Risk and reward - Two sides of the bitcoin

Bitcoin surpassed the $35,000 mark, creating a new record on Wednesday. Investors who may have entered at $9,000 levels in June-July 2020 have seen over 300% returns in just about six months.

Like other assets, the price of cryptocurrencies rise with increase in demand. What makes Bitcoin more price-volatile is the fact that it has a limited supply. “There are only 21 million Bitcoins in the world and there are 7 billion people. So as more and more people get in, the value is going to increase,” says Nischal Shetty, Founder & CEO of WazirX – an Indian Bitcoin and cryptocurrency exchange.

Legal or not illegal? 

Last year, the Supreme Court quashed the 2018 RBI-imposed ban on cryptocurrencies. But in the absence of a regulator, the risk associated with buying cryptocurrencies in India is high.

Moreover, since it is not legal tender like a real ‘currency,’ it cannot be used as a medium to transact. “In the last three to five years, the narrative has changed to looking at Bitcoin as Digital Gold,” Nischal Shetty added.

Making of a Ponzi Scheme?

Not having a regulator has led to fear of this global phenomenon turning out to be a ponzi scheme. But Shetty says the technology driving crypto transactions will not let that happen. “Its a decentralised asset. For a ponzi scheme, you need a perpetrator who is going to run away with your money. That’s not going to happen in the decentralised system,” he said.

Beware, say Fund managers

Fund managers are offering cryptocurrency options to non-resident Indians, especially those with a high net worth and higher risk appetite. Amit Kumar Gupta, Fund Manager at Adroit Portfolio Management Services said, “we have recommended a 5 to 10% switch from gold to bitcoin to our clients in their asset portfolio.”

Gupta says the same may not be advisable for Indians right now as there is not regulatory clarity. Shetty disagrees. “Bitcoin is limited in supply. The later we get in to it, the more expensive it will get… This is technology, it can go in any direction, but everyone should have some exposure. May be a small…1% to begin with.” He adds that the risk-reward is similar to the dotcom boom of 1990s when early movers bought domain names and sold them at exorbitantly high prices in 2005.

Tax concerns on crypto

There were also media reports last week which hinted at levying GST on cryptocurrencies, which were later rubbished. Both Shetty and Gupta say any government activity  will be a step in the right direction. They also agreed that the biggest challenge continues to be lack of regulatory clarity.

Money9 Mantra

Cryptocurrencies are high-risk and potentially high-reward. Enter only if you have spare money you won’t need for a three to five-year horizon, but at your own risk. If you don’t have surplus money, refrain from entering cryptocurrency trades until there is regulatory clarity.