Saturday, January 9, 2016

Crypto-currency is not digital equivalent of a national currency

The way we use money is based on some fundamental assumptions that are rarely noticed. What we call money is actually a national version (sometimes regional too) of money that is called currency. Dollar, Pound, Rupee, Yen and Yuan are versions of money but only in a national context. In a different geographical territory, they may not fetch any value. For that, they must be exchanged. That is where exchange rates come in. So, what is called money is actually not a global definition. Currency is only a fragmented or a limited understanding of money; it does not signify a flat world.  If it has to become money, it will have to jump across the exchange barriers every time it crosses borders. A national currency may go digital but it cannot avoid this barrier of exchange and related costs involved rather it imposes a negative element to the global definition of money.
The digital currency has got a new rival and that is what is called digital money or more truly, a crypto-currency. In July, 2014, there were 400 such crypto-currencies and over half of them were trading currencies too. Around fifteen months after as on December, 2015, the figure has risen to around 670 crypto-currencies and 580 of them are trading currencies. It all started from Jan3, 2009 when Bitcoin was launched by an anonymous coder/s called Satoshi Nakamoto. While it lay dormant for around two years, it quickly surged ahead in 2011 and reached over $1100 in 2014 and is currently staying around $430. Other crypto-currencies followed like Namecoin, Litecoin, Ripple, Dogecoin, Peercoin and many more. The total market cap of all these currencies is over $ 7 billion today. Over 120 of these currencies have a market cap of over $100,000; nearly 30 of them have market cap of over $1,000,000 and six of them have more than $10 million each and three have over $100 million each. This has happened in a very small period of less than five years. Who is investing in them and why the money is shifting to these new currencies? Are they not the true versions of money without any exchange barriers?
 A crypto-currency is a Whatsapp like message app. The way you share message with no restrictions and no cost with anybody in the world, you can share digital cash with no restrictions with anybody anywhere in the world. Even message apps were not known in public domain before 2009. Whatsapp has grown from zero to over 700 million active users in just 5 years and over 2 billion smartphones use message apps today. Imagine if message apps give you an option to make digital payments by inserting a crypto-currency like ripple, bitcoin or stellar or ether, what would happen. If people choose to shift from physical cash to digital cash in such a mode, what will happen to physical cash????? A rupee-based payment chunk (or any national currency) would simply vanish from the current value of its GDP. This may seem an imagination but it may be a reality if paper currencies keep devaluing themselves by continuous inflation or meaningless third-party transaction charges and bottlenecks.
On a fundamental level, money is nothing but an instrument that facilitates exchange of utility between two persons. Currently, this is a paper currency but if two people have the freedom to use a better alternative, they will definitely use the one where there is no inflation, no transaction costs, no fear or no conversion hassles. That is where crypto-currencies are turning out to be a huge favourite. A good government is known by sound money and not by high inflation. 
The world is seeing the deluge of debt-laden governments and public sector enterprises. Either an economy is suffering from inflation or fear of disinflation. A big country like Brazil is nearing economic disaster and we have already seen the cases of Cyprus and Greece. Their national currencies have not helped their people in choice of a better economic future. Now, the people have found that it is not the government that can be changed rather they need to change themselves by shifting to digital currencies. If the growth rate of bitcoin is divided by a factor of ten and distributed across only 10% of these digital currencies, the entire paper currency system of the world will have an equivalent flow of crypto-currency. Though this is only an imagination and needs political testing yet the fact is that people can have alternatives even if the governments fail.  All the governments need to understand this. Their job is to safeguard the value of money and its equal distribution. If they don't understand this, they are going to face a monetary apocalypse.
(This was published on on 5th January, 2016.

Friday, December 11, 2015

Natural price levels for Bitcoin

Bitcoin is the strangest form of currency ever developed in the human history. Starting from January 2009, it rose to the levels over $1000 in January 2014. After that, its price crashed drastically and stayed around $250 throughout the first ten months of year 2015 but of late, it has started again rising and volatility is very sharp. It jumped to nearly $476 in a very short period of around a week and then dropped around to nearly $370. This is pretty sharp shift. (See Picture) Those interested in bitcoin tend to ask, “What barometer should be used for predicting bitcoin prices?
There is no definite answer to this question. Some people say that Chinese investors are rushing in to buy Bitcoin as many of them assume it to an excellent method of capital flight. Many rich Chinese who have amassed huge wealth want to shift it abroad and bitcoin enables them to avoid all forms of capital control. This may or may not be true because majority of bitcoin transactions happen in North America and Europe. The share of Asia-Pacific is very small in that. If Chinese elements were really active, the price of bitcoin would not fall rather it would have kept rising on and on. There is one more explanation being offered behind this sudden rise. As the crypto-currency ecosystem is maturing, the institutional support mechanism for bitcoin payments is falling in place. Merchants are adopting bitcoin as a mode of payment, more bitcoin wallets are being downloaded, more exchanges are being opened, more companies are entering crypto-money infrastructure like those in sidechains & altcoins and more banks are turning receptive to test the bitcoin space. This is a better reasoning though it only explains a part of the question. The real question is how far Bitcoin can rise and should rise. There is currently no framework for this answering this question.
If bitcoin is regarded as digital gold that works peer-to-peer
Let us try to answer this question. It is true that dollar is the world’s reserve currency but this is true more for the governments as they need dollars for international trade. For people, the true global store of value is gold. The second half of 19th century and in the 20th century till 1971, gold remained both the defacto and dejure global reserve currency as pound first and then dollar was pegged to it. People still regard gold as the true asset for hard times because it is acceptable to populations in all corners of the world. It is the true form of peer-to-peer money in a traditional sense. Bitcoin is called “digital gold” as its supply is fixed and any fresh incoming of this digital currency is through mining. So, like gold, bitcoin is a scarce unit of money. It is divisible and portable but bitcoin is more than gold in certain terms. It is a tradable gold. It is a technology platform too and a peer-to-peer network too. It can travel to any corner of the world without any chance of getting checked by any intermediary. In a way, it is a complete self-sustainable payment network for the entire world. What gold cannot do in terms of movement, bitcoin can do. It is censorship-resistant payment system that can work for multiple segments of global population. There are 200 million immigrants who send remittances to their native lands regularly. There are global telecom players who want a parallel revenue stream in addition to their sagging profits in voice and data market. If fiat currencies have cash-based network and they are yet to jump on to digital payments, the gap can be filled by mobile networks or message apps-driven systems of social networks like Whatsapp or Snapchat. The global hawala route may also jump on to this. Very few governments can counter the decentralized nature of bitcoin network. This is a great asset in the age of digital money. For a peer-to-peer exchange, bitcoin is a better bet than gold. So, it can be safely assumed that bitcoin would acquire at least the equivalent if not more than value of gold. 
Let us assume that true value of bitcoin should have been equivalent to one gram of gold. It comes down to around $40. This is the price that bitcoin crossed in year 2011. It means that in terms of gold, next barrier of 10 gm (1 Tola) should be tried. It comes down to around $400. This is the current market price range of bitcoin but we should not forget that bitcoin had touched over $1100 earlier. It means that an ounce of gold is the price limit that bitcoin has already touched. So, there are three gold-reference price barriers that bitcoin has already breached. That is why to guess a reasonable price level of bitcoin is not an easy task but the trajectory of growth in bitcoin prices does gain weight in terms of gold price references. That is why the popular consciousness assumes that price of bitcoin is expected to rise in direct proportion to its value in terms of gold. 

If we assume pound of gold as the next price barrier, this value comes down to around $17600 if current prices remain constant. If we go further to one kilogram of gold as the last price barrier, this would reach to over $38,000 apprx. Of course, this may seem a blatant case of speculation in short run but if people tend to regard bitcoin as digital gold, the long-term bet at these kinds of prices is not misplaced. What do we mean by long-term? It may be any period from 15-25 years from now. It cannot be predicted as to what price would be there in which year but it only reflects what people may think in terms of long-term positions on bitcoin.
If bitcoin market cap is regarded as equivalent to that of gold
There is another method of reaching a probability of price. Let us find what amount of gold is available for international trading. Let us evaluate in terms of market cap of gold. As per Wikipedia, the total gold reserves of the world were around 171,300 tonnes.
Source: Wikipedia
If we exclude gold used in jewellery, central banks and industrial categories and assume only half of gold in the investment and unaccounted categories, that amounts to over 18,000 tonnes. This is a very simplistic method but it can give us a rough market cap of gold that is being traded around the world. We should not forget that bitcoin is going to attract forex traders also where a single percent of investment can touch hundreds of billions but for the time being, let us only consider market cap of gold that flows across the trading platforms. This can become a good reference point as far as the price levels of bitcoin are concerned. At current prices of gold, this amounts to around $700 billion. This seems a figure that is the likely target of bitcoin market cap but when would it happen? If we give at least 25 years to above possibility, the average price would come out to be around 1Kg of gold (assuming constant price of gold) by the year 2040. Nobody knows whether it would happen but this kind of exercise of predicting future rise of bitcoin is an important one.
Utility and scale of Bitcoin wil drive its price 
Are we not over-estimating the potential of bitcoin? Is this framework really accurate? The answer is that even $700 billion market cap (if it happens) would make only a small fraction of existing monetary base of the world and further much smaller fraction of the global money supply. It is not to say that bitcoin would replace fiat currencies. The focus is price matrix with respect to gold and it is only to state that it can turn out as a good alternative as global store of value the way gold is. This may be off the mark but we should not forget that same thing could have been said four years back too but the reality is that number of bitcoin transactions have jumped 100 times in the same period. Today, the daily transactions are touching nearly 200,000 and to expect this figure to reach 20 million in next 10-20 years is not an impossible target.  This will definitely affect the price too. Nobody can predict bitcoin price in short term and nobody should. This blind game may be counter-productive both to the trader and the bitcoin itself too but long-term price trend is positive. This needs to be understood in the context of some related developments that are going to become major trends in coming years. The internet of things, cloud-based nature of software services, evolution of smart contracts, inherent weaknesses and inflationary nature of fiat currencies, real-time payments, universal adoption of smartphones by 2020 and 4G networks by 2025 are all the emergent features of global life that will make bitcoin a very acceptable solution. Let the critical mass around this technology be fully developed. As number of bitcoin transactions increase and its usefulness is proven beyond doubt, a natural mode of evolution will raise its price. Bitcoin is a true version of a global currency that has emerged from the grass-roots. The decentralized nature of its blockchain technology makes it a sustainable and scalable solution in the digital age. How far it would go is not clear but it would remain the most disrupting monetary phenomenon ever happened in human history.
(This was published on Economylead on 9th December, 2015)

Friday, November 27, 2015

A speech on Bitcoin that never happened

Recently at FIBAC 2015, Mr. R. Gandhi, RBI Deputy Governor delivered a speech, “Disruptive Innovation and Inclusive Growth – Some Random Thoughts” and two prominent themes in that speech were crypto-currency and crowd-funding. He expressed great possibilities hidden in these unique innovations of 21st century. To him, a “Crypto currency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank” and crowd-funding is “the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet.….it is a form of alternative finance, which has emerged outside of the traditional financial system.” Still, he does not find them desirable because they “both hope to operate in a regulator free environment. In matters financial… unregulated financial system has immense scope for depriving ordinary public of their hard earned money and therefore highly risky to be permitted to grow.…. Secondly, both have the potential to support criminal, anti-social activities like money laundering, terrorist funding and tax evasion.”
Such a speech by a senior RBI functionary seems quite a conventional way of saying both good and yet bad things about a paradigm shift in the world of money and finance. This change is so big that every big financial institution is working on it. British banks are seriously exploring it. London is not just the financial centre of the world but also the new Fintech capital of the world too. Federal Reserve is working on the new framework of real-time payments where members of Ripple team, the crypto-currency giant are also involved. Australian Banks are testing it. IBM, MIT, Santanders and many more are building advanced models of blockchain for use in financial industry. Against such a backdrop, the ideas of RBI deputy governor show less than adequate understanding of institutional changes that RBI may need to accommodate for the crypto-currency world in future. It seems that a lot of hard work is yet to be done on this front by the regulator. A better way of what could have been possible in this regard is to re- imagine the speech the deputy governor might have made.
1. The kind of traction that bitcoin has gained in less than six years is quite a challenging proposition for central banks. To be more precise, this is the challenge from the open source and decentralized nature of money and finance to the centralized regulators of the present world. The world is watching a bottom-up model instead of a top-down model that we have got almost used to. There would be nearly five billion smartphone users in the world in another five years. In a cashless society, the physical hold of a paper currency will need to be replaced by a mobile interface and technology back-end. It is a change that is totally new and disruptive for all of us. It may be a moment of creative destruction but if we remain unmindful, this destruction may not be creative too. It seems to be issuing a wake-up call to all the regulatory authorities as the nature of challenge is much deeper than is visible at present.
2. Bitcoin is the first-ever authentic digital version of a bearer asset. All physical currency notes are also bearer assets of multiple denominations. The natural leadership of a central bank emerges from the fungible nature of this bearer asset. It is the simplest and the safest mode of exchange. Central bank performs its seigneiorage functions with absolute quality and public safety. This public acceptance of RBI in its monetary grammar is a great asset. The challenge is to reproduce this kind of authenticity in the digital domain too. Bitcoin does have the first mover advantage but it is far away from the scale of fiat currencies. The time available should be used to reproduce the digital rupee payment network the way it operates on cash front. Payment banks are one way to take in this direction but to match equivalence of ease, efficiency and security of bitcoin, we need to go a bit further. The best way forward is to erase the friction of payment during transaction and conversion of rupee. We need to develop a core technology group on the lines of something like Ripple, Ethereum or Stellar like crypto-currencies. They provide sufficient variety of management alternatives that a central bank can replicate. With the help of institutions like NIPFP, C-DAC and NIC, RBI can develop in-house technology solutions based on blockchain.
3. Banking on tap for Indian market is already being given a serious push in the form of payment banks and small banks but banking needs to change not in terms of aiding financial inclusion but also in terms of reducing costs through seamless unity of payment platforms. The blockchain technology is the biggest gift of bitcoin. As all banks have similar systems for deposit management, payment systems, databases, credit and debit ledgers, credit card, lending and so on, this creates needless duplication of identical functions across banks and hence unnecessary costs for the banking industry. Blockchain can reduce it by creating industry-level systems of record in such a way that everyone can use them. What may be needed is some sort of “consortium blockchain” which in words of Vitalik Buterin is “a blockchain where the consensus process is controlled by a pre-selected set of nodes; for example, one might imagine a consortium of 15 financial institutions…… The right to read the blockchain may be public, or restricted to the participants, and there are also hybrid routes …… with an API that allows members of the public to make a limited number of queries and get back cryptographic proofs of some parts of the blockchain state.”
4. India has a unique and single register of identities/e-KYC in form of Aadhar. With its support, we can design a model of crowd funding. What is needed is that RBI must innovate on this turf by issuing an open-source software model of crowd-funding. The challenge is that this model has to be technology-centric as well as financially safe. This may be called LINUX of crowd-funding models. Micro-investments for crowd-funding can be modeled on the micro-payments and share issuance can be transparently seen on the blockchain. SEBI can join for this financial innovation. Small-cap companies or start-ups can be allowed to participate in this model. Instead of fighting against crowd-funding, we need to develop our own methods of easy and reliable fund generation. If this kind of public software can be made popular as well as mandatory for crowd-funding in India, this would also be paradigm shift in the role of central banks. From a money issuer to a technology-issuer, this would be a great achievement.
5. The fast rise of crypto-currencies beyond 600 in less than two years is not a happy trend and it is expected to cross 1000 in another couple of years. If even 90% of these currencies die, there would be around 100 such currencies still left and that would be still a great number to tackle. They are already emerging as the favourite medium for hawala transactions as well as banned goods and drugs online. Despite closure of Silk Route, an online market-place for sale of illegal goods with bitcoin, there have emerged dozens of new ones. Tor network and proxy nature of servers make it too difficult to stop them. Defense may not be right strategy for central banks as far as crypto-currencies are concerned. It seems that time has come for all central banks to come together and start working on this challenge. More is the friction between currencies; more is the incentive to shift to alternative crypto-currencies. A user cannot make instant micro-payment across currencies with enough ease and at low cost. This can be corrected by ending the fragmented nature of our monetary systems. We need to remove the multiplicity of standards and protocols and reduce the compliance cost too. The need for cooperation and collaboration is so high that inter-currency payment friction should be eliminated with only one goal of real time payments. The entire world should move towards this goal and there should be no lapse in it. If fiat currencies can do what crypto-currencies are doing, with a much better record of public acceptance, scale and efficiency, the world may not need so many of crypt-currencies. 
(This post was published on 26th October, 2015 at the web portal, India Bitcoin, a news portal maintained by Unocoin, a premier Bitcoin Exchange of India)

Monday, August 18, 2014

India as a zone of secular stagnation

Have we ever bothered to notice one serious trend in India in last couple of decades? Whatever business stream generates profits more than the average return on FD (Fixed Deposit), suddenly finds a deluge of investments even if these investments are not legal. Think of thousands of engineering colleges, business schools, B Ed colleges, Electronics showrooms, Shopping Malls, CBSE Schools, Real Estate business, Gold jewellery, telecom business and many more. The profitable business cycle shrinks so fast that it soon turns into a negative zone where returns are less than interest earned on a FD. It is ironical wherever the money moves, a short stint of profit is followed by a long-term secular stagnation of profits. In last sixty years, the share of industry in the GDP has not drastically improved (not even doubled or increased by double digits even). The fact is that all businesses are dependent on the climate of Indian business that feeds upon the inertia of the past. Private money follows a linear pattern and not a holistic design in India. Improvisation and research are the last priorities in the Indian business. The upper middle class that holds money, is actually sitting with an education system that is non-innovative, a government system that is deeply fragmented and dysfunctional and the institutions that are outdated. Indian money men are the poorest chaps on earth these days. Think of a businessman who invested 2 crores on his Electronics showroom some three years back and today, he is running daily losses because of losing business to e-retail giants. The best of business efforts are ending up in a long-term loss making proposition which one assumes to survive through because the debt burden keeps postponing the immediate shock but keeps increasing the vulnerability. The real reason for this sustained loss of money and effort is the prevailing deluge of herd mentality. Everybody thinks short term and everybody suffers in long term. We need to build business models where human intelligence is more critical than simply the availability of money capital. What is made with earned wisdom will stay with us for years and decades. What makes Germany a world manufacturing nation despite global recession? What makes US entrepreneurial hub of the world? What makes Britain the global financial centre? These are the goals that were decided decades back (if not centuries) and pursued with rigour whatever party may rule the country.

Thursday, August 7, 2014

महाभारत आज भी -2

ध्रितराष्ट्र ने भी तो गीता सुनी थी संजय के मुख से। पर ऐसा क्यूं है कि उसे वो समझ नहीं आती. इतनी ज्ञान ध्यान की बात उसे क्यूँ नहीं समझ आ रही? समझ तो आती होगी पर उसे हजम नहीं होती होगी कि यह क्या बात हुई कि कर्म भी करो और फल की इच्छा भी न करो! उसने शायद विश्वरूप भी देखा होगा पर उसने इस पर भी सवाल उठाया होगा। वो हर चीज़ में बड़ा सोच समझ कर, मोल-भाव कर के चलने वाला इन्सान है। उसे लगा होगा कि क्या यह विश्वरूप गांधारी की तरह मेरे साथ-साथ चल सकता है पक्का आसरा बन कर ? जब भी जरूरत हो, आवाज़ लगाई और लो हाथ में! उसे पता था कि कृष्णा बहुत चतुर है इसलिए उसका निष्पक्ष होना असंभव है? उसके लिए वफादारी किसी की चतुराई से भी बढ़कर है।ईश्वर भी इसी कसौटी पर खरा उतरना चाहिए, तभी तो उसे ईश्वर मान के पूजा करने का फायदा है। (पोलिटिकल इस पर्सनल के अनुसार चतुर और निष्पक्ष साथ साथ हो नहीं सकते ) ऐसे हालातों में उसके लिए गीता मात्र कचरे के सिवा कुछ भी नहीं थी।  जीवन एक उपहार है या फिर एक संपत्ति? ध्रितराष्ट्र एक ऐसा व्यक्ति है जो कहता है सीधा साफ कि यह मेरी संपत्ति है।  इसे जिंदा रखने और भोगने के लिए मैं सब कुछ कर सकता हूँ। अगर कर्म का फल ज़िन्दां रहना नहीं है तो क्या फायदा कर्म का और भाड़ में जाये ऐसी गीता ! मसला असल में यह है कि गीता की ज़रुरत ही उसे है जो यह मानता हैं कि कुछ ऐसा भी है जो मेरा नहीं है कम के कम अधिकार की दृष्टि से। उसके साथ मेरा रिश्ता संयम और संतुलन का होना चाहिए। यही उसके अन्दर सवाल पैदा करता है और उसी से पैदा होता है वो जो निष्पक्ष है, जिसकी बात सुनी जा सकती है पर अगर फैसला पहले ही हो चुका है कि सब कुछ मेरा है और मुझसे बढ़ कर कुछ भी नहीं है तो फिर गीता पर टाइम ख़राब करना मूर्खता है और कमाल की बात है कि सौ में से निन्यानवे बार ध्रितराष्ट्र ही जीत जाता है पर क्या करें उसे गीता का शोर सुनते रहना पड़ता है! उसके लिए प्रॉब्लम यह है कि यह कृष्ण गीता का बाजा बजाने बार बार आ जाता है, जाता ही नहीं है। उसे यहाँ हर हाल में पता करना है कि उसका कर्मफल उसे मिलेगा कि नहीं और यह साला कृष्ण बीच में अर्जुन को लेकर हर बार बैठ जाता है और  कान पकाता  रहता  है. धृतराष्ट्र के  लिए गीता एक पक्की बोरियत है और  कभी न साथ छोड़ने वाली बोरियत है.

महाभारत आज भी -1

क्या हमने कभी सोचा है कि दुर्योधन के जन्म और बचपन का उसके स्वाभाव से कोई रिश्ता है? थोड़ी देर के लिए उसके प्रति एक सहानुभूति पूर्ण रवैया रख कर अगर उसके बारे में सोचा जाये तो शायद उसे समझना आसान होगा. वो एक ऐसा बच्चा है जो एक गहरे तनाव में पैदा होता है. उसकी मां को गुस्सा है कि कुंती के बच्चे पहले हो गए और उसके नहीं. क्यूंकि राजपाट में पहले जन्मे बेटे को ही राजा बनाया जाता है. इस बेतहाशा को न झेलते हुए वो अपने ही गर्भ पर जोर से प्रहार करती है और एक मांस को लोथड़ा बाहर गिर जाता है जिससे बाद में दुर्योधन के साथ साथ बाकी कौरव भी पैदा होते हैं. बात फिलहाल दुर्योधन तक ही. क्या आप को यह कोई ऐसा बच्चा लगता है जिसे मां ने बड़े प्यार से पाला होगा. क्या वाकई उसकी मां ने उसे गोद में भर कर महीनों भर उसे छातियों के साथ लगा कर रखा होगा? क्या उसके बाप ध्रितराष्ट्र ने उसे गोद में बिठा के लम्बी कहानियां और लतीफे सुनाये होंगे? जो मां बाप उसे राजपाट का निश्चित वारिस मानना चाहते थे, वो बेचारा काल का मारा थोडा लेट हो गया और अब उसके मां बाप की असुरक्षा उसका उम्र भर के लिए बोझ बन गयी. जिसे मां की गोद नहीं मिली और बाप से आसमान छूने की कल्पना नहीं मिली, वो मां-बाप से दूर उन्हें खोजता रहा हस्तिनापुर में. मां बाप के लाड में जो अति करने की तृष्णा शांत होनी थी, वो हस्तिनापुर में पहुँच कर गुनाह में बदल गयी. मां बाप से प्यार, गाली और माफ़ी की रोज़ रोज़ सौगात अगर मिली होती तो शायद उसे छीनने की आदत न पड़ती और गुनाह की छूट न मिलती. बचपन में जैसे हम बच्चों को पालते हैं, उसकी परछाईं सदा के लिए रह जाती है. ज़िन्दगी के पहले मास्टर औरत और मर्द अगर फेल हो जायें, तो सारे स्कूल, कालेज और यूनिवर्सिटी मिल कर भी कुछ नहीं कर सकते.