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Thursday, July 19, 2018

Cryptocurrencies: Hopes & fears as Dream returns fire Bitcoin interest, but extreme volatility a cause for worry

According to Bloomberg data, Bitcoin has risen from $ 904.48 a piece to $ 14,239.64 a piece — up 1,474 per cent between December 23, 2016, and December 22, 2017.

Written by Khushboo Narayan | Mumbai | Published: January 10, 2018 3:48:36 am

Kumar V, 33, a real estate consultant who invested about Rs 3.5 lakh in Bitcoins on the advice of a friend in September, has seen his investment grow three times in one quarter to over Rs 15 lakh. Kumar said he chose to buy Bitcoins instead of looking at other investment options as he believed that the Blockchain technology backing Bitcoins was revolutionary. Bitcoin, a virtual currency, has given returns of over 1,400 per cent to investors in the past year.

Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. It uses peer-to-peer technology to operate with no central authority or banks managing transactions. The issuing of Bitcoins is carried out collectively by the network. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange. The coins also can be bought and sold on Bitcoin exchanges.

“As far as investment is concerned, I don’t believe in keeping all my eggs in the same basket. I have invested a very small portion of my savings in Bitcoins. So far, it has done very well. My investment has increased three times in just three months,” said Kumar.

In the last six months, virtual currencies have gained immense popularity in India as retail investors are increasingly trading in Bitcoins through a dozen-odd exchanges and a few virtual currency wallets in the country. This, despite the lack of regulations guiding such transactions and the repeated warnings of the Reserve Bank of India (RBI). The government is now considering framing rules for trading and transacting in cryptocurrencies. The Finance Ministry issued a recent warning saying investing in Bitcoins was like putting money in ponzi schemes.

According to Bloomberg data, Bitcoin has risen from $ 904.48 a piece to $ 14,239.64 a piece — up 1,474 per cent between December 23, 2016, and December 22, 2017. This, in a year when the benchmark BSE Sensex and NSE Nifty yielded annual returns of 27.47 per cent and 28.19 per cent, respectively.

Kumar said he was confident that Bitcoin would surge in 2018, and hoped the government would come out with clear taxation and transaction guidelines for virtual currencies.

“I will stay invested but I don’t want to increase my exposure to Bitcoins till the government comes out with a detailed set of norms on virtual currencies. I am hoping that the regulations, if any, will be put in place soon. It is not a chit fund scheme. A number of investors have put in their hard earned money in Bitcoins. If we book profits, we are willing to pay tax as well,” he said.

But not every investor is buying into the cryptocurrencies success story as Kumar is. A city-based journalist who bought a fraction of a Bitcoin in 2016 while writing a story on the growing interest around virtual currencies said the price of Bitcoins would rationalise in 2018, as the current prices are “too high” and solely driven by investor sentiments instead of “fundamentals”. The investment of this journalist had increased from Rs 4,000 in September 2016 to Rs 1.3 lakh in December.

“I have not seen this kind of volatility in any other financial product. The cryptocurrency prices are driven by news reports and investor sentiments. But now due to the introduction of futures in Bitcoin, the prices may rationalise in 2018,” said the journalist who did not wish to be named.

“I have recently withdrawn 80 per cent of my investment in Bitcoins and parked that money in other safer and regulated financial products as the initial investment was just for research purposes for my article. In the absence of clear regulations, virtual currencies are prone to financial frauds, and can easily be used for money laundering and tax evasion,” the journalist said.

Cryptocurrencies, including Bitcoin, are not approved by Indian regulators. A number of countries such as the US, Japan, Australia and the Philippines have either regulated it or declared it illegal. Financial market experts said while the Blockchain technology had good use, the Bitcoin boom might be a bubble.

“We have no idea who is controlling the software code, there is no underlying value, yet you hear somebody made Rs 20 lakh in a day. I am worried. Many people will have to rediscover there’s no easy money in this world,” said Nirmal Jain, founder and chairman of IIFL Group.

The RBI has been issuing warnings to cryptocurrency investors since 2013. The Income-Tax Department is yet to clarify if Bitcoins should be treated as unlisted securities or commodity for taxation purposes. The capital markets regulator, Securities and Exchange Board of India (Sebi), has said Bitcoin and cryptocurrencies have so far not posed any systemic issue for the economy, but virtual currencies (VCs) cannot be ignored.

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