From Exuberance To Sobriety: How 2022 Changed India's Crypto Ecosystem

Ishaan Kohli, a tech executive in his early 20s, discovered crypto during the pandemic. 

Curiosity about investing combined with scepticism about the prevailing monetary structures—and a fair bit of pandemic-induced free time—solidified his interest to put money into it. That bet seemed to be hatching gold for a while, but it turned around in a hurry. 

"It was certainly blinding. You had that feeling that there is no way this doesn’t work out," Kohli told BQ Prime, referring to the crypto bull runs of 2020 and 2021. The overall market capitalisation of crypto assets went from $241 billion in March 2020 to a peak of $2.8 trillion in November 2021, according to data from CoinMarketCap. Currently, the market cap stands at $810 billion. 

For his part, Kohli has gone from checking his crypto portfolio multiple times a day and relishing the gains, to having stopped looking at it altogether now. In many ways, Kohli’s experience typifies the journey of scores of retail investors in crypto. What started as fascination with new technology and fast appreciating token prices has given way to an ebbing of interest and a somewhat resigned scepticism.

The current year in particular has been relentless in terms of the skeletons that have tumbled out of the crypto closet. Starting with the blow-up of algorithmic stablecoin TerraLuna, the meltdown of crypto hedge fund Three Arrows Capital, bankruptcies at crypto lenders BlockFi and Voyager, and most recently, culminating in the discovery of massive fraud at crypto exchange FTX. 

In addition to the global headwinds, India also became an unhospitable playing ground for crypto enterprises due to steep taxation measures and overall hostility towards the asset class at the Indian central bank. 

"Our view is that [crypto] should be prohibited because if it is allowed to grow... please mark my words, the next financial crisis will come from private cryptocurrencies," Shaktikanta Das, governor of the Reserve Bank of India, said during a public event on Dec. 21.

In many ways, crypto exchanges work like doors to a magic kingdom. Anyone who wishes to interact with this global asset class has to go through an exchange, which allows them to swap their fiat money for crypto tokens.

While trading volumes have dipped sharply as asset prices have gone down, Indian exchanges were hit even harder on account of the government’s tax policy. Starting on April 1, a 30% tax on income derived from crypto assets went into effect. Three months later, an extra 1% tax was taken out of each transaction at the source.

The capital gains killed investor interest, but the TDS drove away frequent traders to offshore exchanges, the co-founder of an Indian crypto exchange told BQ Prime on condition of anonymity. The TDS essentially locks up a part of your capital on each trade, and if you’re a heavy trader, you are unlikely to be okay wasting any liquidity, they added.

Indian exchanges like WazirX, BitBNS, and Zebpay have all seen trading volumes decline by over 60% since April, according to data from CoinGecko. 

"Coming from the investing side, valuations have corrected a lot," Parth Chaturvedi, crypto ecosystem lead at CoinSwitch Kuber, told BQ Prime. Chaturvedi leads CoinSwitch’s crypto venture fund, which both invests in crypto startups and helps them gain access to other investors. 

In the exuberance of January and February, fundraisers were held against concept papers that lacked even a minimum viable product, but things have dramatically changed since then, he said. While venture capital firms deployed a lot of capital—over $500 million according to one venture investor’s estimate—in Indian crypto and blockchain enterprises during 2022, they have tightened the purse strings since July. 

"Everyone has changed priorities. Either they want to invest in middleware or infrastructure. Nobody’s going to touch metaverses," Saumya Saxena, the co-founder of a crypto payments startup, told BQ Prime. He founded the company after finishing a residency with venture capital firm Antler.

Implementing compliance and governance using decentralised blockchains and using such ledgers to fact-check news information are among the use cases for crypto that Saxena personally feels bullish about. But they are both long shots and are likely to take years to materialise, he said. His current firm is focused on solving friction in cross-border payments.

It is hard to understate the ripple effect of FTX’s collapse on the crypto sector. Allegations that the world second largest crypto exchange’s senior management willfully diverted customer funds for personal use will undoubtedly be going to make retail investors wary and make regulators more sceptical. 

The unbridled hype and enthusiasm of early 2022 have already given way to a more sombre mood as the year draws to a close. But the crypto-faithful aren’t losing hope just yet.

Although the current tax regime is widely seen as one of the biggest negatives for crypto in India, crypto tax platform KoinX occupies an odd middle ground. While people paying taxes on crypto helps it earn revenue, this has driven volumes so low that KoinX’s revenue base has shrunk.

"Exchanges going out of business or people not paying taxes make no sense to us," Punit Agarwal, the founder of KoinX, told BQ Prime. Despite the waning trading volumes, KoinX continues to expand its operations, and Agarwal indicated that while the tax environment is prohibitive in India, he plans to expand the firm overseas in countries like Turkey. 

Even those like Saxena, who left a role at a non-banking financial company to build a crypto company in December 2021, remain invested in the promise of the technology. The sentiment around the crypto sector may have shifted, but the product-building momentum has stayed the same, Saxena said. "A group of builders has moved from one hype cycle (crypto) to the next (artificial intelligence), which is normal," he said. 

Even though entrepreneurs in the sector strike a hopeful note when looking at the future, retail investors are less gung-ho about it. "I am part of the cultural experiment of losing money in crypto," Tony Sebastian, a retail crypto investor, told BQ Prime. 

For his part, Kohli said he isn’t cashing out of his crypto holdings yet. "It's diamond hands now," he said. "I will look at [the portfolio] when I am 10-15 years older." Diamond hands are investing slang for holding onto an asset even when there is market pressure to sell.

But at the same time, a disdain for supposed decentralisation seems to have crept in.

"At the end of the day, no matter how much you try to decentralise things, money just moves from one bunch of rich white men to another bunch of rich white men," he said. Retail investors "don’t stand a chance against big money big sharks", he said. "At that point, it’s like a fight between hope and reality."