Decoding the Crypto Bloodbath

Santosh Kumar from Udaipur got hooked to the cryptocurrency craze some four years ago shortly after watching a YouTube “influencer” shower effusive “praise” on a phenomenon called decentralised finance, the epitome of which, he was then told, was a thing called Bitcoin. “I had heard of Bitcoin but had no clue what it actually was, how it functioned until I listened to that talk. The same day, I heard about another cryptocurrency called Ethereum and several other coins that they now call altcoins. Soon, I became a crypto fanatic or nut, whatever you call it, pick­ing up things at a quick pace and making up for lost time,” he tells Open. Kumar, now 37, soon persuaded his wife to invest a large chunk of their disposable incomes over the next few years in these coins that are highly secured and almost impossible to counterfeit or double-spend. All this is made technologically possible thanks to blockchain which, according to IBM, “is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a busi­ness network.”

Kumar lived in the world of near-impossible possibilities, parking his extra income in these financial assets until recently when the markets began to crash, quickly and steadily, to his great shock. He sees it as a life-altering event. “I am not able to sleep much these days,” says this finance professional who, un­til a few months ago, thought he was “loaded”, like the merchants Charles Dickens described as having “locked up money in their strong-boxes.” But lately, Kumar says he feels more “like the man in the Arabian Nights,” who, on opening those boxes—again in Dickensian evo­cation—“found but withered leaves.”

This projection of a dreary, worst-case scenario is no literary exaggeration. The combined crypto market capitalisa­tion led by Bitcoin has seen $2 trillion disappear in just six months due to the ongoing crash, triggering fear and rage among investors caught unawares. The price of Bitcoin alone has fallen rapidly to pre-2017 levels, to below the psychological $20,000 mark. Bitcoin, the original cryptocurrency that is the largest by market cap, is often seen as the benchmark of the dynamics of the market—to the extent that “Bitcoin dominance” is used as a tool for understanding the behaviour of the market. It is essentially the ratio of the market cap of Bitcoin to that of the rest in the cryptocurrency market. Bitcoin has had its share of ups and downs. It had traded at $350 a coin until 2013, and then in 2017, it rose towards $20,000 levels before crashing to $3,300 in December 2018. Then it rose and fell again, but only after touching $65,000 in April 2021. On November 10, 2021, Bitcoin reached an all-time high of $68,789 before closing at $64,995. But since January this year, it has been falling.

Kumar is among the hundreds of thousands of investors around the world who are in the grip of deep anguish and sheer helplessness. The impact of this bloodbath is destined to be huge in India, especially since the country was quick in adopting the crypto system over the past few years amidst the proliferation of enthusiasts and influencers.

It was akin to a fairytale romance with money. According to a recent survey by Finder, a global research agency, India ranked number one among the close to 30 countries it featured in its Cryptocurrency Adoption Index. It also meant that the crypto ownership rate in India was the highest of them all, at 30 per cent early this year, while even advanced countries trailed. But wait, it is not individual investors that faced the sweltering heat of a rever­sal of fortunes. Those that incurred losses include corporations of the stature of Tesla and others which had converted a chunk of their cash reserves into crypto assets. Amid the crypto blood­bath, Tesla will have to write off at least $440 million because of its investments in Bitcoin. Headed by Elon Musk, the company purchased Bitcoin valued at $1.5 billion last year. Companies in China, too, are no exception, forcing top officials in that country to grow deeply suspicious of the global crypto system.

The flurry of bad news doesn’t end there, and India’s now-reviled influencers aren’t unaware of these challenges. Crypto blogger Sapna Singh, a former software engineer who has made a name for herself as a YouTuber and influencer since 2016, says people are still keen on getting nuanced views on the world of cryptocurrencies she offers through her channel Earn with Sapna. Considered one of India’s most followed crypto influenc­ers, Singh says her primary function is to educate people about these new financial assets. Singh, who has also recently authored a book titled The Basics of Crypto Market, feels that the crypto mar­kets are going through what all markets go through: cycles of ups and downs. “There isn’t anything extraordinarily different with crypto markets. The current crisis is an opportunity for those who want to accumulate coins,” she says, adding that the market is destined to evolve even further because it is a new system and will go through rounds of corrections.

An Indian-origin crypto trader based in Berlin, who goes by the nom de plume “Ray the Wanderer”, cannot agree more. He is hyper-optimistic about a rebound in the crypto market. He terms the response of a majority of the investors and market watchers and experts as “FUD”, an acronym for fear, uncertainty and doubt. He suggests “HODL”, short for hold on to dear life, for all coins, and emphasises that “eyes are now on [tokens] such as ALBT [Alliance­Block], Casper and Cypherium.” He is also gung-ho about coins such as RSR (Reserve Rights) and points out that several banks and companies are “hiring like crazy” to fill positions to handle their crypto assets. He doesn’t care about being called a “raving madman” by other investors who are extremely sceptical at the moment.

The combined crypto market capitalisation led by Bitcoin has seen $2 trillion disappear in just six months due to the ongoing crash, triggering fear and rage among investors caught unawares. The price of Bitcoin alone has fallen rapidly to pre-2017 levels, to below the psychological $20,000 mark

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From their viewpoint, they have all the reasons to be circum­spect about their hard-earned money. The fear, after all, is for real. Adding to the doom and gloom scenario are reports from war-torn Ukraine that desperate crypto buyers—who didn’t want to carry money either in crashing banks or as physical notes and therefore bought cryptocurrencies—are now ruing their deci­sion. Even in peaceful locales, the anxiety is palpable. The New Jersey-based cryptocurrency loan company Celsius Network has recently disallowed customers from withdrawing and transfer­ring crypto coins on their platform. It has also laid off many of its own employees. Some investors have huge amounts of Bitcoin and Ethereum parked in their Celsius accounts, adding to the woes in a fragile market. These are life savings for many of them. According to reports, more crypto companies (including Babel Finance, CoinFlex, Voyager Digital Ltd, Finblox, and Vauld) have either taken similar measures or controlled transactions on their websites. Many Indian investors are losing sleep over what will happen to their savings and dreams on the trading platforms where they have their accounts and money. After all, although they perform like traditional exchanges and look like them, protections and guarantees are missing here. “It is a shock­ing realisation but many of us have been warning people about it [the outcome of trading platforms freezing accounts] for long,” says an official close to the matter.

Let’s look at how the market crash began this time round.

Experts will tell you that it started with accelerating inflation globally, which forced central banks to raise interest rates. In such an economic situation, people had less money to splurge, perhaps a precondition for being able to invest in crypto. Many of them either delayed their investments or sold them. In India, there was excitement despite the Covid-induced lockdown when the Supreme Court in March 2020 overturned the Reserve Bank of India’s (RBI) 2018 ban on banks from facilitating cryptocurrency transactions. Open had reported then, quoting Nischal Shetty, founder of WazirX, who said on Twitter: “Crypto has won in India. We won!” Around then, the signs looked bright for the crypto world in India. For instance, as we had reported then, Atul Khek­ade, a crypto entrepreneur who in 2017 founded XinFin Network (XDC), saw cryptocurrency grow by over 1,300 per cent in price.

But things soon changed, and in hindsight, the Centre’s regulatory moves in India came as a blessing in disguise for investors, the majority of whom fall in the 20-35 age group, according to a claim by crypto exchanges.

In this year’s Union Budget, even as countries around the world grappled with how to regulate cryptocurren­cies, India proposed a 30 per cent tax on all capital gains from digital assets and also added that a 1 per cent TDS will be charged on every transaction. Sanjeev Sanyal, then principal economic ad­visor, Ministry of Finance, wrote in Open, “What we have imposed on gains on any asset sales and windfalls is reasonable. When you buy and sell other assets, you have to pay capital gains tax. There is no particular reason why you shouldn’t be doing this for this particular asset. This does not endow any legitimacy to such crypto assets. It doesn’t in any way regulate or regularise this space. It just says what is obvious: if you make capital gains from other assets and pay tax, there is nothing exclusive about those who make a profit from crypto assets. Moreover, the cur­rent laissez-faire regulatory system cannot be sustained. Globally, the whole discussion on regulating crypto assets is taking place at the level of the G20 because it cannot be handled by any single country. Meanwhile, the Reserve Bank of India is going to create a digital currency.”

Many observers felt that a majority of Indian investors benefited from that move—because they slowed down. Nithin Kamath, founder and CEO of stock trading firm Zerodha, tweeted recently: “I think many Indian crypto investors accidentally got lucky due to TDS & Tax on Crypto announcement this budget in Feb. Activity & participation dropped significantly immediately. If not, many could have potentially been trapped trying to buy the dip & then averaging down.”

He is right, but not all those who embraced crypto were ready to back out, as market trends confirm and so does the interest in following the channels of crypto influencers.

A Bengaluru-based crypto enthusiast and investor who doesn’t want to be named tells Open that there were other signifi­cant reasons for the market fall. “One of the fundamental issues about crypto currently is that it is not as utilitarian as a normal fiat currency. It is majorly used for trading. Hardly anyone uses it as a normal currency to buy and sell stuff [although several countries have announced it as legal tender and many organisa­tions announce that you can make transac­tions through cryptocurrencies, including in India],” he says. Another observation is that if you want to drum up the revival of the crypto market, you will have to be able to buy oil through crypto. The Bengaluru expert hopes that Pi Network, started by Stanford PhDs and which is yet to make its initial coin offering, may succeed in its efforts to make its coins utilitarian because it is following a wait-and-watch policy, analysing the latest trends in the global economy and learning from the mistakes of others.

The crash started with accelerating inflation globally, which forced central banks to raise interest rates. In such an economic situation, people had less money to splurge, perhaps a precondition for being able to invest in crypto

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Other events, too, may have led to the current crash. Writers Krisztian Sandor and Ekin Genç capture with great finesse on CoinDesk, a news site specialising in Bitcoin and digital curren­cies, a detailed history of Terra blockchain and its founder Do Kwon’s failed mission to create a price-stable crypto payment system “to take on the biggest e-commerce platforms.” Terra had started off as a payments app in South Korea and it went on to become a $60 billion crypto ecosystem, before then becoming one of the momentous failures in crypto. The authors write in an article titled ‘The Fall of Terra: A Timeline of the Meteoric Rise and Crash of UST and LUNA’: “On May 7 (2022), the price of the then-$18-billion algorithmic stable coin TerraUSD (UST), which is supposed to maintain a $1 peg, started to wobble and fell to 35 cents on May 9. Its companion token, LUNA, which was meant to stabilise UST’s price, fell from $80 to a few cents by May 12.”

“The Terra/LUNA fall set the trend,” avers Sapna Singh. She is certainly right about the fact that the crypto market, like other markets, runs in cycles and that crypto adoption is not going to stop with various countries, including Venezuela and the Central African Republic having granted Bitcoin the status of legal tender. Notwithstanding the pessimism of doomsayers who continue to predict the end of the crypto experiment, the principal focus now is on how to reactivate the market. The simple answer is that more countries must make cryptocurrencies legal tender, besides making these coins more utilitarian. Insiders affirm that it is not the use cases of blockchain technologies that power the cryp­tos whichare the key determinants. “It is a utility that matters. How easily you can use your cryptocurrencies for day-to-day transactions, even for buying tea and groceries, will make a big change,” says a Delhi-based MNC executive who has invested exclusively in Ethereum.

It is a long road ahead for a market that is relatively na­scent. The current crisis has proved that there cannot be a zero correlation between crypto and traditional assets, as was claimed earlier. Ian Taylor, executive director of CryptoUK, a trade association, writes in Financial Times that crypto and equity markets come down together in the face of the same macroeconomic headwinds. Essentially, he advocates treating crypto as a core part of fintech and bringing in more regula­tions. And yes, more and more countries are looking to bring in regulations now.

Like elsewhere, there are concerns among crypto investors in India, too, about the security of their investments. So far, we haven’t had the likes of the Bulgarian-German convicted conwoman Ruja Ignatova, the so-called missing cryp­to queen wreaking havoc on the world, but cybercrimes are rampant here too. Ignatova disappeared when her crypto­currency, OneCoin, feted as “Bitcoin kill­er”, was at its peak. She conned billions of investors and landed on the FBI’s 10 most wanted fugitives list.

Mumbai-based Ritesh Bhatia of V4web Cybersecurity tells Open, “Com­mon crypto crimes include giveaway scams, hacking of social media accounts and then posting of unrealistic messages of profits on these hacked accounts, crypto-jacking [mining], rug pull, tech support scams, Ponzi schemes, romance scams, and so on.” He goes on to narrate the story of a victim. “A lady who lost ₹ 46,000 by investing in crypto on a particular website approached me recently. The details of this website were posted on her friend’s Instagram account which had been hacked, and the victim did not realise it. Another thing is that people are getting messages on WhatsApp from strangers who pretend to know them. They then build friendships and gradually convince them to invest in crypto.”

Here, Bhatia offers tips to potential crypto investors: “Never share your wallet’s private keys and store them in a hard wallet. Invest only in known currencies. If the returns are too good to be true, it’s most likely a scam, and do not get influenced by social media influencers who are promoting any particular crypto—do your own research.”

Indeed, that’s a slogan that ought to ring in the minds of all crypto investors. The other oft-doled-out piece of advice is to invest in crypto only as much as you can afford to lose.

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