Here's Why the Leading Cryptocurrencies Ticked Higher Today

What happened

Many cryptocurrencies surged sharply higher on Tuesday morning as the government of India proposed a 30% tax on capital gains from buying and selling digital coins. Let's take a look at three of the largest cryptocurrencies by market cap:

Data from Coinmarketcap.com, as of 12:20 p.m. ET on Feb. 1, 2022.

So what

India has a rocky history of cryptocurrency regulations. Last November, the Modi government wanted to ban digital coins as a payment method, treating them more like stock-like securities. Cryptocurrency firms were not allowed to market their products and services at all.

At the Davos-based World Economic Forum conference in mid-January, Prime Minister Narendra Modi compared the crypto market to system problems such as inflation, climate change, and disrupted supply chains. He called on world leaders at the gathering to come together and face the shared enemy of digital finance systems.

"Cryptocurrency is an example of the kind of challenges we are facing as a global family with a changing global order," Modi said. "To fight this, every nation, every global agency needs to have collective and synchronized action."

That bearish attitude from the second-largest country in the world weighed heavily on the crypto market. Bitcoin prices fell 17% in the next three days after Modi's speech. Ethereum prices dropped 21% over the same period while Cardano took a 24% haircut. Many investors feared that India might follow in the footsteps of China, which banned cryptocurrency operations outright in September.

So when India's budget for 2022 included a proposed 30% tax rate on crypto-based capital gains, it's easy to see that as a modest step forward. If India is willing to participate in the global cryptocurrency economy while pocketing a generous slice of the profits its citizens reap from it, that's much better news than an outright refusal. Furthermore, India is planning to launch a national digital currency of its own. Modi's ruling party did not strike that plan from the budgeting agenda, so India's central bank may launch that coin as early as this year.

Image source: Getty Images.

Now what

As you can see in the table above, this jump does not mean that the cryptocurrency market is out of the woods. Most tokens are still down by double-digit percentages over the last 30 days and even further away from the sector-wide highs of November.

Still, Modi's budget is unequivocally good news for cryptocurrency investors and businesses with Indian connections. Bitcoin miners are on a global hunt for facilities with low costs for electric power and data-center floor space where they can run their mining chips without breaking the bank. Cardano's backers don't share that interest since their preferred blockchain network relies on a proof-of-stake architecture that doesn't require massive computing efforts. Ethereum falls between those extremes. This cryptocurrency still depends on a proof-of-work system similar to Bitcoin's but is in the process of switching over to proof-of-stake later this year.

On an even wider scale, India's potential ability to provide the right assets for crypto-mining operations at the right price arguably matters less than the fact that it's a major world economy that can steer the global crypto conversation along a friendlier route than China's chosen path. That discussion is quite active as governments around the world grapple with these newfangled digital assets.

So a 30% tax on cryptocurrency profits may sound draconian, but it's actually a small step in a productive direction.