‘Bitcoin Billionaires’, ’Bitcoin will soon be legal in India’, ‘RBI asks banks not to allow buying cryptocurrency’.
These are some of the few headlines I came across when I poked my nose into CRYPTOCURRENCIES. Cryptocurrency is a kind of digital currency or virtual currency and have decentralized control unlike other financial assets in the market.
Being an investor, NO RISK NO GAIN is an important mantra to follow to make profits. This also applies to cryptocurrencies. Cryptocurrencies are susceptible to high price volatility. This makes it an unsuitable currency for conservative investors. Why is it so? The volatility is due to decentralized control. If bitcoins’ operations are centralized, we can make the situation better. One of the biggest fears of investors is bitcoin scams and frauds which also amounts to lack of control. The capital markets also faced these problems before SEBI came into the picture. So, with proper security and back-ups cryptocurrencies can be a lucrative investment option. Risk is an innate characteristic of any financial asset which should be digested by investors.
Indian bitcoin exchanges are thriving. Bitcoins makes international transactions easier than regular currencies. There are no transaction fees and red tape as it is often through Credit cards, ATMs or Money transfers. Cryptocurrencies are gaining more popularity among businesses due to easy transferability. This has also made illegal dealings easier which should be curbed.
The liquidity of an asset is as important as its returns. In that case cryptocurrencies enjoy greater liquidity than bonds, debentures, equity shares, preference shares etc. To sell the latter we need to match the requirements of the buyer and seller which may take considerable more time than bitcoins. On the other hand cryptocurrencies like bitcoins can be exchanged for the U.S dollar and the euro. Also, the cumbersome process involved in shares and debentures puts them in the back burner.
The price of bitcoins skyrocketed from a little under $1,000 in 2016 to touch nearly $20,000 last year (as given in the reference). But is it a bubble? Lots of people are going for bitcoins(cryptocurrency) recently. Is this herd mentality? This again reflects US housing bubble. This should definitely be analyzed by an investor before plunging into the ocean.
Before cryptocurrencies money market and capital market instruments were ruling the investment market. Money market instruments have more security and liquidity but the nominal value is high which makes it difficult for ordinary individuals to invest. The capital market gives good returns but the risk involved and the convoluted process makes it quite tough for individuals. Cryptocurrencies are investor – friendly. The super hit of bitcoins around the world proves my former statement. Since cryptocurrencies use cryptography it is difficult to break the code and manipulate the currency’s supply.
Cryptocurrencies may have a great impact on the global economy. The bubbles are mainly due to irrational behavior of investors and greediness. If one can avoid it, Cryptocurrencies are a good source of investment for investors with good risk appetite and rationality.