Bitcoin slump: The risks of investing in cryptocurrencies

Bitcoin slump: The risks of investing in cryptocurrencies

Even seasoned investors and hardcore supporters of Bitcoin don't deny that trade in cryptocurrency is an extremely risky affair but greed has made them addicted to this digital gamble.

More risk often brings more profit, but blind risk always leads into a blind alley. The losses associated with Bitcoin are more certain than earnings because it is highly unpredictable, volatile and esoteric. Even seasoned investors and hardcore supporters of Bitcoin don't deny that trade in cryptocurrency is an extremely risky affair but greed has made them addicted to this digital gamble. That's why Bitcoin and other alternative cryptocurrencies are banned in various countries around the world and the Reserve Bank of India (RBI) has many times warned the people about the repercussions of Bitcoin.

Let's find out that how this digital currency came into existence and what are those factors that make it an investment option despite a whopping growth in Bitcoin prices in the last couple of years. Bitcoin is a type of digital currency which is generated by using encryption techniques. Bitcoins were invented in the year 2009 by an unknown programmer under the pseudonym Satoshi Nakamoto. The value of one Bitcoin in 2009 was Rs 0.0048 whereas in December 2017 the value of one Bitcoin was around Rs 9 lakh. No certified body or authority monitors the Bitcoin and it works on the peer-to-peer network; where all transactions get recorded in a distributed ledger known as blockchain. Moreover, Bitcoin allows users to make anonymous transactions and remain anonymous. Due to the absence of any central authority, the transactions involving bitcoins are highly anonymous. This element of anonymity associated with bitcoin makes it a highly favorable mode of exchange for covert and illegal transactions.

A Dark History

The history of bitcoin is full of upheavals; rise of bitcoin exchanges, unexpected appreciation, hacking, and then a loss of millions and billions of dollars through Mt. Gox hacking, Bitfinex fiasco, NiceHash, and the global tragedy WannaCry that happened a few months ago. Studies on Bitcoin convey that nearly one-third of its exchanges/trading platforms have been hacked, and almost 50 percent were shut down in the last seven years. Bitcoin neither qualifies for a currency status nor meets the criteria of a commodity. The highly volatile nature, issues of legality, an absence of a governing body, and its illicit use by grey marketers make Bitcoin a quite untrustworthy investment option.

Though a number of factors are involved here that jeopardise the money of Bitcoin holders, the worst thing about these investments is zero depositor's insurance to cover up the loss. This is the reason that investment tycoon Warren Buffet calls it a mere bubble and according to James Dimon, CEO of JP Morgan Chase, "It's little more than a "fraud".

Looming Security Threats

Bitcoins are synonymous with looming cyber threats as the absence of any central authority means that in case of a technical error or an encounter with a deceitful dealer, there would be no one to be contacted. Even the password of Bitcoin wallet is irrecoverable. Once lost or forgotten, it is impossible to recover the password which would make the balance of your Bitcoin wallet futile. Similarly, the balance transfers of Bitcoins are also irreversible. Hence, Bitcoins once stolen or diverted to some other account by hackers would be impossible to recover.

Beware of Blind Temptation

People assume that Bitcoin is legalised in India although its status is quite ambiguous and the RBI had also warned people about the consequences of making investments in Bitcoins and other cryptocurrencies. Very recently, Corporate Affairs Minister Arun Jaitley has also clearly stated that none of the cryptocurrency is so far legal in India. He said, "Bitcoin does not have a legal tender in India. However, it has presence in both in the public domain and in the unorganised markets." Jaitley also admonished the investors about risks involved in cryptocurrencies.

"Virtual currencies (VCs) including Bitcoins do not have any underlying assets and their price is entirely speculative, which can expose the investors to heightened risk," said Jaitley. Now, as no legal status is granted to virtual currencies in India, there are no set rules and guidelines available to the judiciary for resolving disputes related to investments in cryptocurrencies. So, in case of any fraud/dispute, an investor can't seek legal help and has to bear the brunt of losses solely.

The writer is CEO of Finway Capital Private Limited