“Forget about investing in any venture when the Bitcoin is here with surging profit on the cards.” This is how people are reacting with surging demand of the cryptocurrency. But is it really safe venture into this mysterious digital currency? Let’s explore what experts have to say.
Bitcoin is a virtual currency created from computer code. Unlike a real-world unit such as the US dollar or euro, it has no central bank and is not backed by any government.
Instead, Bitcoin’s community of users control and regulate it. Advocates say this makes it an efficient alternative to traditional currencies because it is not subject to the whims of a state that may devalue its money to boost exports, for example.
Just like other currencies, Bitcoins can be exchanged for goods and services — or for other currencies — provided the other party is willing to accept them.
Here are six reasons, according to financial experts, that you should not blindly trust the Bitcoin and stake your hard-earned money.
Origin unclear, growth speculative
When you buy stocks of a company, you know that the growth of your investment is directly proportional to the company’s growth, its earnings, turnover, expansion, and other internal and external factors. Similarly, behind every investment product there’s a mechanism as to how your money grows. However, in bitcoins, price is determined solely on the basis of demand and supply, and speculation is what is driving its prices right now.
Karan Bharadwaj, chief technology officer of Singapore-based fintech firm, XinFin says, “Bitcoin was invented to be a peer-to-peer digital cash system with a limited supply of 21 million bitcoins. Its price is driven because it is limited supply and decentralized, he was quoted by Financial Times as saying.
You can’t buy anything with it cos of remittance issue
By and large, in most countries, the acceptance of bitcoins is low and people are purely buying it out of speculation and not with the intention of using it as a tool to transact.
Deepak Kinger, vice president, banking and financial services, Virtusa Corporation, a fintech firm says, “Like we have Visa, MasterCard and RuPay networks, for bitcoins to become mainstream something like that needs to happen.
Once your money is gone, you cant reclaim it
In most countries, if by any chance you make investments in a fraudulent bitcoin exchange, there’s no one you can approach, not even the government can help you in getting your money back.
You buy and sell cryptocurrency solely on the face value of the exchange. Some of the popular exchanges include Zebpay, Unocoin, and Coinsecure. But if there’s a fraud, your money is gone, and in the absence of a regulator there’s no way to address it.
Kinger says that there’s no mechanism to validate the authenticity of bitcoins.
Also, there have been instances where investors have faced challenges while trying to sell their bitcoin holdings. So, even if you have holdings worth crores in bitcoins, if you can’t remit or liquidate it easily, what good does that do?
Is it really a currency or even commodity?
The lack of clarity about its origin is another big issue related to bitcoin. In olden days, highly priced metals like gold, silver, etc. were used as currencies.
Then came currencies printed by governments (or central banks) and these are called ‘fiat currencies’. Though its proponents claim that cryptocurrency is ‘mined’ using complex mathematical formulae, they are reluctant to call it a commodity. They also claim that it is not controlled by any government and so, it is ‘democratic’. Therefore, cryptocurrencies don’t fall into the ‘currency’ category either. “It can be very risky for businesses, industry and people to trade or invest in bitcoins as it is just a formula, not backed by any tangible asset, but by sheer demand,” says S.P. Sharma, Chief Economist, PHD Chamber of Commerce and Industry.
‘Don’t invest if you don’t understand’
Some global bankers and experts have warned investors against investing in cryptocurrencies, because they are of the opinion that it is nothing but a bubble that is just about ready to burst. Jamie Dimon, CEO, JP Morgan, for instance, has recently expressed his doubts about the value of bitcoins, saying “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.”
The problem is apparent: If global bankers don’t understand the phenomenon, retail investors might not have much of a chance either. So what should you do? Follow the simple yet profound wisdom of Warren Buffett—if you don’t understand it, don’t invest in it.
Aside from the operational issues of trading in cryptocurrencies, there is also a high risk of fraud.
There is still a good deal of misinformation and lack of clarity regarding bitcoin trading, and fraudsters have taken advantage of this to launch Ponzi schemes, which promise ‘guaranteed high returns’. Some companies claim to double the initial investment within a very short period of time.
Suggestions for buyers
Liquidity is a major issue with bitcoins, especially if prices crash or if a bitcoin exchange goes bust. And about the returns, well, such inflated returns in less than five years, is an indicator that the cryptocurrency is inching towards bubble territory. And history has taught us that when an asset bubble bursts, it is the small investor who gets hurt the most.
Some commentators say that like many technological developments, the first iteration of a product will encounter difficulties, possibly terminal ones. But the trail it blazes might smooth the way for the next crypto currency.
Problems include an apparent vulnerability to theft when Bitcoins are stored in digital wallets.
A major Hong Kong-based Bitcoin exchange suspended trading last year after $65 million in the virtual unit was reportedly stolen by hackers.