When economic historians and financial market experts discuss asset price bubbles, market instability, or irrational exuberance, one example that often crops up is what is famously referred to as “tulipmania”—a speculative price bubble in tulip bulbs that gripped Holland in the mid-1630s. At its peak, the rage for trading tulips was so high that one Viceroy tulip bulb sold for as much as $51,945 in 2017 US dollars. Understandably, back in the mid-1630s, the Dutch buyers had to trade fortunes for one tulip.
As happens with most price bubbles, however, the tulip bubble burst and prices collapsed to a negligible fraction of their peak levels as buyers began to withdraw from the market. It should come as no surprise, therefore, when analogies are drawn between the tulipmania of the 17th century and the dynamics surrounding cryptocurrencies, especially bitcoin. The former president of the Dutch central bank, Nout Wellink, for instance, called the hype surrounding bitcoin worse than tulipmania. “At least then,” he said, “you got tulips in the end, now you get nothing.” The chief executive officer of JPMorgan Chase & Co., Jamie Dimon, seconded that view at an investor conference a month ago.
To be sure, the comparison between bitcoins and tulips may seem far-fetched, even unfair. Blockchain, the technology underpinning bitcoin, promises to revolutionize the traditional way of maintaining records—thereby helping facilitate secure land transfers, ensure efficient delivery of public services, or reduce transaction costs for businesses.
But do cryptocurrencies merit a position as an asset class in an investor’s portfolio? That question requires us go back to the first principles of investing and draw a distinction between value and price.
As New York University professor and valuation expert Aswath Damodaran explains that value is essentially derived from the fundamentals of an asset—its present or expected cash flows, growth prospects, competition scenario, market structure, and so forth. Making investment decisions require us to assess this value and compare it to the current market price. If the fundamental value is higher than current market price of that asset, then the asset merits a position in the portfolio because the market price is expected to eventually converge to its fundamental value.
In contrast, pricing requires us to make a judgement about the future market price of an asset, mainly based on the market mood and momentum. It ignores the fundamentals because the objective is to profit from short-term movements in prices irrespective of the underlying value. This raises the question: Can bitcoin be valued, or priced? Or both?
As bitcoin does not generate cash flows, it is not possible to value it as an asset. Like any fiat currency, it must be priced relative to other currencies. But unlike fiat currencies, bitcoin is neither a relatively stable store of value nor a widely accepted medium of exchange. Its prices are highly volatile, swinging wildly in response to new information. It is, therefore, neither as safe as gold nor as trusted as fiat currencies. High price volatility makes it impossible for businesses to price their goods or services in bitcoin.
In their 2008 white paper, the bitcoin creators had proposed the new system chiefly as a means to enable electronic transactions in a more robust manner than the existing technologies, including those that involve digital signatures. But the trajectory of the bitcoin market has hardly echoed that intention. This is reflected in the fact that since the beginning of 2013, while the price of bitcoin has risen by as much as 456 times, the number of daily transactions has risen only by about eight times. For bitcoin to be viewed as a credible currency, it must gather steam as a medium of exchange than merely being a speculative bet.
One of the cardinal reasons why bitcoins, or for that matter any other cryptocurrencies, are not trusted enough for actual transactions is their lack of legal tender and the absence of regulations. But this may change soon.
The Securities and Exchange Board of India, for instance, is working on a framework to regulate bitcoins. Kenneth Rogoff, professor of economics and public policy at Harvard University, views regulatory pressure from governments as a major reason for the prices of bitcoins to collapse in the long run. Monetary authorities do not tend to view competing currencies on favourable terms. Anonymous transactions in bitcoins not only encourage tax evasion and capital flight but also aid criminal activities because both the source and end usage are unknown.
In 1936, British economist John Maynard Keynes, in his magnum opus The General Theory Of Employment, Interest And Money, proposed that stock prices are based not on their fundamental values but on people’s perception of what others would pay for it. In other words, equity prices were influenced more by crowd psychology than intrinsic value. Keynes illustrated this through the example of a beauty contest, where participants are asked to rate the most beautiful faces from a hundred options. Those who voted for the most popular option, not necessarily the most beautiful, would win. The best strategy in this case, Keynes noted, would be to choose the face that you believe others would find beautiful. This would ensure that you ended up choosing the most popular face.
Bitcoin must be viewed in a similar context. Like any fiat currency, its success hinges on the trust it may or may not eventually build among its intended users—merchants and consumers. Devoid of that trust, however, bitcoin will continue to be a speculative bet driven by market momentum until its prices eventually collapse under its own weight.
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- In the Large States category (overall), Chhattisgarh ranks 1st, followed by Odisha and Telangana, whereas, towards the bottom are Maharashtra at 16th, Assam at 17th and Gujarat at 18th. Gujarat is one State that has seen startling performance ranking 5th in the PAI 2021 Index outperforming traditionally good performing States like Andhra Pradesh and Karnataka, but ranks last in terms of Delta
- In the Small States category (overall), Nagaland tops, followed by Mizoram and Tripura. Towards the tail end of the overall Delta ranking is Uttarakhand (9th), Arunachal Pradesh (10th) and Meghalaya (11th). Nagaland despite being a poor performer in the PAI 2021 Index has come out to be the top performer in Delta, similarly, Mizoram’s performance in Delta is also reflected in it’s ranking in the PAI 2021 Index
- In terms of Equity, in the Large States category, Chhattisgarh has the best Delta rate on Equity indicators, this is also reflected in the performance of Chhattisgarh in the Equity Pillar where it ranks 4th. Following Chhattisgarh is Odisha ranking 2nd in Delta-Equity ranking, but ranks 17th in the Equity Pillar of PAI 2021. Telangana ranks 3rd in Delta-Equity ranking even though it is not a top performer in this Pillar in the overall PAI 2021 Index. Jharkhand (16th), Uttar Pradesh (17th) and Assam (18th) rank at the bottom with Uttar Pradesh’s performance in line with the PAI 2021 Index
- Odisha and Nagaland have shown the best year-on-year improvement under 12 Key Development indicators.
- In the 60:40 division States, the top three performers are Kerala, Goa and Tamil Nadu and, the bottom three performers are Uttar Pradesh, Jharkhand and Bihar.
- In the 90:10 division States, the top three performers were Himachal Pradesh, Sikkim and Mizoram; and, the bottom three performers are Manipur, Assam and Meghalaya.
- Among the 60:40 division States, Orissa, Chhattisgarh and Madhya Pradesh are the top three performers and Tamil Nadu, Telangana and Delhi appear as the bottom three performers.
- Among the 90:10 division States, the top three performers are Manipur, Arunachal Pradesh and Nagaland; and, the bottom three performers are Jammu and Kashmir, Uttarakhand and Himachal Pradesh
- Among the 60:40 division States, Goa, West Bengal and Delhi appear as the top three performers and Andhra Pradesh, Telangana and Bihar appear as the bottom three performers.
- Among the 90:10 division States, Mizoram, Himachal Pradesh and Tripura were the top three performers and Jammu & Kashmir, Nagaland and Arunachal Pradesh were the bottom three performers
- West Bengal, Bihar and Tamil Nadu were the top three States amongst the 60:40 division States; while Haryana, Punjab and Rajasthan appeared as the bottom three performers
- In the case of 90:10 division States, Mizoram, Assam and Tripura were the top three performers and Nagaland, Jammu & Kashmir and Uttarakhand featured as the bottom three
- Among the 60:40 division States, the top three performers are Kerala, Andhra Pradesh and Orissa and the bottom three performers are Madhya Pradesh, Jharkhand and Goa
- In the 90:10 division States, the top three performers are Mizoram, Sikkim and Nagaland and the bottom three performers are Manipur and Assam
In a diverse country like India, where each State is socially, culturally, economically, and politically distinct, measuring Governance becomes increasingly tricky. The Public Affairs Index (PAI 2021) is a scientifically rigorous, data-based framework that measures the quality of governance at the Sub-national level and ranks the States and Union Territories (UTs) of India on a Composite Index (CI).
States are classified into two categories – Large and Small – using population as the criteria.
In PAI 2021, PAC defined three significant pillars that embody Governance – Growth, Equity, and Sustainability. Each of the three Pillars is circumscribed by five governance praxis Themes.
The themes include – Voice and Accountability, Government Effectiveness, Rule of Law, Regulatory Quality and Control of Corruption.
At the bottom of the pyramid, 43 component indicators are mapped to 14 Sustainable Development Goals (SDGs) that are relevant to the States and UTs.
This forms the foundation of the conceptual framework of PAI 2021. The choice of the 43 indicators that go into the calculation of the CI were dictated by the objective of uncovering the complexity and multidimensional character of development governance
The Equity Principle
The Equity Pillar of the PAI 2021 Index analyses the inclusiveness impact at the Sub-national level in the country; inclusiveness in terms of the welfare of a society that depends primarily on establishing that all people feel that they have a say in the governance and are not excluded from the mainstream policy framework.
This requires all individuals and communities, but particularly the most vulnerable, to have an opportunity to improve or maintain their wellbeing. This chapter of PAI 2021 reflects the performance of States and UTs during the pandemic and questions the governance infrastructure in the country, analysing the effectiveness of schemes and the general livelihood of the people in terms of Equity.
Growth and its Discontents
Growth in its multidimensional form encompasses the essence of access to and the availability and optimal utilisation of resources. By resources, PAI 2021 refer to human resources, infrastructure and the budgetary allocations. Capacity building of an economy cannot take place if all the key players of growth do not drive development. The multiplier effects of better health care, improved educational outcomes, increased capital accumulation and lower unemployment levels contribute magnificently in the growth and development of the States.
The Pursuit Of Sustainability
The Sustainability Pillar analyses the access to and usage of resources that has an impact on environment, economy and humankind. The Pillar subsumes two themes and uses seven indicators to measure the effectiveness of government efforts with regards to Sustainability.
The Curious Case Of The Delta
The Delta Analysis presents the results on the State performance on year-on-year improvement. The rankings are measured as the Delta value over the last five to 10 years of data available for 12 Key Development Indicators (KDI). In PAI 2021, 12 indicators across the three Pillars of Equity (five indicators), Growth (five indicators) and Sustainability (two indicators). These KDIs are the outcome indicators crucial to assess Human Development. The Performance in the Delta Analysis is then compared to the Overall PAI 2021 Index.
Key Findings:-
In the Scheme of Things
The Scheme Analysis adds an additional dimension to ranking of the States on their governance. It attempts to complement the Governance Model by trying to understand the developmental activities undertaken by State Governments in the form of schemes. It also tries to understand whether better performance of States in schemes reflect in better governance.
The Centrally Sponsored schemes that were analysed are National Health Mission (NHM), Umbrella Integrated Child Development Services scheme (ICDS), Mahatma Gandh National Rural Employment Guarantee Scheme (MGNREGS), Samagra Shiksha Abhiyan (SmSA) and MidDay Meal Scheme (MDMS).
National Health Mission (NHM)
INTEGRATED CHILD DEVELOPMENT SERVICES (ICDS)
MID- DAY MEAL SCHEME (MDMS)
SAMAGRA SHIKSHA ABHIYAN (SMSA)
MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME (MGNREGS)