Bitcoin Hits All-Time High After Trump Win

Syllabus: GS3/ Economy

Context

  • Bitcoin, the world’s largest cryptocurrency, has soared to an all-time high after Donald Trump’s historic win in the US presidential elections. 

What is Cryptocurrency?

  • Cryptocurrency is a type of digital or virtual currency that uses cryptography for security, making it difficult to counterfeit or double-spend. 
  • It operates on decentralized networks based on blockchain technology—a distributed ledger enforced by a network of computers. 
  • Cryptocurrencies are typically not controlled by any central authority, which makes them theoretically immune to government interference or manipulation.

Key Features of Cryptocurrency

  • Decentralization: Most cryptocurrencies operate on decentralized blockchain networks, ensuring that no single entity has control over the entire network.
  • Security: The use of blockchain technology also adds a layer of protection through consensus mechanisms like Proof of Work (PoW) or Proof of Stake (PoS).
  • Transparency and Anonymity: Blockchain technology allows for transparent record-keeping of transactions that are visible to all participants on the network.
    • Despite this, cryptocurrencies often offer a degree of user anonymity.
  • Global Accessibility: Cryptocurrencies can be transferred across borders quickly and efficiently without the need for currency conversion or significant fees.
  • Ownership: Cryptocurrency holders have full ownership of their digital assets, which are stored in digital wallets secured by private keys. 
Blockchain technology
– Blockchain technology is a decentralized, distributed ledger system that records transactions across many computers in a way that ensures security and transparency.
– Blockchain networks rely on consensus algorithms to validate transactions and maintain network integrity. These mechanisms ensure that only legitimate transactions are added to the chain.

Challenges with Cryptocurrency

  • Regulatory Uncertainty: The lack of clear, consistent regulation stifles innovation, leads to fragmented markets, and leaves investors vulnerable.
  • Market Volatility: Cryptocurrencies are known for their price swings, which can result in substantial financial loss.
  • Lack of Consumer Protection: Most cryptocurrency transactions lack consumer protections. This absence led to fraud, scams, and loss of funds with limited recourse for victims.
  • Environmental Impact: The energy-intensive nature of proof-of-work mining, especially in Bitcoin, raises concerns about its sustainability and environmental footprint. 

India’s Cryptocurrency Landscape

  • Taxation Policies: The Indian government imposed a 30% tax on income from transfers of virtual digital assets in 2022, along with a 1% tax deducted at source (TDS) on each transaction.
    • These stringent measures have dampened domestic enthusiasm for cryptocurrency trading.
  • Regulatory Uncertainty: In 2018, the Central Board of Direct Taxes proposed a ban on cryptocurrencies, and the Reserve Bank of India (RBI) restricted banks from facilitating cryptocurrency transactions labeling it as a “macro-economic risk.”
    • This decision was overturned by the Supreme Court in 2020. 

Way Forward

  • Comprehensive Regulation: Clear, balanced policies that delineate the legal status of cryptocurrencies while addressing security concerns.
  • Investor Education: Initiatives to inform investors about the risks and benefits of digital assets.
  • Collaborative Frameworks: International partnerships for coordinated regulation and technical expertise.

Source: IE