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Thinking of making big bucks off bitcoin? It could be a risky investment

The frenzy over the incredible rally in bitcoin prices (up 18-fold this year) has made many regret not investing in the virtual currency. Some are curious about getting in on the action at least now, hoping that bitcoin will surge further. Madhur Todi, an Ahmedabad-based certified financial planner and bitcoin investor, has this to say to them: "It's a very risky and volatile asset class. I would say to not get into it to make a quick buck. There are no benchmarks because the ecosystem is new."

Todi believes an investor should not put away more than 1-2% of his net worth in bitcoin. "You should be prepared to lose it." Todi first bought the currency at around Rs 20,000 per bitcoin in 2015; now it is around Rs 11 lakh, and he is bullish about its future. Bitcoin is a cryptocurrency which does not fall under the purview of a central authority. It works on a technology called blockchain, which is a record of all transactions on a decentralised network of computers across the world.

Stories abound about those who have become significantly richer, thanks to their early investments in bitcoin. The Winklevoss twins, who fought a legal battle with Mark Zuckerberg over the idea behind Facebook, reportedly invested $11 million out of their $65 million settlement in bitcoin in 2013, which is now worth $1.6 billion. Then there are others like venture capitalist Tim Draper, who invested in the likes of Tesla, Skype and Hotmail, and who reportedly has bitcoins worth over $530 million. There are also reports that Satoshi Nakamoto, the anonymous creator (or creators) of bitcoin, owns nearly a million bitcoins, which would put his holding at $17.3 billion.

Risky Business
But this is all speculation and that is how it should be treated. Investments in bitcoin are not like investments in a listed company (in India, shareholding of more than 1% has to be disclosed) or in a startup at a certain valuation. It is hard to gauge who has how many bitcoins or any other cryptocurrency.

Besides, there are serious questions being raised about the future of cryptocurrency. India's Finance Ministry and central bank have both issued warnings on the same.

The Securities Exchange Commission (SEC) of the US in a statement, earlier this week, said cryptocurrency markets span national borders and significant trading may occur on systems and platforms outside the US.

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"As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds." It also cautioned investors on initial coin offerings, in which entrepreneurs raise funding in cryptocurrency. New Zealand's central banker has said the rise in bitcoin prices looks "remarkably like a bubble". Trading in bitcoin futures started last Monday on the Cboe derivatives exchange in Chicago.

While it is hard for any one government to clamp down on trading in bitcoin, given that it is immune to national boundaries, Vishal Gupta, a bitcoin advocate, says the government could end up regulating bitcoin exchanges. China has asked its bitcoin exchanges to wind up their operations.

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If India were to follow suit, it could dampen investor enthusiasm. The Income-Tax Department is probing bitcoin exchanges to gather information about their transactions and ET reported on Saturday the department is in the process of determining at what rate they should be taxed under the goods and services tax regime.

Apart from whether or not bitcoin is a sound investment, there is the crucial question of whether businesses will accept this as a form of payment for their products and services. There are exceptions but the uncertainty over its status as legal tender will stop most merchants from embracing it. In such a scenario, taking an informed call on bitcoin is tricky.

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