Talking Point. Why bitcoin does not pose a threat

Bitcoin once again moved to the centre-stage, zipping past the $10,000 mark recently. But its supporters were unusually silent this time, and rightly so. There can be no logical justification for a currency to appreciate 1,350 per cent in one year, except surging speculative demand.

The detractors of bitcoin, on the other hand, have been very vociferous, predicting a bubble and an imminent crash causing widespread losses. It’s true that the bitcoin phenomenon has the making of a bubble. Since it is created by bitcoin miners from various countries, there is no way to value the worth of a bitcoin. It’s price is driven simply by demand, which is steadily increasing with price increase.

But despite the growing possibility of a bubble formation, followed by a crash, bitcoin and other virtual currencies do not pose a systemic risk to global financial markets, on the lines of the dotcom bust or the subprime mortgage crisis.

The size of the virtual currency market is minuscule compared to the global financial markets for stocks, currencies and their derivatives. Also, with this fad yet to catch on in a big way in India, our country appears insulated.

Small market

The geeks who can mine bitcoin were the original investors in these coins, but as the value of these currencies raced higher, those with surplus income and with a higher risk taking ability are also beginning to dabble in these. But the more conservative investors, who invest in assets such as mutual funds, real estate and gold, are yet to look favourably at this asset. So global investors are largely ring-fenced from this phenomenon.

The size of the virtual currency market is also too small to cause a major destabilising effect.

There are more than thousand virtual currencies currently traded on mostly unregulated exchanges across the globe, such as Ripple, Dash, Bitcoin Gold, Litecoin and so on. Bitcoin is the most popular of the virtual currencies, accounting for around 55 per cent of the total market capitalisation of all virtual currencies, that is currently at $294 billion.

This number pales in comparison to the global stock exchanges that have a combined market capitalisation of $67 trillion, according to the World Federation of Exchanges. The NYSE group alone had a market cap of $19.5 trillion towards the end of 2016.

If we consider the global OTC market for derivatives, the numbers are even larger. According to the Bank of International Settlement, notional amounts outstanding in the OTC market in forex, interest rate and equity-linked contracts in the first half of 2017 was $542 trillion.

In terms of volume transacted too, the virtual currency exchanges emerge as insignificant. The daily traded volume in virtual currencies has soared over the last few months with increasing prices, with the daily average between $10 billion and $20 billion. The daily average trading volume on global stocks exchanges in 2016 was close to $32 trillion. Global exchange traded futures market trades close to $6 trillion every day.

These numbers help to highlight that virtual currencies currently exist on the fringes of financial markets and are too small to do any serious damage, even if the price collapses dramatically.

A yen for Japan

Japan accounts for a large chunk of daily trading in virtual currencies. This is probably due to the fact that this virtual currency originated here, as Bitcoin’s anonymous founder Satoshi Nakamoto is Japanese, going by his name.

According to Bitcoincharts, a website that provides data related to bitcoin and other virtual currencies, Coincheck, a bitcoin exchange located in Tokyo, founded in 2014, accounts for 38 per cent of the global traded volume.

Other exchanges in Japan such as Bitflyer, Zaif and Fisco account for another 19 per cent of exchange traded volume.

The only large exchange for virtual currencies outside Japan is Coinbase that accounts for about 10 per cent of the traded turnover.

India insulated

The RBI has stopped with issuing a warning to investors about dabbling in virtual currencies and has not made any move to regulate it. While the government did form a committee to understand this, no action has yet been taken.

This is probably a good move since the exchanges that trade bitcoin and other virtual currencies in India such as Zebpay, Unocoin etc trade less than ₹100 crore per day, compared with daily turnover of around ₹2,50,000 crore on the stock exchanges.

The fact that that it is unregulated and the high level of volatility are prompting conservative investors to move away, anyway. Allowing these exchanges to exist but ensuring that investors are aware of the risks could be the best way to deal with this bitcoin mania, for now.

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