When a financial asset moves up by 20 times in one year it is natural that many will term it as fake and call the price rise a bubble in the making. More often than not they might be proved correct as chances are that prices would have run ahead of the fundamentals. The key here is that the value of the asset can be measured and pegged while prices can be checked against it. Thus it becomes easier to call and justify a bubble.
But when it comes to Bitcoin the problem is that there is no way of calculating the value of bitcoin.
Before getting into the intricacies of bitcoin let’s first understand what it is and why the calculation of its value difficult.
Bitcoin is a cryptocurrency and is one of the thousands such cryptocurrencies in the cyber world. Cryptocurrencies are currencies which are generated by computer codes and do not have a central bank like the Reserve Bank of India to issue it. These currencies are like virtual cash that is stored in online wallets like Paytm.
The only difference between an online wallet that we use, say a Paytm or a Freecharge and bitcoins are that the underlying currency is rupee in the former that can be used to transact on a day to day basis. Bitcoin, on the other hand, has not yet found the same level of acceptance as other ‘controlled’ currencies issued by governments. Many governments and central banks are in fact discouraging the use of Bitcoin.
Also Read – All about Bitcoins – Part 1
Pros and Cons
Proponents of Bitcoin make a solid case for investment of bitcoin. Following are some of the pros of using bitcoin.
1. Safety: Since bitcoins are cryptocurrency and reside on the safe blockchain network, they are one of the safest modes of keeping and moving money. It’s because of the safety aspect of bitcoin the possibility of identity theft is reduced. When one uses a credit card or any form of conventional electronic mode of payment ones identity have to be disclosed. This, however, is not the case with bitcoins and the user has enough protection as his identity is concealed.
2. Lower Fees: There is generally no transaction fees in bitcoin exchanges as – the miner (person who verifies transaction and issues new bitcoins in crypto world), who acts as a seller of bitcoin is compensated by the network with newly issued bitcoins. Even though the exchange does not charge any fees, the intermediaries who act as brokers for the transaction can charge a commission. These can vary from one service provider to another.
3. Tradable: Apart from being easily tradable on various bitcoin exchanges, there are now five international exchanges globally that have allowed trading in the futures instrument of these exchanges. So those investors who do not want to go through the bitcoin intermediaries can now trade directly with their existing brokers and at the same time enjoy the leverage the instrument offers.
Now for a look at the cons of trading in bitcoins
1. Does not have government backing: Almost all governments and their central banks have advised people from staying away from bitcoin. Though they accept the utility of cryptocurrency and the benefits of dealing with it they have not yet granted bitcoins a legal status. But with trading being allowed on various exchanges the barrier is fast falling.
2. Anonymity: One of the biggest reason governments are against bitcoins and another similar currency is that the anonymity aspect of the currency is being used to transact in drugs and weapons illegally. Successful raids have been conducted on various locations all having connections of wrongdoing and promoting immoral activities.
3. No counter-guarantee: Unlike a currency which is backed by the central bank, as is the case with rupee where the governor of RBI guarantees payment of the underlying currency, there is no such system in bitcoins since the currency is software generated.
4. No underlying value: Currencies normally have an underlying economy which gives it its value. Various economic parameters like inflation, interest rates, and growth determine the value of a currency vis-a-vis the value of the currency of another country. In the case of bitcoin, the only market forces that determine the value is supply and demand. Since the demand is controlled, critics say the prices are artificially propped up.
Having addressed the commonly discussed pros and cons of bitcoin and in case you are interested in investing in bitcoins in India here are three ways where you can do it.
Also Read – All about Bitcoins – Part 2
Zebpay: It is an application that is available in the play store or Apple store and can be downloaded. After opening an account, post the verification which includes giving details of your identity, PAN card, Aadhar details, canceled cheque and other bank details. It takes three working days for the account to be opened.
Unocoin: A similar app is available with Unocoin which allows trading and storage of bitcoin in their wallet. Users have to follow the registration process with similar documentation. The added advantage here is that one can send bitcoins by mails to people who do not have a bitcoin registered account.
Coinbase: This app allows a person to connect his bank account or credit card account to the coinbase account and trade in bitcoins just like it does with other currencies.
There are many apps globally that allow transaction in bitcoins. The user however, should read the cost of the transaction and other information before they start transacting.
How much to invest:
Indian brokers have not yet allowed trading in bitcoin because Indian exchanges and Indian government does not approve of it. But in case one is still keen on participating in the mad rally in bitcoins it is advisable to start very small. The currency is like a lottery ticket and investment has to be made accordingly. One does not buy truckloads of lottery tickets but usually, a few, the same money management principle should be used for investing in bitcoins.