Crypto-currencies like Bitcoin have been in the news in recent times. More because of the kind of return they generate and also because they have emerged as an attractive alternative over the regular currency medium. However, how safe are crypto-currencies for investment?
Experts seem to be divided over this. While some say that crypto-currencies may be a good investment option if bought carefully, others say that investing in them is fraught with risks, and should better be avoided. According to some experts, crypto-currencies like Bitcoin are safe as they are guaranteed by cryptographic algorithms, ie. they cannot be hacked, manipulated or altered. Also, the paperless, bank-less, state-less currencies are more stable than the government-backed currencies that can be easily devalued or demonetized by central banks printing money. Investing in Bitcoins also makes sense as it has substantially low inflation risk, no risk of currency collapse and they are limited in number. Another advantage is that Bitcoins cannot be tracked and the owner needs to memorize a private key. They are, thus, free from economic inflation and regulatory woes.
Talking about crypto-currencies, Sreekanth G S, COO, Coinome Crypto Currency Exchange, says, “Traditional currencies were always either pegged against gold or were fundamentally inflationary. Over the last decade, Bitcoins have seen a surge in consumption, treating them as a store of value, a mode of payment or as an investment. This surge is attributed to their limited supply and non-inflationary nature. Crypto currencies are generally de-centralised and not controlled by government or monetary authorities. This disruption has made many nations keenly observe the evolution of cryptocurrencies, leading them to acceptance by counties like the United States of America, Japan, and Australia, to name a few.”
However, crypto-currencies have inherent security risks being digital and pseudonymous in nature, and the lack of a central authority leading them to occasional illegal uses. To overcome such risks and for the fruitful future of this technology, regulation and acceptance by the government is highly anticipated by the public, he adds.
These experts, therefore, advise to invest in, say, Bitcoins with a long-term view as their value increases over time. Short-term traders may not find Bitcoins as a lucrative investment option. However, in the recent years the market has experienced a good volume of short-term traders earning good profits as well. Therefore, some experts recommend investing in small amounts and bracing oneself for massive value swings in the long term.
On the other hand, there are many who are skeptical about crypto-currencies as they have none of the stability mechanism typically associated with a currency — the very reason which makes them volatile.
“Crypto-currencies like Bitcoins are not regulated, implying that your investment is not safe. In case of any loss, you will not be able raise the issue with any regulator. The system is opaque because on what fundamentals the currency derives its value from is not known. If, for example, the value of bitcoin goes from $4000 to $10,000 in two months, then there is nothing to determine the cause of the surge except for demand-supply dynamics, which can be manipulated,” said a currency and forex expert at a brokerage, who did not wish to be named.
“So, I wouldn’t recommend investing in cryptocurrencies. From an Indian perspective, given the lack of transparency, cryptocurrencies may encourage parallel economy. I am not sure if it would be a good idea to encourage them,” he added.
It is a fact that Bitcoin is a legal instrument and well regulated in developed places such as the USA, EU, Japan, and Singapore. However, in India there is no specific law governing it. The RBI acknowledges the transactions happening through Bitcoin and warrants a strict watch over them. Many countries are now formulating rules to regulate and tax the use of Bitcoin. Since there is a push towards going cashless in India, it is likely the government may introduce a legal framework governing the use of crypto-currencies. However, if you are still looking to accumulate Bitcoin or any other crypto-currency, do not plunge in before you understand the nitty-gritties of these currencies.