Why do they trade in Bitcoins?

Virtual currencies such as bitcoins are seeing growing interest. Is it safe to trade with them? Here’s what investors and traders say

Will you trust a currency not issued by any government or backed by a central bank? Certainly not — that would be the most likely answer, you might think. But the fact is that there is growing interest in crypto currencies such as bitcoins that have no legal sanction. Without any regulatory approval, registration or authorisation, virtual currencies have been gaining popularity in many countries, including India. This is in spite of the RBI warning that any user, holder, investor and trader dealing with virtual currencies would be doing so at their own risk.

Currency basics

Started in 2009, bitcoins are digital currencies created by a decentralised process called ‘mining.’ Transactions happen in the bitcoin network through a shared public ledger called block chain.

This ledger contains every transaction processed, so that the validity can be verified. Transactions can be done in smaller sub-units of a bitcoin, called satoshi — a million bits make a bitcoin.

Karthik Iyer, a technologist, founder of advisory firm BlockchainMonk and Indian ambassador of P2P Foundation, says that bitcoins account for less than half of the $100-billion market for virtual currencies that includes over 150 crypto currencies.

Currently about 10 per cent of the total bitcoin trades come from India. “The supply of bitcoins is limited — 21 million only. It is a finite resource and as demand increases, its value tends to go up,” he explains.

He says that people find bitcoins to be faster and cheaper to transact cross-border as there are no commissions and clearing delays. He is one of the early investors, having bought bitcoins at $7 in 2011 out of research interest during his Ph.D tenure in Scandinavia. Prices are over $2,800 currently.

User interest

The technology aspect was also what attracted Madhur Todi, an MBA, Finance, from the US and a Certified Financial Planner who manages over ₹150 crore of assets in his firm Mera Money Advisors.

“I started buying bitcoins in 2015, when it was at ₹15,000. I am very confident about the block chain technology and the future of digital currency,” he says.

Fundamentals aside, bitcoins and digital currencies have seen a spike in interest since May 2017. This may have been triggered by a change in Japanese law on April 1, 2017, which put in place standards for security and audits around virtual currencies. Prices shot up from around $1,200 to $3,000 in less than 4 months.

This rally has attracted investors such as Shivani, a marketing manager with a branding firm. “One of my friends told me about the foray of bitcoins in India and their rising price. I then read about it and it appeared to be one of the most unconventional investment methods,” she says.

The verification process, including uploading of documents such as PAN card, was fast and she started buying bitcoins. “I buy for ₹500 — which is about 0.003 of a bitcoin,” she adds.

Shivani sees it as an investment akin to shares. “The current buy and sell prices are clearly written in the bitcoin exchange platform and there is no hassle, just what the millennials prefer,” she explains.

Himanshu Goswami, a sales and marketing professional in New Delhi, is also a new entrant.

“We had a conversation about how the younger generation has multiple options to invest in, apart from property, gold etc,” he says. “I bought bitcoins when the price was nearly ₹1.75 lakh per bitcoin. The price has come down but I am in it for the long haul,” he says.

Many of them are also going beyond bitcoin and buying other currencies such as ethereum and ripple.

Many risks

Investors and regulators point to risks galore. The RBI, for instance, has expressed concern on potential financial, legal, customer protection and security-related risks on virtual currencies.

For one, its value is a matter of speculation. The currency has no underlying to which its value can be pegged. So increase in demand can lead to sharp rallies followed by equally steep declines. For instance between October 2013 and January 2014, bitcoin value increased from $130 to $985. The price then crashed to $212 by January 2015.

Two, there is no legal status as bitcoins are not authorised by the RBI. There have also been reports on the usage of these currencies for illicit and illegal activities — such as paying ransom.

Three, virtual currencies are in digital form, stored in digital/electronic media. They are, hence, prone to losses from hacking, loss of password, compromise of access credentials and malware attack. Karthik notes that the currencies are hashes and the risk of their being stolen is real. “Your local disk may be broken into, digital wallets may be stolen and even exchanges can be hacked,” he cautions.

Four, payments are on a peer-to-peer basis with no established framework for recourse to disputes or issues. “I think we might see people buying a sandwich or movie ticket with bitcoins but it is not easy for the B2B industry to accept transactions in crypto currencies,” says Himanshu.

“If vendors do not start accepting bitcoins as a medium of exchange, investors/buyers will have no option but to trade or sell it back on an exchange,” says Madhur.

He adds that there is no clarity on the taxation aspects. “What is the long-term/short-term holding for bitcoins? How much is the tax implication on trading or investing?” he wonders.

All users advise that one take small bets in the initial stages. “Any person wanting to get into this should be willing to take the risk of losing it all if something drastic happens and bitcoins disappear, or get branded as illegal by the government,” cautions Madhur.

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