During the monetary policy press conference on Thursday, Reserve Bank of India (RBI) Governor Shaktikanta Das voiced his concern over private cryptocurrencies. “Investors should keep in mind that they are investing at their own risk. They should also keep in mind that the cryptocurrency has no underlying, not even a tulip,” he said. he stated, referring to the Dutch tulip bulb market bubble of the 17th century. .
Das also said the central bank does not want to rush into introducing a central bank digital currency (CBDC) and is carefully considering all aspects. Finance Minister Nirmala Sitharaman announced in the Union Budget 2022-23 that RBI will launch its own digital currency this year.
What is the underlying value?
In simple terms, underlying means something valuable or investments whose value can decide the value of another asset. For example, the Indian rupee is backed by government reserves of gold, precious metals. forex etc In this case, the metals are the underlying of the rupee. Likewise, the value of the US dollar, the world’s reserve currency, is tied to gold.
This is different from intrinsic value, which describes the perceived or actual value of an asset. Intrinsic value is prescribed to an asset by people. Why do people think gold is valuable? This is because gold has unique properties that are irreplaceable and cannot be copied by any other metal. Based on intrinsic properties, people have assigned a value to gold.
make cryptocurrencydo they have an underlying value?
Most cryptocurrencies, which run on blockchains, have no underlying asset that can help decide their valuation. However, some experts believe that some of them, which have use cases, have intrinsic value.
“Bitcoin is a payment and payment network like VISA, Bitcoin is truly decentralized, no individual or entity governs it, it uses a proof-of-work mechanism to reach consensus, the blockchain is immutable, which means that the data cannot be modified. Also, it is censorship-resistant, which means it cannot be stopped,” says Kashif Raza, founder of Bitinning, an online platform focused on crypto awareness. people who value digital tokens are willing to pay a price to acquire them, he added.
Experts also argue for the usefulness of digital tokens. “Cryptocurrencies certainly have multiple use cases that make them valuable. For example, using decentralized finance, or DeFi, one could access a loan in a fraction of the time of traditional methods. And at a fraction of the price too! This is just one of many use cases for cryptocurrencies,” says Edul Patel, CEO and co-founder of Mudrex, an algorithm-based global crypto investment platform.
Manish Kumar, co-founder of two blockchain-based financial market platforms GREX and RealX, claims that crypto tokens were issued for various reasons. “Some tokens represent real-world assets; others represent a stream of income (so they represent financial assets).”
However, he warns of a third category of crypto tokens that do not represent real-world assets or any revenue streams. “This category of tokens is the most speculative and investors can lose their entire primary investment,” he says.
The government has warned of the risks associated with cryptocurrencies. You would do well to weigh the pros and cons before jumping in as they are unregulated.