Bitcoin’s Surge to New Heights

Syllabus: GS3/Economy

Context

  • Bitcoin crossed $100,000 for the first time, post US election rally.

What is Bitcoin?

  • Bitcoin was introduced in 2009 by an anonymous creator known as Satoshi Nakamoto.
  • It’s the world’s first decentralized cryptocurrency, using blockchain technology to secure and verify transactions.
  • The Bitcoin network is public and open-source, meaning anyone can participate.

Key Features of Bitcoin

  • Decentralization: Bitcoin operates on a decentralized network of computers (nodes), meaning no single entity controls it.
  • Blockchain Technology: Bitcoin transactions are stored in a public, immutable ledger called the blockchain. This ensures transparency and security.
  • Limited Supply: There will only ever be 21 million Bitcoins, which makes it a deflationary asset.
  • Mining: New Bitcoins are created through a process called mining, where miners use computational power to solve complex mathematical problems and verify transactions. This process also secures the network.
  • Security and Cryptography: Bitcoin uses strong cryptographic techniques to secure transactions, ensuring that the identity of users and the integrity of the blockchain are protected.

Factors Responsible for the Change in Prices of Bitcoin

  • Limited Supply: Bitcoin has a fixed supply of 21 million coins, which can lead to price increases if demand grows.
  • Investor Sentiment: Positive news or developments, such as institutional adoption or favorable regulations, can drive prices up, while negative news, such as government crackdowns or security breaches, can lead to price declines.
  • Tax Policies: How countries decide to tax Bitcoin transactions or gains can also affect demand and pricing.
  • Security Issues: Hacks, vulnerabilities, or concerns about Bitcoin’s security can negatively impact the price.
  • Price Manipulation: Large players, like “whales,” can manipulate Bitcoin’s price by making large buys or sells, affecting its price in the short term.
  • Geopolitical Events: Events like wars, political instability, or major economic sanctions can lead to price fluctuations, as Bitcoin might be seen as a safe haven.

Indian Government’s stand on Cryptocurrency

  • The Reserve Bank of India (RBI), has long recommended a complete ban on all crypto, warning that it has the potential to destabilize the country’s monetary and fiscal stability.
  • Despite having no regulatory framework for crypto, the Indian government had introduced a new tax regime, taxing crypto income at 30% and a 1% tax deducted at source (TDS) on crypto transactions.

Emerging Issues of Cryptocurrency Regulations in India

  • High Taxation Rates: The government can consider revising these rates to make them more competitive and encourage investment while ensuring compliance.
  • Regulatory Ambiguity: The absence of a comprehensive regulatory framework creates uncertainty for businesses and investors, affecting long-term planning.
  • Integration with Traditional Financial Systems: The integration of cryptocurrencies into traditional financial systems remains challenging due to concerns about volatility and systemic risk. 
  • Global Regulatory Disparities: Differences in regulatory approaches across countries create confusion and complicate international operations for crypto businesses.

Way Forward

  • Financial institutions can explore partnerships with crypto firms to develop hybrid products that mitigate risks while promoting innovation.
  • International regulatory bodies can work towards harmonizing regulations to facilitate smoother cross-border transactions.
  • The finalization of the Cryptocurrency and Regulation of Official Digital Currency Bill could be expedited to provide the much-needed clarity and stability that businesses and investors seek.
  • India can position itself as a leader in the crypto space, contributing to the broader vision of a New India that embraces technological innovation and financial inclusion.

Source: IE

 
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