Saying that bitcoins are the future of money may be a bit of an overestimation. As more and more people subscribe to this currency by the millions, the price of a single bitcoin skyrocketed from $0.06 in 2009 to a whopping $16,448 in 2017. What’s more, this unique digital currency is only scheduled to grow with time. In this article I made some clear points why you should avoid investing in Bitcoins or any other crypto currencies atleast in India.
The first thing you need to understand, there’s no living on these currency. You can’t literally have all or most of your wealth converted to bitcoins or any other crypto currency and use it to live off the rest of your days until retirement. Many of my colleagues who have tried living off bitcoin for even a week have come back to tell me that it’s extremely risky, mostly unrewarding and many of them have suffered big loss as they didn’t got even their invested money from various crypto exchanges in India.
The Finance Minister of India made the first official pronouncement about cryptocurrencies in this Budget, stating clearly that the ‘‘Government does not consider cryptocurrencies as legal tender or coin.” He also stated that the Centre will take all the necessary measures to ensure that cryptocurrencies are not used in financing illegal activities. In the same breath, he has stated that the block chain technology on which cryptocurrencies are built, will be used to develop the digital economy further.
Cryptocurrencies are virtual currencies mined by people across the world by solving algorithmic equations. Those mining the currencies also help maintain an open ledger called blockchain, in which all the cryptocurrency transactions are recorded.
These currencies can be purchased by anyone though cryptocurrency exchanges across the world. The currencies purchased are stored in digital wallets on mobiles or computers and used for further trading or for buying goods and services.
Initially, cryptocurrencies, including bitcoins, were looked upon as an alternative to conventional currencies such as rupee, dollar, euro etc. Many had expressed an opinion that given the debasement of the value of conventional currencies due to continued monetary easing, crypto currencies could emerge as a viable alternative. Greater transparency, lack of government control and the digital base were said to favour this shift.
But the fact that cryptocurrencies can be used to buy goods or services across the globe, with no regulatory oversight has led to their misuse in financing drug trafficking and terrorist activities. The volatility in prices of these currencies has also made them useless as legal tender.
In India, there are almost no retail outlets that accept bitcoin or any other virtual currency in lieu of cash. While websites such as Dell, Expedia and Microsoft were taking bitcoins as payment, their usage as currency, is otherwise quite limited. The FM’s statement that cryptocurrencies can not be used as legal tender means that these can not be used to buy any goods and services in India. So don’t continue to harbour the hope that the bitcoins you have been holding can be used to buy a swanky home some time in future. This might never happen, at least in India.
Supporters of cryptocurrencies have however been trying to sell the idea that while it is not a currency, it is an asset akin to other assets such as stocks, mutual funds or gold.
There is no underlying asset to support the prices. I find hard to comprehend why I should buy 1 bitcoin when I do not know the true value of what it can really do, nor can I see or touch it. What I only know is that there is a resell value.
When the price of bitcoin, the primary cryptocurrency that accounts for almost 50 per cent of the global traded volume and market cap, hit $10,000 in early December, 2017, interest in this currency surged.
In the next couple of weeks, price hit $19,200 with a speculative frenzy gripping this segment. Prices have since crashed to $9000 over the next one month.
But the soaring value of bitcoin has attracted many investors, with many investing small sums, up to Rs.5,000 in to it.
Many exchanges that enable trading in bitcoin and other cypto currencies such as litecoin, etherium and bitcoin cash have cropped up in India in recent times such as Zebpay, Unocoin, and so on.
These exchanges were also doing brisk volumes of Rs.50 to Rs.100 crore every day. According to the exchanges, those trading on these exchanges come from all parts of the country, including Tier II and Tier III cities.
They are mostly in the age bracket 25 and 40 years in age. Eighty per cent investors are male and 20 per cent, female.
The trouble is that if cryptocurrency trading has to become legal, then these have to be recognised as security or commodity by SEBI. Derivatives on cryptocurrencies can also be allowed only after SEBI gives permission. Further, these cryptocurrency exchanges have to register with SEBI and adhere to the networth, margin and surveillance norms.
As of now, the cryptocurrency exchanges are not governed by either SEBI or RBI. So the gains made in these exchanges are also illegal. It is therefore not possible to set off losses made in these exchanges against capital gains or other speculative income. There were also reports of some banks in India recently disallowing transfer of funds to trading account of cryptocurrency exchanges.
Against this background, it will be better to stay off cryptocurrency trading until SEBI or RBI give the green signal to trade on these exchanges. If these is no regulatory backing, you will have no recourse, if any exchange defaults on payment or shuts down suddenly. Late last year, China ordered shutting down of all cryptocurrency exchanges and initial coin offerings.
It would, therefore, be best to wait for a regulatory nod before investing or trading in cryptocurrencies. These are currently too risky to be treated as even alternative investments.
It has been a remarkable year for Bitcoin; its value has soared more than 900% in the past 12 months. But investing legend and Vanguard Group Inc. founder Jack Bogle isn’t buying it.
“Avoid Bitcoin like the plague,” Bogle said at a Council on Foreign Relations event last week, according to Bloomberg. “Did I make myself clear?”
The Vanguard founder, who has spawned legions of followers for his simple ethos of investing in low-cost index funds, criticized the cryptocurrency for having “no underlying rate of return.”
“You know bonds have an interest coupon, stocks have earnings and dividends, gold has nothing,” Bogle said. “There is nothing to support Bitcoin except the hope that you will sell it to someone for more than you paid for it.”
Legendary investor Warren Buffett famously declared the currency worthless. He told CNBC in 2014: “Stay away from it. It’s a mirage, basically. It’s a method of transmitting money. It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money, too. Are checks worth a whole lot of money? Just because they can transmit money? … The idea that it has some huge intrinsic value is just a joke in my view.”
Bitcoin bulls argue that it’s the currency of the future, but its price is tremendously unstable, making it unsuitable as a currency today. While its price was near $7,900 per coin in early November, it was below $6,000 just days later, a decline of more than 25%. We’ve seen five drops of more than 20% this year alone. Then, by late November, bitcoin had risen again and eclipsed $9,600. That’s whiplash.
Consumers need stable prices to make purchase decisions. Imagine if you walked into McDonald’s one day and your meal cost $10. What if the same meal cost $5 the next day, and $20 the day after that? You’d have a hard time figuring out where to eat lunch, and the business would have a hard time making appropriate financial choices.
I can’t stress this enough, but bitcoin is a highly experimental digital asset. It’s kind of like investing money in a kickstarter. You have no idea what the end result is going to look like. You may very well get your money’s worth, or you may end up losing big. If you are going to invest money in bitcoins, or really any other form of cryptocurrency, please remember to do your research and study the graphs so that you may know where the price is headed, be cautious.