If you are someone interested in growing your wealth you had to have heard of the big Bitcoin story that has kept appearing in the finance pages in recent days. Now I have to confess I don’t understand very much about Bitcoin except that it is a type of crypto currency that only exists in digital (not physical) form. I also read recently that one Bitcoin equals about Rs. 27 lakhs (or about $36,934), a simply staggering exchange rate. So what else do we know about Bitcoin? Is it a sound investment?
The nature of crypto currencies such as Bitcoin is that these are not issued by any government or central authority. Instead they are created by an unknown group of people using the name Satoshi Nakamoto as open source software. People then ‘mined’ for Bitcoin. There were only a limited number of these and those original ‘miners’ were mostly tech geeks. Bitcoin had little or no value to begin with, but soon they were traded using traditional currency and valuations simply shot up. Apart from Bitcoin, there are other crypto currencies such as Ethereum and Litecoin that have seen varying degrees of appreciation.
Over the years, we have witnessed many a Bitcoin crash where the value of this ‘decentralized virtual currency’ has tumbled dramatically and alarmingly. Over the past year of 2020, the value of this shot up by a whopping 400% but then most recently experienced a very steep fall of 20%. This volatility has ensured that many have made a lot of money while a lot of people have sustained big losses as well.
The nature of Bitcoin is such that the ‘mined’ currency can be ‘thrown away’ accidentally (remember that episode of the Big Bang Theory where a keychain pen drive with Bitcoin worth a lot of money was lost?). Just recently there were reports of IT engineer James Howells throwing away a hard drive with Bitcoin worth about $280 million on it. The man is currently petitioning local authorities to be allowed access to search landfills where his precious hard drive could have ended up. There could be a similar result if one forgot a password or accidentally corrupted the data on a hard drive.
According to former RBI Governor Raghuram Rajan, this is a classic bubble scenario. Right now everyone is just jumping on to the Bitcoin bandwagon creating an artificial and probably unsustainable surge in valuations. Rajan points out that Bitcoin produces no value and currently it is very difficult to pay for anything using this virtual currency. The $40K valuations are ‘just too costly’ according to him, and the expectation of a further rise is unrealistic.
Other experts also believe that trend following investors could dump Bitcoin, further hurting its prospects. This is with reference to the record $42,000 mark Bitcoin touched earlier in January, followed by a sudden 10% drop. Unless the valuations rise about the magic $40,000 mark, there will be this apprehension. That 40K mark could determine future outlook for Bitcoin, say trade analysts.
There are those who believe that Bitcoin is now maturing and presents a hedge against dollar weakness. It could be important in a recovering world economy, say proponents.
However, on the whole, experts seem largely to think of Bitcoin as a highly speculative option with very high risk. It is certainly not for the risk averse among us. And as Raghuram Rajan and any other financial pundit will tell you, diversification is a must; the key to any healthy investment portfolio. So Bitcoin may be both ill-advised and unaffordable for an overwhelming majority of investors right now.
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