Do you need to invest in Bitcoin?

Written by Pranav Mukul, Sandeep Singh | New Delhi |

Updated: 23 December 2020 12:14:26





The origin of Bitcoin is not clear, nor who founded it. It is said that a person or group of people who had the identity of Satoshi Nakamoto conceived the accounting system after the financial crisis in 2008.

Bitcoin, a cryptocurrency, has broken through an important psychological barrier against the US dollar – a mark of $ 20,000 – after falling briefly during the 2017 rally. As of Thursday, Bitcoin has been trading above $ 23,000. The gathering at these levels, which has taken place over the past four months, has also seen different stocks take steps to legitimize the cryptocurrency. But before deciding to invest in Bitcoin, a number of factors need to be considered.

How does Bitcoin work?

The origin of Bitcoin is not clear, nor who founded it. It is said that a person or group of people who had the identity of Satoshi Nakamoto conceived the accounting system after the financial crisis in 2008. Nakamoto has published a white paper on a peer-to-peer electronic cash system, which would “allow online payments to be sent directly from one party to another without going through a financial institution”. According to Bitcoin.org, a website originally co-owned by Nakamoto, Bitcoin from a user’s perspective “is nothing more than a mobile application or computer program that provides a personal Bitcoin wallet and allows the user to send and receive Bitcoin with them.”

Bitcoins are usually identified by a Bitcoin address containing 26-35 alphanumeric characters beginning with “1” or “3”. This address, which remains anonymous, represents the destination of Bitcoin or its fraction. Originally, Bitcoin was supposed to provide an alternative to fiat money and become a universally accepted medium of exchange directly between the two parties involved. However, after Bitcoins gained momentum, some entities began to establish stock exchanges – on stock exchange lines – so that people could buy and sell Bitcoin against fiat money, such as dollars, euros or pounds. Early proponents of the cryptocurrency argued that, after the exchange was established, all of Bitcoin’s strengths disappeared, as a third party was once again involved in the money to change ownership.

The ups and downs of the value of Bitcoin

Are records kept of Bitcoin transactions?

Nakamoto put forward the idea of ​​a publicly available, open book that would contain all transactions ever executed, albeit in an anonymous and encrypted form. This book is called a blockchain. Given the public and open nature of the general ledger, proponents of this currency system believe it could help eliminate corruption and inefficiencies in the system. In a traditional financial transaction in which two parties use fiat money, a third organization – usually a central bank – ensures that the money is true and that the transaction is recorded. With Bitcoin, a chain of computers is constantly working to authenticate transactions by solving complex cryptographic puzzles. To solve puzzles, these systems are rewarded with bitcoins. This process is called Bitcoin mining.

How is Bitcoin acquired?

You can either dig up new Bitcoin if they have computing capacity, buy it through an exchange, or acquire them in person-to-person transactions without a prescription. A bitcoin exchange works like a bank where a person buys and sells Bitcoin with a traditional currency. Depending on supply and demand, the price of Bitcoin varies constantly. Miners are people who confirm a Bitcoin transaction and secure the network with their hardware. The Bitcoin protocol is designed in such a way that new Bitcoins are created at a fixed rate. No developer has the power to manipulate the system to increase their profits. The unique aspect of Bitcoin is that only 21 million units will ever be created. However, transactions may be denominated in Bitcoin subunits. Satoshi is the smallest particle of Bitcoin.

What led to the rise in Bitcoin prices?

According to those closely monitoring the currency, prices were affected by a variety of factors, including increased acceptance during the pandemic. Globally, big players like the payment company PayPal and Indian lenders like the State Bank of India, ICICI Bank, HDFC Bank and Yes Bank have given cryptocurrency legitimacy to some of their decisions. For example, these Indian banks reportedly allowed their customers to use their bank accounts to finance cryptocurrency trading. In India, financial institutions froze the accounts of several exchanges back in 2018 after Fiat’s Reserve Bank of India banned banks from using their systems for cryptocurrency-related transactions. However, the Supreme Court ruled against the order in March this year.

“… The biggest factor (in the recent rise in Bitcoin prices) was the fact that some pension funds and insurance funds have taken permission to park a small portion of their portfolio in Bitcoins. Once that happens, affordability is a problem that leads to a jump in prices, ”said Sathvik Vishwanath, co-founder and CEO of the Bitcoin exchange Unocoin. Vishwanath, however, believes there would be a price correction when people see a price bubble, “but we don’t know at what level that would happen.” Follow the Express explained in the Telegram

What investment opportunity does Bitcoin offer?

The first proponents of Bitcoin did not intend to use it as an asset, but the growth of exchanges turned it into one. Traditional investment experts are wary of Bitcoin as an investment. “We do not offer advice on investing in Bitcoin. I don’t see any underlying factor driving its price and I think it is mostly driven by supply and demand and technical factors, so we don’t offer our advice. It is an alternative currency that is digital in form and one should be wary of it, ”said Surya Bhatia, founder of financial services management company and investment adviser Asset Managers of Delhi.

It is important to note that the price of Bitcoin fell sharply from more than 18,000 US dollars in December 2017 to about 3,200 US dollars in December 2018. It then rose to over 10,000 US dollars in July 2019, and then fell to about 5,500 US dollars in March 2020. It has had a sudden gathering since then (see chart). Market participants say high price volatility should make retail investors wary without any major underlying reasons.

Is there a case of Bitcoin being regulated?

People from the investment fraternity point out that there are no basic assets in the case of Bitcoin, and the value is “fictitious”. Before investors can look at it as an asset, several things need to be established. If cryptocurrency is regulated, it could result in reduced volatility, and its acceptability and monetization should be mitigated. “You can’t recommend it to anyone, because from now on it’s mostly a speculative thing. No one knows why prices have plummeted by 80% in 2018 and jumped four times this year. This type of unstable products is not for small investors “, said the highest official of the financial services company, who did not want to be named.

However, given that Bitcoin was supposed to come as a global decentralized currency, any central body that regulates it would effectively defeat that purpose.

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