crypto: Triple trouble for crypto: Liquidity crunch, bear market, new tax rules


Consider this: Between January and March of this year, the average daily turnover on three of the leading crypto exchanges in India — WazirX, CoinDCX and Bitbns — was $110 million, data from CryptoWire showed.

TNN(This story originally appeared in on Jul 07, 2022)Mumbai: It’s a triad of negative factors, and not only the new rules relating to crypto currencies that kicked in on July 1, that’s giving jitters to crypto investors and driving some out of the market. Veterans of the trading space (stocks, bonds, commodities, etc), however, feel that the current phase, popularly being referred to as the ‘crypto winter’, is a passing one in the evolutionary process of cryptocurrencies and the prices of these new age assets would soon stabilise.

Consider this: Between January and March of this year, the average daily turnover on three of the leading crypto exchanges in India — WazirX, CoinDCX and Bitbns — was $110 million, data from CryptoWire showed. In the June quarter, after the initial round of tax rules relating to crypto trading kicked in on April 1, this number less than halved to $54 million. And now after the latest round of rules kicked in on July 1, one of which requires every buyer to pay a 1% TDS on each trade, this number again fell sharply to about $23.5 million.

There are three reasons for this drastic drop in turnover on Indian crypto exchanges and can’t be attributed to the change in tax laws alone, CryptoWire MD & CEO Joseph Massey said.
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Most central banks are on a monetary tightening spree, which is sucking out liquidity from the system. Since the pandemic struck in early 2020, central banks were pumping in unprecedented amounts of money to help the economy tide over the sharp slowdown due to lockdowns. That’s when cryptocurrencies caught the fancy of investors globally, including in India, but that tide is now turning. This, in turn, has set in a bear market for crypto currencies. The changes in tax laws kicked in just when the crypto market was entering a bear phase.

With these three factors coming to impact the crypto industry, it’s difficult to see the effect of the new taxes separately, Massey said. “Since investors here survived for long without paying taxes, so a new tax is hurting them. Historically we have seen that taxes make an industry more organised but with a lag. It’s a period of readjustment for the crypto industry.”

Ashish Singhal, co-founder & CEO of crypto exchange CoinSwitch, too feels that it’s a period of readjustment for the industry. “The 1% TDS has certainly had an impact on the trading volume across platforms in India. In India, KYC-compliant exchanges and platforms have established a framework for complying with the TDS.”

Singhal also spoke about another possibility: Trades shifting from organised crypto exchanges that comply with rules to unregulated ones, also called the ‘crypto grey market’.

The negative factors currently bothering the crypto space in India, in the long run, could also have a positive impact on the industry.

“(The) silver lining in this crypto fall is that there are no government bailouts of the public money,” said Khaleelulla Baig, co-founder & CEO of crypto investment startup Koinbasket. He was referring to some of the historic bailouts like during the financial crisis of 2008. “The crypto community is hustling on its own and moving towards a self-regulatory mechanism, which will be far better than the passive government regulations, that generally wait to find solutions after a catastrophic event occurs,” he said.

Baig believes all those crypto projects that are failing were mostly built around a weak collateral system, showed stretched-out leveraged (synthetic) products that offered unsustainably high yields.

“We may continue to see some more crypto projects built around leverage going bust and further tightening of regulations in the near future. However, if we look at the long-term scenario, I see the total market cap of crypto market crossing $10 trillion within the next five 5 years,” Baig said. Currently, cryptocurrencies have a combined market capitalisation of about $900 billion as compared to over $2 trillion at the start of the year, data from CoinMarketCap showed.

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Updated: 07/07/2022 — 18:00