Government, RBI caution on cryptocurrencies has served India well
In the last few months we have seen a collapse in the world of cryptocurrencies. In May, the Luna Terra stablecoin crashed, and in November we saw a shocking meltdown of FTX exchange, which was a crypto exchange. If we add the continuous volatility in the prices of other cryptocurrencies, the crisis circle is complete.
Mark Twain allegedly said that history may not repeat itself, but it rhymes. These words come true time and again in the world of money and finance. Something new comes in money and finance which gives hope of continuous growth and prosperity. People rush towards this new craze, and the price surges due to the law of demand and supply. Overtime, people realise their follies, and the mania becomes a panic, leading to a crash. These events reoccur so many times that Charles Kindleberger, an economic historian, even wrote a classic named ‘Manias, Panics and Crashes’, which has many tales of similar rises and declines. We see crashes not just across assets such as equity and housing, but also across locations from ‘Tokyo to Bangkok to New York’ as discussed in the book.
Behind all these manias and crashes lies the core human belief that humans can create money or ways of earning money from thin air. US economist John Kenneth Galbraith in his book, ‘Money, Whence It Came, Where It Went’, explained this human folly beautifully:
“Men possessed of money, like men earlier favored by noble birth and great title, have infallibly imagined that the awe and admiration that money inspires were really owing to their own wisdom or personality. The contrast between their view of themselves, as so enhanced, and the frequently ridiculous or depraved reality has ever been a source of wonder and rich amusement.”
The cryptocurrency
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