in most other cryptocurrencies around the world that pulled its market cap down to $1.26 trillion from its peak of $3 trillion it hit in November 2021, decline of 58 percent.

However, the leaders of crypto sector in India don’t think it is a long-term trend. Some of them attribute the fall to decline in the market sentiment that is not impacting cryptos alone but all other asset classes.

“Bitcoin has moved nearly lockstep with Nasdaq tech stock. The correlation is at an all-time high,” said Ashish Singhal, co-founder and CEO of CoinSwitchKuber in one of his tweets recently.

Although he acknowledges that it is not fair to compare this to an asset class but he clarifies that broader economic sentiment has a role to play in the overall decline of cryptos.

“Correlation between asset classes is not ideal. Yet, this tells us the fall is not signalling a fundamental weakness in any asset but simply the broader economic sentiment and the nature of capital flow. We're also likely coming off of a multi-year bull run across asset classes,” he adds.

"Several factors account for the ongoing crypto market decline, including inflation and recession fears"

“Several factors account for the ongoing crypto market decline, including inflation and recession fears. Also, the global crypto market has responded to higher yields on US Treasury securities and the prospect of aggressive policy tightening to address inflation," says Vikas Ahuja, CEO of Cross Tower India.

Mr Singhal also shares a piece of advice when he says that no amount of information is too much when it comes to investment.

“Understand the nature of each asset. Markets go up and down. When it comes to investment, no amount of information is too much. Stay informed, stay safe. Your actions should follow a sound assessment. Don’t buy because others are. Don’t sell because others are. Do your own research,” Ashish Singhal, Co-founder and CEO of CoinSwitchKuber.