Bitcoin Investment : What should an investor do ?

Latest drop in bitcoin prices have left many high and dry. While some are saying it is a buying opportunity, others have turned cautious. Many pundits have been predicting its demise for a long time and may be feeling vindicated. Yet there are several industry stalwarts who continue to invest. So, what should an investor do with his hard-earned money? We have tried to answer this below.


Bitcoin Prices in last couple of years

Bitcoin – The Beginning

Born in mid-2009, Bitcoin gained attention for its blockchain technology that can facilitate safe and fast digital payments across the globe. It is a cryptocurrency which is limited in supply. According to its protocol, there can only be a maximum of 21 million Bitcoins in circulation. Out of these, around 15 million Bitcoins have already been created. It is expected that by the end of 2032, there would be around 20 million Bitcoins in circulation. The remaining 1 million Bitcoins would be mined over a period of the next 100 years.

The limited supply combined with increase in global acceptance drew high interest from retail investors. This resulted in its meteoric price rise. The story of the Winklevoss twins, who became the first bitcoin billionaires after investing just $11 million in the year 2013 caught investor fancy. And within a short time, not investing in Bitcoin wasn’t being savvy. Despite warnings from several governments and finance gurus, people went ahead due to fear of missing a golden opportunity where their friends were making easy money! .


Latest drop in bitcoin prices

[Source: ]

Let us what government and gurus say about Bitcoin:

Positive views from,

Jay Clayton,

U.S Securities and Exchange Commission Chairman

“We have seen historical instances where such a rush into certain investments has benefited our economy and those investors who backed the right ventures,” he said in testimony before the Senate banking committee. “But when our laws are not followed, the risks to all investors are high and numerous –- including risks caused by or related to poor, incorrect or non-existent disclosure, volatility, manipulation, fraud and theft.”

– 02/06/18 [Source: Bloomberg]

Ravi Menon,

Managing Director, Monetary Authority of Singapore

“Whether digital currencies will take off in a big way remains to be seen. But it is a phenomenon that many central banks are watching closely, including MAS. And if they do take off, one cannot rule out central banks themselves issuing digital currencies some day!’”

– 06/29/15 [Source: Bloomberg]

Haruhiko Kuroda,

Governor, Bank of Japan

“Given that the development of financial services has been supported by ledgers as the basic infrastructure for information, the dramatic changes in how ledgers are kept may have the potential of significantly changing the structure of financial services.”

– 08/23/16 [Source: Bloomberg]

Bill Gates,

Co.Founder, Microsoft CORP.

“Bitcoin is exciting because it shows how cheap it can be. Bitcoin is better than currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.”

– 10/02/14 [Source: Bloomberg]

Peter Thiel,

CO-Founder, PayPal and Billionaire Venture Capitalist

“Bitcoin critics are “underestimating [it] … It’s like a reserve form of money, it’s like gold and it’s just a store of value. You don’t need to use it to make payments.”

– 10/26/17 [Source: Bloomberg]

Christine Lagarde

Managing Director, International Monetary Fund

“Not so long ago, some experts argued that personal computers would never be adopted and that tablets would only be used as expensive coffee trays. So, I think it may not be wise to dismiss virtual currencies.” Countries with “weak institutions and unstable national currencies” may see growing use.

– 09/29/17 [Source: Bloomberg]

Jamie Dimon,

JP Morgan Chase & Co. Chief Executive Officer

“I regret making” comments saying Bitcoin is a fraud, Dimon said in an interview with the Fox Business network. “The blockchain is real. You can have crypto yen and dollars and stuff like that.”

– 01/09/18 [Source: Bloomberg]

Cautious / negative views from,

Warren Buffet,

Chief Executive Officer, Berkshire Hathaway INC. and Billionaire Investor

“People get excited from big price movements, and Wall Street accommodates … You can’t value Bitcoin because it’s not a value-producing asset.” It’s a “real bubble.”

– 10/29/17 [Source: Bloomberg]

Elvira Nabiullina, 

Governor, Bank of Russia

“China doesn’t recognize cryptocurrency as payment and forbids ICOs … Our views are absolutely similar. In our view, it’s a sort of a financial pyramid that may collapse at any moment.”

– 09/14/17 [Source: Bloomberg]

Charles Munger,

Berkshire Hathaway INC. Vice Chairman

“I never considered for one second having anything to do with it. I detested it the moment it was raised,” Munger said at the annual meeting for Daily Journal Corp. in Los Angeles. “It’s just disgusting. Bitcoin is noxious poison.”

– 02/14/18 [Source: Bloomberg]

Jamie Dimon
Chief Executive Officer, JP Morgan Chase & CO. 

“It’s a fraud.” If a JP Morgan trader began trading in Bitcoin “I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.”

– 09/12/17 [Source: Bloomberg]

Brian Moynihan
Chief Executive Officer, Bank of America Corp.

“There ought to be a hard look at the policy of anonymous currencies, because the ability to track information of money flowing is one we use seriously against terrorism and as [a tool] against improper, illegal behavior.”

– 10/26/17 [Source: Bloomberg]

Ben Bernanke
Former Chairman, Federal Reserve

“Bitcoin is an attempt to replace fiat currency and evade regulation and government intervention. I don’t think that’s going to be a success.”

– 10/17/17 [Source: Bloomberg]

Arun Jaitley,

Government of India

“India doesn’t consider cryptocurrencies legal tender “and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system” while exploring the use of blockchain technology, he told lawmakers in his annual budget speech.”

– 02/01/18 [Source: Bloomberg]

Value add by Bitcoin which drives its prices

  • Bitcoins can be sent to anyone around the world without any intermediaries.
  • Highly secure transactions based on universally acclaimed blockchain technology.
  • Decentralised currency, which no government or person can trace or take back.
  • Anonymity and privacy

Challenges of investing in Bitcoin

  • Bitcoin is not backed by any asset (in contrast RBI has asset in form of gold etc. for each rupee issued)
  • High price volatilitywill keep investor guessing on right entry price.
  • Its increasing use for illegal activities
  • There is no source of recourse once you lose your bitcoin wallet. That means, once you lose access to your bitcoin wallet credentials, it is impossible to get back them back.

Hence, we think that investors should wait for the dust to settle. The US is mulling to bring in regulation. Once it is regulated, we expect favorable stance from the governments which will help bitcoin to recover its somewhat lost sheen. And most importantly, help investors make money without taking undue risks.

Meanwhile, investors can avail of several new age investment opportunities. One such emerging theme is investment through Peer to Peer lending market places (P2P Lending) which are regulated in most of the countries including India. In addition, they may provide handsome returns of 20% – 30%.

P2P Lending industry in 2017 - A year of recognition

P2P Lending industry in 2017 – A year of recognition

Briefly, P2P Lending market places allow individuals to lend and borrow money directly. There is tremendous cost saved in the process. While banks pay about 7% interest rate on fixed deposit, they lend the same money at 12% – 25%, pocketing the difference. The investors can now lend directly to borrowers and in process making much higher returns.

The return to lenders is in form of monthly repayments from the borrowers, comprising a portion of principal and interest income for that month. Thus, P2P lending facilitates lenders get a regular stream of monthly income. It also allows lenders to lend small sum of money to multiple borrowers, thereby mitigating risks associated with default of one borrower. Hence, this helps lenders make attractive returns at reasonable risks.

Merits of P2P lending

  • A regular and fixed income in the form of loan repayments from borrowers.

Concerns in P2P lending

  • Risk of loss of investment due to default by borrower.
  • Interest earned attracts income tax and hence, impact overall returns.

What is better?

To summarize, we think that it will be wise for investors to wait till there is regulatory certainty of bitcoin. Till that time, it might result in total capital loss in case of outright ban which several countries including India have been proposing. The government of India has called it a ponzi scheme which is tantamount to saying that people buying bitcoin will lose money. Hence, in the meantime, we suggest investors looking for higher returns to explore other options such as P2P lending etc. It is better to be safe than sorry!

Remember to research well and do appropriate analysis before you invest your hard-earned money.

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