Cryptocurrency markets around the world have been hit with billions of dollars being wiped out, taking the total market value of cryptocurrencies below $ 1 trillion in just one year from $ 3 trillion in 2021. Although no novice to high volatility, cryptocurrency enthusiasts are now looking unparalleled, especially in India where the government has been more than just critical of the asset class and has fired the tax bullet to wean demand. The triangular sword with high inflation, strict taxes and regulatory scanners is tearing into the cryptocurrency rally in India, where cryptocurrency companies are facing their biggest test to date.
Figures tell of a cruel fall for the world’s largest cryptocurrency, Bitcoin, which plunged more than 45% in less than three months and traded around $ 20,000 (INR 16 lakh) as of July 5, 2022. Ethereum has seen a downward spiral of almost 60% lower in value compared to the value of $ 2,700 (INR 2 lakh) in April 2022. Other popular cryptocurrencies in India, such as Binance Coin, XRP, Solana have seen a decline of up to 80% to 100% compared to their values in April 2022.
Global factors are key catalysts for cryptocurrency
An increase in interest rates as the US Federal Reserve began with quantitative easing has left the international stock markets stunned. The US stock market has reached its lowest level since the 1970s, while the Fed has already raised interest rates twice in 2022. Inflation in the UK also rose to 9.1% this year to May 2022 – the highest level since 1982.
A look at inflation worldwide shows a sharp increase:
The geopolitical tensions due to the conflict war between Russia and Ukraine and the closure policy for Covid-19 in China have put enormous pressure on the supply side which in turn has disrupted total commodity production worldwide and resulted in increased food prices and production costs causing high inflation in some countries .
The Reserve Bank of India (RBI) has said it sees uncertainty over the stifling inflationary impact the Russia-Ukraine conflict has had on global commodity prices and international crude oil prices which remained high and volatile, including inflation-sensitive commodity prices affected by global shortages and thus increasing the cost of daily consumer goods.
Although the inflation rate in India has marginally decreased to 7.04% from May 2022 from an eight-year high of 7.79% last month, it has remained above the RBI target range of 2% to 6% for the fifth month in a row. Prices of food, oil and fats and spices have also risen significantly.
The overall risk scenario forces investors to leave their money from the stock markets, and in the case of emerging markets such as India, foreign institutional investors (FIIs) have sold shares worth almost $ 22 billion from January 2022 to May 2022, marking an all-time record. outflow.
Retail investors are expanding this round of sales and looking for a way out of more risky assets such as cryptocurrencies, witnessing the chaos in the cryptocurrency world.
Tax cuts in India add further pressure
RBI has maintained its position on digital assets and repeatedly issued warnings against trading in cryptocurrencies. According to the RBI, cryptocurrencies are specifically designed to circumvent the regulated financial system, and this should be reason enough to treat them with caution.
In a circular dated February 2022, the RBI noted that they have seen that “cryptocurrencies cannot be defined as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; they are related to Ponzi schemes, and may even “These should be reason enough to keep them away from the formal financial system.”
RBI has continued to state that cryptocurrencies undermine financial integrity, especially the KYC regime and AML / CFT regulations, and at least potentially facilitate antisocial activities. “
Immediately after the circular, the Indian government announced a tax on income from the sale and transfer of virtual digital assets (VDAs) transactions of more than INR 10,000, including cryptocurrencies. This means that if an Indian sells digital currencies such as Bitcoin or Ethereum, they will receive one percent less value of the sale price. On top of this, a flat tax rate of 30% on income from all VDAs, including cryptocurrencies, has put gasoline on fire.
Under the new tax regime, the authorities imposed a withholding tax of 1% (TDS) on cryptocurrencies that came into force on July 1, 2022, shortly after cryptocurrency exchanges in India including WazirX, CoinDCX and ZebPay saw a sharp decline in their position trading and intraday volumes. The crypto-research company Crebaco Global reported a massive drop of 60% to 80% in daily trading volume within just four to five days after the introduction of the new tax regime.
This has brought the industry together in its view of the VDA fee, and it believes that the fee will act as a deterrent to further investments. Other measures such as limiting the use of the popular Unified Payments Interface (UPI) to help with fast digital transactions for crypto trading have ticked for global players including Coinbase which announced an exit from India shortly after starting its business in the country.
Cryptocurrency companies in India are also reportedly under the regulatory scanner to look for financial irregularities. In an article published in an Indian newspaper, The Economic Times, sources said that top executives of companies including WazirX, CoinSwitch Kuber, CoinDCX have been sued for alleged violations of the Foreign Exchange Management Act (FEMA) for cryptocurrency deals worth millions of rupees.
Crypto Companies Holding Fort
Despite major challenges, India-focused cryptocurrency companies are not yet sounding the alarm and are confident of building a growth-driven environment.
India’s major crypto exchanges WazirX and ZebPay this week published a survey of traders to highlight how further reforms can advance the industry and its participants.
Their survey of traders showed that 27% of the 9,500 participants in the survey had already sold 50% of their portfolio before 1 April 2022, and 57% of them sold less than 10% as soon as the tax was announced. 83% of traders thought that the recent tax deduction had deterred their trading frequency.
In connection with the findings of the survey, the vice president of WazirX, Rajagopal Menon, said “the tax regime must be balanced to encourage participation and revive trade volumes.” Avinash Shekhar, CEO of ZebPay, called on the Indian government to “reconsider its stance on a more supportive regulatory environment that will ultimately contribute to overall economic progress.”
However, some experts believe that the tax on virtual digital assets could actually cause investors to move their crypto investments to foreign exchanges or trade offline instead of stopping trading altogether.
Ayesha Bharucha, CEO of Bharucha & Partners, expects savvy investors to take advantage of the crash with a view to ordering profits in the future. “Crashes and booms are common in volatile assets, and cryptocurrency is no exception … But unlike a stock market crash, investor sentiment is likely to be dampened by the regulatory uncertainty surrounding cryptocurrencies,” Bharucha said.
CoinDCX CEO Mridul Gupta also says that the crypto market is unpredictable just like any other market. He finds no surprise in the crypto-decline as all asset classes are in decline.
“Right now the crypto market is going through a bear phase. Bitcoin may be down 75% from the top in 2021, but it is still 10 times higher than it was five years ago. Stock prices are driven by their fundamentals, in the same way all coins have a certain intrinsic value, based on their use, says Gupta.
Others such as Ashish Singhal, co-founder and CEO of CoinSwitch, suspected that trading may have moved to the gray crypto market and compliance set by crypto companies to report TDS may not apply to the gray market or to transactions taking place on exchanges outside Indian regulations.
“Fear is high. TDS can prevent users from trading within KYC-compliant platforms,” says Singhal as he fights for a lower TDS rate, which he believes can motivate users to stay within the KYC-compliant platforms and keep capital within the Indian regulatory area. .
Regardless of which direction the Indian crypto markets will swing next time, if one follows the mantra – markets are unpredictable – it will be safe to say that although time is a key determination, these are difficult days and the worst may not be over yet for the Indian crypto market.
