Future Trading of Crypto-Currencies

Why in news?

Two futures exchanges in the US gave the green light to list bitcoin futures.

What is the fallout?

• It is a significant step in allowing mainstream investors to buy and sell the crypto-currency.
• As a result, Crypto-Currency rocketed around $11,000, while it was trading just below $1,000 in January.
• The rupee volume of bitcoin trades runs at around Rs 125 crore per day and 1.5 million Indians are active bitcoin traders.
• Other cryptocurrencies like Ethereum too have shown equally impressive gains
• But it is to be understood that, this is clearly a bubble.
• As more money is chasing this limited supply, prices have risen.
• Such bubbles arise when the market finds it hard to accurately value a new concept.

What is the rationale of traders who buy it?

• They expect that bitcoin will be recognised as a currency by more nations.
• Currently, only Japan among the G-7 accepts it as a legitimate currency.
• They also expect that more merchants, including e-commerce giants like Amazon and Alibaba, will accept bitcoin.

What are the negatives?

• Virtual currencies create multiple regulatory concerns.
• Bitcoin is convenient for hawala transactions.
• It can be bought using rupees and sold in euros, dollars, or yen, thus facilitating capital flight.
• Virtual currency-denominated Initial Public Offerings have been launched by many dubious start-ups, which seek to bypass market regulators.

Can it be banned?

• Bans are impossible to enforce.
• Anybody can just memorise private keys, retain no physical evidence of ownership, and make bitcoin transactions from any internet connection.
• Most central banks and tax authorities have not even agreed on basic definitions of virtual currencies.
• So they should emulate the Japanese and treat bitcoin as a currency, laying down rules for usage and clarifying tax treatment.

Source: The Hindu, Business Standard.