Recently the Indian finance ministry criticized Bitcoin and the rest of the digital currencies in the market for their lack of intrinsic value.
The Indian finance ministry stated:
"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.”
Billionaire investor Mark Cuban, a former Bitcoin critic turned holder, previously emphasized that the concept of intrinsic value simply does not exist. Even fiat currencies such as the US dollar and Indian rupee do not have intrinsic value, given that their valuations are decided by two major factors: the market’s demand and the manipulation of supply by central authorities. Cuban said:
“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.”
Hence, the Indian finance ministry’s argument in that Bitcoin and other cryptocurrencies are Ponzi scheme-like because they do not have assets backing their value is flawed, as the same argument can be applied to fiat currencies.
More importantly, analysts have questioned such irrational statement from the Indian finance ministry considering that the country has just recovered from a disastrous financial turmoil triggered by the country’s Prime Minister Narendra Modi controversial decision to crackdown on criminals by eliminating 500 and 1,000 banknotes.
Sunny Ray, the co-founder and president of Unocoin, India’s second largest Bitcoin exchange, wrote:
A sudden and unforeseen crackdown on the national currency led to months-long confusion and financial instability, leading to a period in which fatalities were recorded as people died out of exhaustion waiting in lines to withdraw cash. Because the supply of banknotes was cut so significantly in a short period of time, at one point, more than 90 percent of the country’s ATMs did not have any cash to dispense.
In November 2016, LA Times reported that the unprecedented ban on large bills and banknote denominations backfired on the poor, and the vast majority of the population struggled to obtain enough cash to finance day-to-day operations. Ramesh Sisodia, a local merchant, told LA Times:
"People don't have money to buy bread — why would they stroll out for a coffee? Those who can afford it would prefer to pay 10 times more for a coffee at Barista — a Starbucks-like chain — because they can pay by card.”
Highly regarded Indian Entrepreneur Gaurav Munjal also revealed that a large portion of the population had relied on the barter system to exchange goods because cash was no longer available for the poor and middle class.
Day 2 in Bombay with no cash - no ATMs working. Paid the autowalla 5kgs of rice from a store. Long live barter system. pic.twitter.com/uWtejp60AM— Gaurav Munjal (@gauravmunjal) November 13, 2016
The Indian government was condemned for its statement on Bitcoin and the cryptocurrency market because it has irrationally attacked a decentralized currency system and stores of value that are providing financial stability and independence to their users, unlike the government-owned and issued fiat money.
It also falsely claimed that the price of Bitcoin and other cryptocurrencies are based on pure speculation, failing to acknowledge the fact that crypto assets of the Bitcoin network, Ripple, Ethereum, and others are being used to send and receive transactions, store wealth, process large payments, run decentralized applications and settle private transactions.
"The price of Bitcoin and other virtual currencies, therefore, is entirely a matter of mere speculation resulting in spurt and volatility in their prices,” the finance ministry added.
Why is Indian government harsh on Bitcoin?
As a decentralized and distributed currency system which exists on a peer-to-peer protocol, Bitcoin eliminates the necessity of intermediaries and third-party service providers like the Indian central bank. It could render the existence of central authorities and their control over the country’s monetary system useless.
But, over the upcoming years, it would become more difficult for certain governments to remain indifferent or negative toward the cryptocurrency market because major markets like the US, Japan, and South Korea have already embraced Bitcoin as a legitimate currency and asset class.