[The Outline By Inc42 Plus] Crypto Enters The Indian Household 

Dear Reader,

Until two months ago, 17-year-old Krish Bhatt had not heard much about cryptocurrencies. That is when the teenager from suburban Mumbai came across a podcast by social media influencer Ranveer Allahabadia. Hosted on the YouTube channel BeerBiceps, the show claimed that it could unlock the secrets of making millions from bitcoin.

“It piqued my interest along with Elon Musk’s tweets,” recalls Bhatt. So, he borrowed INR 1,000 from his mother to invest in crypto and returned her INR 1,250 a few weeks later. His father was impressed and wanted to give him a corpus of INR 20,000 to invest, but the teenager said INR 7,000 should be enough to test the waters. Since then, the Bhatt family has managed to amp up its crypto holdings to INR 3 Lakh.

“My father regularly calls me up from his office to enquire about prices, and my mother has stopped playing games on her phone in her free time to focus on trading,” the crypto enthusiast says.

The Bhatt family is not the only one to be convinced by a teenager to invest in crypto. Similar stories abound on social media platforms as crypto prices shot through the roof. The crypto market has been surging amid the pandemic — globally, the crypto market cap has risen 10x, from more than $200 Bn in March 2020 to $2 Tn in mid-May this year. But there is always an underlying fear that these digital assets are tied to sentiment, and no real value is associated with cryptos.

In spite of certain apprehensions regarding its volatility, the effect of the crypto boom over the years is quite apparent, given the rise in transaction volumes across crypto exchanges, globally and in India. For instance, WazirX claims to have achieved 10x growth in just five months, the platform recorded $5.4 Bn in transaction value in April this year, up from $500 Mn in December 2020.

Crypto exchanges across the country are also trying their best to onboard new investors keen to leverage this surge in interest. Take, for example, this year’s IPL season (cut short by the pandemic’s second wave) that saw television ads trying to nudge youngsters to get their parents involved in crypto investment.

Of course, the recent crash in the crypto market has dampened the spirits of many new investors who came in to make a quick buck, but crypto companies are not too worried. “I don’t see it as a market crash. It was more of a market correction, and several technical analysts had predicted that it was due to happen,” says Vikram Rangala, chief operating officer of Ahmedabad-based crypto exchange Zebpay.

Crypto exchanges also feel that early Indian users, who entered this space several years ago, have gotten used to the ups and downs of the market. “There is a difference between the maturity level of an average crypto investor from India three years ago and what we see today. Despite the fall in prices, investors are not exiting,” says Monark Modi, founder and CEO of UAE-based crypto exchange Bitex.

“They are waiting for the valuations to go up again. Although the volume of trading dipped in the immediate aftermath of the crash, it has more or less stabilised now,” he adds.

Demographic Mix Calls For Investor Education

Interestingly, crypto is no longer the preserve of the young out to make a quick buck or the techies who believe that blockchain is the only answer to the world’s evils. Bengaluru-based crypto exchange CoinSwitch Kuber, valued at $500 Mn, told Inc42 that 9.35% of the 4.2 Mn+ active users on its platform are aged above 45. Similarly, rival WazirX pegs this demographic at more than 20% of its 3 Mn+ user base.

Not surprisingly, wealth advisory companies are getting many requests from customers seeking to invest a part of their portfolios in crypto assets. Subramanya SV, the founder of Bengaluru-based wealthtech startup Fisdom, says, “People ask if we can invest in mutual funds through your platform, then why not bitcoin? We have told them that we are still evaluating the space. Fisdom has stayed away from crypto because all our investment products are regulated by SEBI, IRDAI and the likes. So, it may not be a good idea to enter an unregulated market.”

The reason why regulators control almost all investment segments, be it securities or insurance, is investor protection. But in the absence of any regulatory structure in the crypto space, it falls to crypto companies to educate their investors about this asset class.

“A huge chunk of our recent funding will be spent on providing our investors with the right information regarding cryptocurrencies. This will debunk the common myths surrounding crypto and explain how people can safely invest in this new asset class,” says Sharan Nair, the chief business officer of CoinSwitch Kuber. The company has recently launched multiple initiatives, including video campaigns, blog posts and vernacular content, to educate users about crypto investing and blockchain. 

No ‘Nudge’ To Restrict Meme Coins

Crypto detractors feel that most of the awareness-building initiatives by exchanges focus on promotional content instead of alerting users about the loopholes. For instance, most crypto trading platforms have not cautioned investors about betting on ‘meme’ or ‘joke’ cryptos like dogecoin. 

Unlike bitcoins, some of these cost less than a dollar, and their supply is not limited. Therefore, a crypto ‘whale’ (investors with disproportionately high holdings in a particular coin) can easily manipulate their prices, leaving new investors out in the cold. 

This is not a mere assumption. Many crypto investors are now dominating the dogecoin space, lured by their price advantage and egged on by the likes of Tesla founder Elon Musk, called the ‘dogefather’ because of his consistent support. Interestingly, the value of dogecoin dropped sharply on May 9 after the Tesla chief called the whole exercise a ‘hustle’ during a comedy TV show.

Despite such rise and fall, these low-priced cryptos are analogous to the penny stocks (small company’s stock typically below $5 per share and traded over the counter) in the capital market and remain attractive as their value can double or treble in no time. But this also means that their prices can come to nought and never recover again. 

Such volatile assets are also found in the stock market. That is why online stock broker Zerodha introduced a feature called Nudge last year to dissuade new investors from betting on penny stocks.

But the crypto platforms are yet to create such filters to safeguard their users’ interests. Shetty of WazirX earlier told Inc42, “We should look at dogecoin from a startup perspective. It may or may not become successful, but we can’t pass a judgement beforehand. What we can do is educate our users so that they can make the right decisions.” 

Treading On A Thin Line Between Scam And Innovation

Crypto exchanges need to get their act together not only in terms of helping investors preserve their wealth. They have a more critical reason to tread with caution.

“I have been routing my money to the US to make investments there and using crypto wallets linked to the exchanges abroad for this purpose. It is possible to do it so easily as there is no regulation in India yet, unlike the US or Germany,” says a Bengaluru-based crypto trader who does not want to be identified. 

This kind of unfettered access sets the stage for money laundering through crypto, and such incidents are already happening in India. The Enforcement Directorate arrested a Gujarati businessman last year for siphoning INR 1,100 Cr via crypto transactions. The bigger problem in such scams is not that money is going out of the country illegally but that the cash is often coming from gullible crypto investors hailing from small towns. 

“Most of the crypto-related frauds over the past year were either reported against those who collected money (from investors) to put in crypto and then disappeared or people who promised high regular returns similar to multilevel marketing schemes and then ran away with the cash,” says M.D. Sharath, superintendent of police, Bengaluru.

These can be considered minor incidents in the bigger scheme of things. What is more worrying for new investors who trade through well-known crypto wallets is the market’s volatility. A tweet by a figure like Elon Musk or the shuttering of crypto mines in a single country can wreak havoc.

That is not all. “Both these factors contributed to the fall in crypto prices in the past couple of weeks. But this, too, might be a game of smoke and mirrors. Large banks in the US are now convinced of people’s appetite for crypto, and it is not difficult to believe that one of them engineered the crash to shore up their holdings,” says Rishabh Bhargava, a crypto analyst and trader from Mumbai. 

He points out that the crash led to a complete wipeout of crypto assets of 8 Lakh people around the world because those investors were over-leveraged. It means crypto exchanges give loans up to 100 times the size of an account’s actual holdings to invest in crypto. As a result, even if the value of a cryptocurrency falls by just 1%, an investor who has put in $100 will see his account value hit zero. 

Interestingly, this is not a problem unique to crypto trading. Even the capital markets dealing in stocks or commodity derivatives witness these issues. But there is a key difference here. In the first case, SEBI and other government authorities step in from time to time and take corrective actions. However, crypto investors and startups are not so fortunate. The government has played Jekyll and Hyde regarding crypto since the Union Budget of 2018. 

Until the air is cleared on the regulatory front, it will be the responsibility of the startups in the crypto space to self-regulate and call out the not-so-ethical players. They have to understand that the average Indian does not have the financial acumen or experience to invest even in simple company shares. That is why one is prone to missteps in understanding crypto. Worse still, continuous losses mean investors may not want to return to this space, losing out on the opportunity to gain from a new asset class that has caught the world’s attention.

American VCs Court India’s Crypto Startups

The Indian crypto space experienced a dry spell in terms of US funding from 2018 to 2020, but things are now beginning to look up.

American VC Tim Draper, who has been a long-term believer in crypto and India’s potential in this digital assets space, was the first American investor to bet on a Indian crypto startup after the SC lifted a ban on crypto-related transactions facilitated by banks last year. His VC firm led a $5 Mn round in the Tumakuru-based crypto exchange Unocoin in October 2020.

Since then, CoinSwitch Kuber raised $40 Mn in two funding rounds from Ribbit Capital and Tiger Global in January and April. 

While investments in the Indian crypto space have been limited to exchanges, investors are now looking for innovative crypto projects. Last week, tech billionaire Mark Cuban invested an undisclosed amount in Polygon, a Mumbai-based cryptocurrency platform that aims to provide faster and cheaper transactions on the Ethereum blockchain. Polygon’s native token Matic has crossed a market cap of over $10 Bn and is among the top 20 crypto coins globally.

These developments call for a quick rethink on the part of the Indian government. Its policy flip-flop in the cryptocurrency sector will do more harm than good as investors will be scammed, startups will find it difficult to raise funds, and the country may lose out on a huge prospect of wealth creation. In fact, Infosys chairman and technology evangelist Nandan Nilekani tweeted that cryptocurrencies can propel India towards a $5 Tn economy.

Most importantly, the powers-that-be need to understand that crypto is not an asset that can be erased by issuing a diktat. No ban can stop it from festering in the nooks and crannies of the internet. If the government takes timely measures and regulates the technology, all stakeholders can benefit from crypto in the long run. Otherwise, it will be a lost opportunity for the country, and the government will be battling too many illegal crypto businesses and scams in the times to come.

Until next time,

Deepsekhar