March 2020, the Supreme Court lifted the ban from cryptocurrency transactions in India. Since then we have witnessed increased investments and curiosity in the cryptocurrencies’ space (especially Bitcoin) in India. In this article, we will try and understand for Bitcoin the current global and Indian outlook, reasons for its price surge, its legality in India, and will conclude with whether or not Bitcoin investment is advisable.
Bitcoin: The Price Rise
The Bitcoin price has risen by more than 4 times from $7,000 in January 2020 to $ 32,500 today at the time of writing this article. But what are the reasons for the sudden spike in the Bitcoin’s price. Although till the beginning of the year 2020 it was disparaged by investment stalwarts like Warren Buffet. Let us analyze possible reasons.
- Bitcoin as the Hedge Fund:
a) Hedge against inflation:
Governments and Central Banks print in large sums of paper money to reduce debts and address unprecedented losses in jobs and economies. This printing is disproportionate to the resources available for buy and sell. This creates inflation (hyperinflation). For example, the Pandemic 2020 left people jobless and economies dip sharply. The Government and the Central Banks responded by printing in large sums of paper money to accommodate the poverty in the society.
Ex: Venezuela, Zimbabwe, Lebanon and Argentina.
But this is not a sustainable solution in the long term which ultimately decreases the value of the currency, as people have more money against the fixed resources which they can buy and sell. Hyperinflation happens. Zimbabwe suffered a similar situation in 2019 when people were not able to enjoy the basic amenities with a Billion dollar also.
You can read the Case Study for Zimbabwe hyperinflation here.
On the other hand, Bitcoin protocol limits the number of Bitcoin to be mined (produced) to 21 million only. This makes Bitcoin a rare commodity like Gold (even rare than Gold) which is anti-inflationary. With increased adoptions among people globally the price of the Bitcoin is bound to increase. Hence many people treat Bitcoin as the Hedge against the traditional currencies (Dollar, INR, Euro, etc.).
b) Hedge against political instabilities and social disruptions: History has seen paranoid leaders, unstable Governments and Banks seize bank accounts. Ex: Yes Bank in India, Sony Pictures, JP Morgan, Greece Bank. See here. Bitcoin on the other hand is not controlled by any Governments or Banks which can sacrifice your money for accommodating a fraud, scam or debt. Hence Bitcoin acts as the hedge against the possible political and social disruptions.
- Epochal event of “Bitcoin Halving”: You might know that, for adding transactions to the Bitcoin blockchain, one is rewarded with Bitcoins.
The Bitcoin algorithm allows such rewards. The addition of blocks containing transaction data is very similar to the updating of records or ledger by the bankers in the conventional banking system, after every new transaction. In Bitcoin, for all the new transactions, the ledger or the record is updated by members known as miners. Read this article to understand it better.
Bitcoin Halving is a significant event that happens every 4 years. At each Halving event the number of Bitcoins given in reward for adding transactions in the Bitcoin Blockchain, is halved. The current reward for mining one block is 6.25 Bitcoins at the time of writing this article. The next halving somewhere in 2024 will halve it to 3.125. Halving is done to counter inflation by controlling the flow of number of Bitcoins in the market. Each of the Halving event has witnessed the price of the Bitcoin surging up. The last Halving which happened in May 2020, had left analysts speculating the price of the Bitcoin to rise as high as USD 90K.
- Adoptions by the traditional large financial bodies like JP Morgan Chase, BlackRock, AllianceBernstein, Morgan Stanley and Tudor Investment.
a) JP Morgan endorsement of Bitcoin: The large financial body claimed in January 2021, that the price of Bitcoin could surge to USD 146,000 in the long term. The Wall Street Bank also speculates that in the long term we will witness Bitcoin surpassing Gold in terms of more investments being poured into Bitcoin.
b) Morgan Stanley boosting its stake in MicroStrategy (a BI company holding over USD 2 Billion of Bitcoin) to 10.9%: The financial giant Morgan Stanley recently boosted its stake in MicroStrategy by adding 6,50,000 shares to its portfolio. MicroStrategy is a Business Intelligence firm which was little known till it bought its first Bitcoin in August 2020. The investment ensued the shares of the firm skyrocketing by over 330%, from a mere USD 123.80 to USD 539.57 in August 11, 2020. Given MicroStrategy’s shares are largely tracking the price of bitcoin, it’s likely Morgan Stanley views its investment in MicroStrategy as a way to indirectly increase its stake in Bitcoin.
c) BlackRock seeking a Vice President to manage and drive the company’s crypto-related offerings: In December of 2020, the world’s largest asset management firm BlackRock posted a job for a Vice President for its New York office, to help build and execute its crypto business.
d) Paypal new service: In October of 2020, digital payments giant Paypal, introduced its new service offering wherein, clients can buy, sell and hold cryptocurrency (including Bitcoin, of course) directly from their Paypal accounts. Mizuho Securities analyst Don Dolev has forecast that Paypal will earn up to $2 billion in revenue from its bitcoin business by 2023. This year, he expects that the payment giant’s overall revenue will climb 20%.
Bitcoin: Indian outlook
Is Bitcoin Legal?
Yes (at the time of writing this article, and as per the best of my knowledge) buying, selling and holding Bitcoins and other cryptocurrencies like Ethereum, is legal in India. In March of 2020, the Supreme Court lifted the ban that RBI had put in 2018, prohibiting any entity from providing banking services to anyone dealing in cryptocurrencies. Banks like State Bank of India, ICICI Bank, HDFC Bank and Yes Bank, have given legitimacy to cryptocurrency by reportedly allowing their customers to use their bank accounts to fund cryptocurrency trading and investments.
But Bitcoin transactions are not authorized or regulated by any Central authorities like banks or governments. Confused. Let us understand what the statement in the above paragraph and the one starting this paragraph mean.
- It is legal to buy, sell and hold Bitcoins and other cryptocurrencies. You can buy them using a broker, exchange or get them by mining. I will discuss this in a separate article.
- The transactions you perform in Bitcoin or other cryptocurrencies will not be tracked and regulated by any Central authority like banks and governments. This means that there are no concrete regulations or laws to resolve disputes that might happen in Bitcoin or other cryptocurrency transactions.
Bitcoin transactions are peer to peer. The very purpose of Bitcoin is to eliminate third party for any financial transactions. Unlike this all the digital transactions you perform in fiat currencies like INR, USD are tracked, regulated and authorized by Central Banks. Bitcoin transactions till now does not have any concrete guidelines to resolve any resulting disputes. Though entities are working to set concrete guidelines regarding the same. In fact Credit rating and audit firm for blockchain (the technology on which Bitcoin works) Crebaco Global and the Indian law firm Khaitan and Company are working to submit their first draft of a cryptocurrency bill to the finance minister by end of December 2020. I am not been able to get any details for the submission till the time of writing this article.
How to check Bitcoin Price?
There are many portals that will show you the current price of Bitcoin. Use Price Check link to check the current price of Bitcoin.
To conclude, I will say one should invest or trade in Bitcoin, but only his/her extra money. Bitcoin can give huge returns in the coming decade with analysts speculating a price of $300,000 in the coming decade. But one needs to keep in mind that it is still in the nascent stage and parking a major portion of your capital is not advisable at all. Some of the upcoming events that should witness a further surge in the price of Bitcoin are listed below.
- A concrete law or regulation around cryptocurrency. As mentioned above, the India law firm Khaitan and Company is working with a global Blockchain audit firm to submit the first draft of the cryptocurrency regulations to the Finance Ministry. This will further witness increased adoptions of Bitcoin among people.
- Increased adoption by banks and digital payment entities. In addition to lenders like State Bank of India, ICICI Bank, HDFC Bank and Yes Bank, new banks are likely to allow their customers to use their accounts to fund cryptocurrency trading.
- Pension funds and Insurance funds adoption. The biggest factor (in the recent rise of Bitcoin prices) has been the fact that some pension funds and insurance funds took permission to park a small part of their portfolio in Bitcoins. Once that happens more and more people will make their first plunge in the Bitcoin industry, hence surging the prices further.