A leaf out of history to understand Cryptos

Cryptocurrencies were first thought up as an act of defiance against the establishment that include banks and governments the world over. But in the mother of all ironies, crypto is now part of mainstream conversations. People talk about it as an asset class to be actively considered. And why not? If the prices of cryptocurrencies such as Bitcoin and Ethereum among others are indicators, it has delivered exponentially high returns. To add salt to injury, veteran investors are witnesses to teens and young people who invested early having earned in the millions. Did the veterans miss a trick or two?

To make matters worse still, the government’s position on cryptocurrencies continues to remain fuzzy. A Bill was introduced in the Lok Sabha back in 2019 that banned it. But after it was challenged and restrictions lifted, a new Bill was introduced in 2021, and Finance Minister Nirmala Sitharaman proposed that all crypto transactions must be taxed. Does this imply crypto currencies are now legal tender?

Perhaps, we’ll do well to recognise that neither the young nor the government know what they’re doing. But it takes a legendary investor such as Warren Buffet, chairman and CEO of Berkshire Hathaway, to say it in as many words: “If you offered me all the Bitcoin in the world for $25, I wouldn’t take it.” This is not to suggest cryptocurrencies are not worth looking at but to hammer home that you don’t dabble with what you don’t understand.

On speaking to young people studying at colleges and early career professionals in Mumbai, no one could coherently articulate the history of money, how the current system operates, or explain the underlying technology that powers cryptocurrencies. If anything, on attempting to decode their answers, it sounded like most are tinkering with the next “shiny toy”. When told that there are at least 20,000 cryptocurrencies in circulation now, that Bitcoin was the first, and that anyone who understands how to code, can create a cryptocurrency, most people’s jaws just drop.

To prove this can be done, two software engineers, Billy Markus and Jackson Palmer, created a cryptocurrency called Dogecoin eight years ago. They had intended it to be a joke. But a month after they placed it in the public domain, there were over a million users transacting on it. And last year, it gained a market capitalization of over $85 billion. Much water has passed under the bridge since then, its value has plummeted, and holders of Dogecoin don’t know what to do with it.

That is why it is worth look at cryptocurrencies through the long arc of history. Adam Mosseri, the head of Instagram, did that brilliantly earlier in April this year. He argues that each time a technology emerges, it strikes at the existing systems of power. By way of example, once upon a time, knowledge used to reside in repositories accessible only to the establishment. Then the printing press happened. What followed were innovations that democratized knowledge to include everything from posters to newspapers and all else. The floodgates of knowledge opened and led to the European Renaissance. In the interim, the Ottoman Empire and the Catholic Church did try to impose restrictions but their attempts didn’t work.

Extrapolate this analogy to the contemporary world. Cryptocurrencies were thought up by early internet pioneers as part of an alternative payment infrastructure built on a technology called blockchain. “The most important thing to understand about a blockchain,” Mosseri explains, “is that they remove the need for trusting an intermediary. How many of you have put money in a bank? When you did that, every single one of you trusted an intermediary, in this case the bank, to take care of that money on your behalf. A blockchain, on the other hand, allows you to hold digital money directly, in this case cryptocurrency, without relying on a bank. And so, the blockchain offers the potential for a transfer of power.”

His larger point is that people such as content creators on the internet dislike the “establishment” such as banks and large technology companies such as Facebook, YouTube or Amazon. They “own” the relationship between the creator and the end consumer. And to service every transaction, the “owners” charge a service fee. But if the technology exists for the consumers to pay creators directly, creators can “own” the community they service. Cryptocurrencies allow that and make the establishment redundant. The question now is, which cryptocurrency must be the dominant one? No one knows.

What is also clear is that governments world over accept that cryptocurrencies are here to stay though they remain unclear about how far they will go. This is why policy makers come up with ideas such as bans and taxes without thinking them through. History also suggests that public policy always lags technology. It was only after the automobile was invented that traffic rules were created. It will be a while before the dust settles on cryptos.

That takes us to where we started from: Do you invest in cryptocurrencies or not? Buffet won’t invest because he doesn’t understand it. Another way to look at it is that if there’s some money you don’t mind losing but are willing to take an informed punt on for the longer run, deploy that. And then forget about it for a few years.

Charles Assisi writes at the intersection of business, tech and policy