Earning returns of over 1900% in one year has certainly attracted many investors to bitcoins. Against the US dollar, a single bitcoin is now worth a massive $15,860 as on December 8, 2017 at the time of writing this article.
Not surprising then, many investment advisors are receiving queries regarding investing in bitcoins. But, should you recommend your clients to invest in bitcoins?
Most of the industry experts have warned investors in India about trading in bitcoins owing to its high market and regulatory risks. The Reserve Bank of India (RBI) has issued three warnings about trading in virtual currencies such as bitcoin so far. It has clearly said that those trading in virtual currencies were doing so at their own risk, given that the central bank has not allowed any company to deal in such cryptocurrencies.
Let us understand more about this virtual currency that is taking over the world.
Basic nuts and bolts
Bitcoin is unique as there are a finite number of them: 21 million. Created in 2009 by a mysterious identity under the pseudonym, Satoshi Nakamoto, bitcoins are mainly used for electronic purchases and transfers.
Every bitcoin transaction is immediately logged digitally on a transaction log, more popularly called a ‘blockchain’ that tracks the time of purchase and ownership of every bitcoin. To process these transactions, a procedure called ‘mining’ takes place, which involves using software and algorithms to solve a difficult mathematical problem with a 64-digit solution. For each problem solved, one block of bitcoin is processed. Additionally, the miner is rewarded with bitcoins.
There are currently about 16 million in existence. Considering the fact that only 21 million bitcoins can ever be mined, these coins will be divided into smaller parts with the smallest divisible amount, that is, one hundred millionth of a bitcoin.
To receive a bitcoin, a user must have a bitcoin address that looks like a string of 27-34 letters and numbers.
Alternatively, one can buy bitcoins from the bitcoin exchange like Coinbase, bitFlyer and so on. However, one needs to have a bitcoin wallet similar to that of a demat account to trade on exchanges.
Ups and downs
Bitcoin has a history of price swings related to security breaches, hacking and regulatory scrutiny and action. Trading for nearly $13.50 at the beginning of 2013, it rose to more than $1,200 before falling about 50% in December 2013 after China’s Central bank barred making bitcoin transactions in the country.
In early 2014, it soared again when Tokyo-based Mt. Gox, one of the biggest bitcoin-trading platforms at that time, filed for bankruptcy protection after being affected by security breaches, theft and shutdowns. Bitcoin declined nearly 40% from Feb 1, 2014 through the end of March 2014.
However, after that, bitcoin began its upward journey as more investors began looking at this emerging asset class. Often, investment markets are driven by more than just fundamentals. In fact, Nobel Economics Laureates Daniel Kahneman, Robert Shiller and Richard Thaler and many others have shown that investment markets can be far from rational and this along with crowd psychology can drive asset prices far from fundamentally justified levels. Bitcoin is a classic example of such a situation.
While no mutual funds or ETFS in India or US currently track bitcoin, several firms are trying to bring such investments to market. In fact, two weeks ago, a French AMC announced the launch of it’s first bitcoin mutual fund called Tobam Bitcoin Fund.
What experts have to say
Suresh Sadagopan of Ladder7 Advisories said, “My general rule is, if you can't understand it, don't invest in it. Hence, neither I invest nor recommend my clients to put their money in it.” Suresh added that though he has been researching bitcoin for some time, still doesn't fully understand the system.
He also pointed to regulatory uncertainty as another risk factor. Government authorities can restrict or control the use and sale of bitcoin or other digital currencies in the future.
Seconding his views, Vishal Dhawan of Plan Ahead Wealth Advisors said, “Bitcoin doesn’t possess the characteristics of medium of exchange, let alone an investment owing to its high volatility. We therefore tell our clients to invest in other alternative assets that are rewarding and regulated.”
“However, looking at its growing popularity it’s going to become more vital for financial advisors to pay attention to bitcoin and blockchain technologies in order to advise and alert their clients accordingly,” he added.
According to, Coinmarketcap.com, a cryptocurrency market tracker, the total value of all bitcoins in circulation stood at $150 billion on December 8, 2017.
A Business Insider report recently published, “Bitcoin users predict 94% of all bitcoins will have been released by 2024. As the total number creeps toward the 21 million mark, many suspect the profits miners once made creating new blocks will become so low they'll become negligible.”
