Prominent members of the Indian government seem to be confused on the nature of cryptocurrencies and the value that they bring to the market. They call it a Ponzi scheme. It appears that these members are a little late to the game as the pioneer cryptocurrency has already gone through this situation in the past and has come out unscathed.
Several others have sounded the alarm on what they perceive to be as the Ponzi nature of Bitcoin, but this is because they have not taken the time to understand the concept or read up on it in any manner.
Indian ministers think that the cryptocurrency market might be a massive Ponzi Scheme
Several regulators in the Indian government have commented on the cryptocurrency market, sounding their alarm on the market stating that there might be no real value the digital currencies and that one should stay far away from it.
The Ministry of Finance in the country states:
“There is a real and heightened risk of investment bubble of the type seen in Ponzi schemes which can result in sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money. Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes.”
No Rationale for this sort of thinking
The fundamental problem with calling these new currencies a Ponzi scheme is that it doesn’t play out to be so in reality. The basis of the argument typically rests on the ground of having inherent value. The problem is that even with traditional currencies like the Dollar, Rupees, or Francs, there is no intrinsic value.
There is only value in the currencies because that is what the government says is legal tender and all the citizens agree that it is so and live in that manner. The currencies go through some fluctuations in their value due to a variety of factors related to the government, management of finances and politics. Aspects that affect exchange rates for currencies that are tied to nations are those such as differentials in inflation, differentials in interest rates, current- account deficits, public debt, terms of trade, overall political stability, and economic performance.
“It is interesting because there are a lot of assets which their value is just based on supply and demand. Most stocks, there is no intrinsic value because you have no true ownership rights and no voting rights. You just have the ability to buy and sell those stocks. Bitcoin is the same thing. Its value is based on supply demand. I have bought some through an ETN based on a Swedish exchange.”
With stocks, the company sets the supply; the demand fluctuates on a day to day basis depending on the different actions that the company takes and on the news that comes out about the company’s sales and other vital indicators of viability.
With cryptocurrencies, the value is coming from similar metrics supply and demand and news.
Always do the work
The Ministry of Finance is entirely correct in their statements when they note that the investors need to be cautious. All investors in every market should be careful when approaching any investments. Investors that are holding for the long term must conduct their due diligence on the company and must have a reasonable understanding of why it is a good investment. If investors do not do so, they are merely speculating, which is not a problem in and of itself, as long as they are willing to lose that money.