Is the Indian govt worried about Bitcoin collapsing Indian banks?
Here’s the explanation in simple English !
Before looking at Bitcoin, let's look at Housing loans which has a huge impact on banking.
Over 80% of banking loans by volume are housing loans, so a housing market collapse is sure to bring down the banking system to its knees , point no 1
Let's do the math:
A typical house in an Indian metro costs about 1 Crore INR ( 10 Million) and fetches a rent of 25,000 INR per month.
Now, a simple DCF analysis at 10% interest ( * why 10% explained more below) project for 30 years of rental yield( even assuming no taxes ) comes at about 25 Lakh INR ( 2.5 Million )
Now is why this house valued at 1 Crore? Are people crazy for paying EMI for 20 years
This is literally the $10 trillion question ( roughly the size of the Indian housing market ).
Now of course, people are not crazy ( they are lazy though :P ), The reason why the houses are valued at 75% over the fair value is that there is an expectation of INFLATION, i.e people expect prices to go up, coz of inflation, and people expect rents to increase the future, etc.
now, Where is the inflation coming from year on year?
This is the tricky bit and you need to pay attention, inflation primarily only comes from MONEY PRINTING done by govt and the money supply created by banks when they give out loans, So inflation is a direct result of Money printing by GOVT & BANKS .. this point no 2 to remember.
When govt prints say 2% of new money, banks loan this out through fractional reserve lending and create over 10x the new money supply i.e 20%.
So every year more and more money circulates in the economy, the direct result of this INFLATION.
Now, Here’s the weird part
In a limited/ scarce money economy — i.e gold standard, out of every 10 banks that exist 1 bank has to fail every year, why you ask?
When banks lend out money to 100 people for different ventures, not all ventures are successful isn't?
Similarly, when one bank makes a lot of profits, another bank has to make losses, coz in a gold-standard — money is a zero-sum game i.e if someone makes more money ( aka gold ) someone else has to lose it.
However, as you might have noticed, there are no major bank failures in the last 50 years, have you wondered why?
The reason is simple: Govt bails out failed banks, all the time !! There is no exception to this rule.. point not 3
You see banks are institutions of trust! People invest their life savings in banks!
So even a single failure of a bank sends deep distrust of banks and people will start asking all types of questions about their bank's stability and start pulling money out of banks.
If 1 bank out of 10 banks collapsed in a country, people would respond by demanding at least 15–20% or more (this is typically what non-govt-backed money lenders pay you coz it's too risky to lend to them).
As you know govt uses banks as Tax collection agencies i.e banks by law have to report your income to govt. So again, if big banks were allowed to fail, people will simply go back to using cash or demand some huge interest rates of say 20–25%.
So Government too has an incentive to keep banks from failing.
Enter Bitcoin — the thorn in the smooth road of banking
Bitcoin is the biggest craze lately, it has gone up by over 10000% in the last 4 years
You see Bitcoin doesn’t run on bank servers, it runs on its own decentralized network and cannot be controlled by banks or govt.
By its very design, Bitcoin has an extremely limited new supply of inflation of 0.5%.
So in an expansionary monetary environment i.e inflation of 20% money supply, an asset with just 0.5% inflation means simple.
Investing in BITCOIN is mathematically guranteed to give better results over investing in REAL Estate !
This is simple truth!
Now, why is govt worried if we all invest in Bitcoin and make a lot of money?
This is the $200 Trillion question ( this is the total value of low-risk investments worldwide that can pour into Bitcoin)
You see, an average middle class invests mostly only in real -estate, if they all invest in bitcoin instead, Govt loses a lot of taxes in stamp-duty
Next, typically when you sell your house ( for some expenses ) you will pay over 30% capital gains on it, in the case of Bitcoin you don't need to sell the full amount — you can just sell the exact amount you want or you can simply take a loan against bitcoin ( at the insanely low-interest rates )
Next up, the annual Real estate supply ( new houses created) is at least 20% so prices of real-estate don't shoot up like Bitcoin ( which has only 0.5% inflation). The price pumps act as a very powerful feedback mechanism — As bitcoin prices go up, more people invest, as more people invest, the price goes up furhter. In the Bitcoin frenzy, many people will start selling their houses to invest in them.
If you read so far, you are awesome, keep going!
Now, this is the final thing you need to know, What happens when people start selling houses? prices come down
what happens to those banks which gave bad real-estate loans? they will start failing
But as explained before govt can't let banks fail remember? so they will print new money to rescue the failing banks.
What happens when govt prints new Money? Inflation, prices go up, including that of Bitcoin :)
Now, what happens when the price of Bitcoin rises? more and more people buy into it.
what happens when more and more people buy bitcoin? prices go higher :) and the cycle continues.
Soon, govt would have to print lots and lots of money just to rescue banks and fill-up for their tax -shortfall: this is a death-trap for Govts and banks.
What about Gold you ask? Gold is similar to Bitcoin in terms of all the good qualities of money like divisibility, durability, scarcity, store-of-value etc, however, gold prices don't shoot up like 200% a year, why you ask?
Govt hates gold coz if gold prices go up 200% every year, no one will want to invest in Banks, if no one invests in banks, govt and banks will have a very tough time as explained before.
You see, In times of economic problems, Govts in the past have simply seized GOLD in the name of national security and sold it in the open market for their fiat currency, this is why RICH people don’t want to hoard gold, they know Govts will seize it with one law or another and they will typically lose everything. Since RICH people don’t invest in gold world-over the prices of gold are artificially lower ( at least 10 times lower).
But the RICH people are loving BITCOIN!
Here’s where Bitcoin seriously out-shines GOLD, since gold is physical if you have large quantities of gold, it raises lots of bells of whistles :)
However Bitcoin is simply controlled by a long password, so extracting that from you, is a breach of 1st fundamental right in all constitutions in the world and In times of real distress, you can simply transfer your bitcoins to a confidant/friend across a different country and eliminate any MOTIVATION for governments even to seize your BITCOIN.
Indian banks and their high NPAs
Indian banks have one of the highest NPAs across the world, thanks to epic mismanagement by Public sector banks and crony capitalists.So, Indian banks are particularly vulnerable to the seemingly unstoppable growth of Bitcoin, even if just 10% of Indians invest in Bitcoin instead of Real-estate.
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