Bitcoin vs Rupee: Which is real money?

Since the start of BitCoin Wiser, a lot of subscribers have messaged me for how to invest in Bitcoin, what’s the future and when should I buy it? While I wish I could do crystal ball gazing for them but there is simply no benchmark for it (in case you want to know how to decide, read my previous article on how to tread with caution when it comes to investing in cryptocurrencies). However before I address the aforementioned questions I think the first step to know anything about Bitcoin is – how is it different from a rupee, or a dollar, or any other fiat currency which we are habituated to since birth. Let’s start by understanding what the rupee is?

What is Rupee? Rupee is the monetary unit of India (Rupee is also the name of the currencies across India, Indonesia, Maldives, Mauritius, Nepal, Pakistan, Seychelles, Sri Lanka, and a few other ones but here we talk in context of the Indian rupee). Before I indulge into why Rupee is one of the worst forms of storing value as a consumer, let me put a context of what real money should do and what we actually receive by our governments (titled Fake Fiat Money):

Before I arrive at each points of comparison listed in the above table, let’s dig into the chronology of Indian rupee exchange rate policies since independence:

  • 1947: India became part of IMF and the rupee is tied to a pound(1 Re=1 Pound) .
  • 1949: Pound devalued, rupee maintained par with pound.
  • 1966: Rupee is devalued from 1$= Rs4.76 to 1 $ = Rs7.50 .
  • August 1971: Rupee pegged to dollar/gold , international financial crisis.
  • 18 December 1971: Dollar is devalued
  • 20 December 1971: Rupee pegged to pound again.
  • 1975: India links to basket currencies of major trading partners.
  • 1991: Rupee devalued by 18 – 19 %. 1$= 26 Rs
  • 1992: Dual exchange rate system, Liberalized exchange rate management system (LERMS).
  • 1993: unified exchange rate 1$ = Rs 31.40.
  • 1994: Rupee made freely convertible to trading but not for exchange purposes.
  • 1999: 1$ = 42.60 Rs
  • 2000-2010: dollar traded between Rs 40 – 50 .
  • 2013 : Devalued to 1$= 65 Rs

The major devaluation of Indian currency actually came about in 1966 and 1991.

The major reasons of 1966 crises were :

  1. Balance of payment Deficit : Ever since independence India has striven to keep a positive balanced of trade but never achieved its goal . The trade deficit kept on bludgeoning till 1966.
  2. Fixed Exchange rate system: When exchange rate is fixed and country experiences higher inflation than other partner countries, those countries’ goods become more expensive than other countries’ goods as a result imports increase which further increases inflation and account deficit.
  3. Budget deficit : India also faced a budget deficit which led to huge dependence on international aid. Due to the increasing inability to repay the debts the aid was denied.
  4. War with Pakistan: The pressure on already increasing budget deficit worsened when defense budget shot up in 1966. Also US and other countries that supported Pakistan denied aid to India.

The main reasons for 1991 devaluation were:

  1. Necessary to avert crises: In 1966 there was extreme foreign pressure that forced India to change its economic policy but in1991 the government of India opted to carry on with the much awaited reforms of liberalization (thanks to Dr Manmohan Singh and the then government) as India was left with exchange reserves to fund imports of just three more weeks!!
  2. Gulf War : Though the value of exports increased in the later half of 1980’s but it was not enough to keep pace with the increasing imports.The price of imports mainly shot  up due to increase in oil prices which was attributed to the gulf war.

Present scenario in 2017:

  • India is sitting atop a financial unstable environment among all developing nations (source: Mint)

  • Recently, foreign investors have cut India holding by over Rs12,000 crore, all thanks to POTUS

  • India’s net employment outlook is touching new lows

Now that we have followed through the actual worth of rupees, one can only imagine how market forces impact the rupee you earn or the rupee you hold in your bank (just to be clear the money that you keep in your bank, the bank earns on those keepings and not you). Let’s define what Rupee (money) actually is:

  1. Rupee is one of the worst mediums of exchange: The buying power of rupee is controlled by the USD. In economics, the purchasing power of a currency is equated to the basket of goods one can acquire in exchange for that currency. Sadly, with rising petrol prices, increasing taxation of goods and services, political arena of dissent and gagging of free speech, inability to store money in cash due to demonetisation and strong capital controls on sending and receiving cash via banks due to extreme scrutinization, and now Aadhar linked to PAN Card and Bank accounts : the value of rupee is at its worst exchange health. What is the worth of Rs 100 now? 1/2kg of toor daal? A litre of bottled water? A little more than a litre of petrol? Convenience fee which you spend to book your movie tickets online? We all know how inconvenient the truth is now.
  2. A promise to pay a morally and fiscally bankrupt government in the making: Just to make things clear if India had 100 rupees in its pocket, 67% of it is debt (currently as of March 2017). Yes, you read that right. 67 rupees is to be given back to the lenders. The good news is that in the year 2008 our debt was 74.5 rupees out of 100 we had in our pocket. And wealth of the nation is the wealth of the people of its nation. So now you know why the rupee is a promissory note and does not actually holds an inherent value of its own.
  3. A wealth confiscation device: no dearth of evidence here post demonetisation that occurred in 2016 in India.
  4. Redeemable in nothing: In other words, you can’t redeem it for ‘lawful money’. A rupee bill is not lawful money, but a “legal tender”. It’s a promissory note which you use to exchange value for products and services. What’s the erstwhile Rs500 and Rs1000 today? Just a piece of paper. Oh correction, you’re on your way to jail now if you’re caught having any of those.
  5. Printed endlessly: 86% of currency of the nation was demonetised on 8th November 2016. We are still in the era of remonetisation. If rumors are to be believed, we are so short strapped of denominations that INR200 notes are coming soon in a couple of months. Printing new money is not only an additional cost to the nation but is a national debt too.

Rupee hence is the birthchild of inflation.

Now let’s get to know what Bitcoin is? Bitcoin is digital money, but it’s so much more than that. Saying bitcoin is digital money is like saying the internet is a fancy telephone. It’s like saying that the internet is all about email. Money is just the first application. Bitcoin is a technology, it is a currency, and it is an international network of payments and exchange that is completely decentralized. It doesn’t rely on banks (I am sure this must be a shocker for many). It doesn’t rely on governments (doesn’t sound exciting right).

Bitcoin isn’t created “out of thin air” as Rupee is. There will only ever be a finite amount of bitcoin, which controls it’s value. Once all bitcoin is mined there will be 21 million in existence, that’s it. No one can ever create more (as is done every year with fiat currency). When fiat currency is created by central banks they reduce the value of the existing currency in the market, which results in inflation of prices. This is why the price of every day things (that haven’t changed in 50 years, like groceries or utilities) have gone up in price over time. There’s a lot of other differences, but it’s better for you to read up on them in my following articles.

Why should you invest in Bitcoins? All sorts of reasons ranging from pure curiosity to the love of new technology to investment diversification. Bitcoin is used as currency to buy things and as a store of value, i.e., a place to house your savings with hopes of value appreciation or hedging against the depreciation of stocks or savings held in fiat currency. One example often used is that of Cyprus. Are you familiar with the country of Cyprus and it’s severe monetary crisis from a few years back? It was so bad that the Cyprus government controlled how much money their citizens could take out of their banks. Think about that. That government telling you that you can’t access your very own money! How scary is that? Bitcoin offers an alternative. No government (currently) can seize control of your bitcoin, this represents safety and security.

Summarizing :

  • Bitcoins are an electronic form of money, a digital currency.  Rupees are a physical form of money made of paper, and now forced to keep it in digital state of course in banks. (Please do not confuse digital currency and digital money, they are entirely different).
  • Bitcoins are limited in quantity.  The Reserve Bank of India can create as many Rupees as they want.
  • You can create a backup of your access to bitcoins.  You can’t create a backup of your Rupees.
  • You can secure your access to your bitcoins with a password and cryptography.  You can’t encrypt your Rupees.
  • It is much easier to store a large amount of bitcoins.  It can be difficult to securely store a large amount of Rupees.
  • You can send bitcoins over the internet.  It is difficult and/or expensive to send money over significant distances.

So tell me what do you think is real money for you now?

(Acknowledgements: Livemint.com, Quartz.com, Trading Economics.com, BitcoinTalk.org, a few books from MBA on Economic History of India, IMF, etc.)

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