Vasant G Hegde Chartered Financial Analyst (CFA), former banker and teacher at Manipal Academy of Higher Education, Bengaluru
DH Illustration
Just as one considered writing off crypto-currencies, with central banks across the globe refusing to accord them legitimacy and governments also dithering to recognise them, Bitcoins have made a silent but clear recovery last year, growing by no less than 158% in value. This resilience has brought this pioneering crypto-currency into the reckoning as an asset class to consider while looking to diversify one’s investment portfolio. Let us try to understand this survival story and the excitement Bitcoins continue to evoke.
The history
Invented with blockchain technology in 2008 - the very year a financial crisis rocked the world - by a mysterious individual or group identified as Satoshi Nakamoto, Bitcoin was first mined the next year. It is divisible into eight decimal places, with the smallest unit called Satoshi. The first commercial use of Bitcoin happened in 2010, when a programmer bought two Papa John pizzas with 10,000 Bitcoins. It has been one rollercoaster ride for this crypto since then, rising from the value of just $1 in 2011, crossing $1,000 in January 2017 to an all-time peak of $67,600 in September 2021, only to drop to below $ 20,000 after the crash of the Crypto exchange FTX in November 2022 and then rise again to trade at around $50,000 even as this article is being written.
The 2023 rally
As mentioned, the world’s first and still the largest cryptocurrency made an impressive 158% climb in 2023 going from $17,000 in January to $44,000 in December. The peaking of interest rates and subsequent multiple rate cuts implemented by the Federal Reserve, help push Bitcoin’s case. As did the collapse of the Silicon Valley Bank, First Republic Bank and Signature Bank within a span of five days in March 2023.
The remarkable feature of the current rally has been the indifference and lack of excitement by retail investors as reflected in trading volumes. With the US Securities and Exchange Commission approving eleven spot Bitcoin ETFs in January 2024, the cryptocurrency has finally got legitimacy and seems to be in the final stage of evolution. The Bitcoin halving, which happens every four years (when the reward for mining is cut in half), will occur in mid-2024 and that too could push up its price.
What’s in it for retail investors?
While Bitcoins offer investors an additional option for diversifying their portfolio, they need to be mindful of the volatility of the cryptocurrency. They are better suited for investors with a high-risk appetite and a long investment horizon. In India, investors can invest in Bitcoin ETFs through the LRS route (Liberalised Remittance Scheme) up to $ 250,000 in a financial year. Investors can invest in Bitcoins through many crypto apps or exchanges. Investors also need to have a wallet to store bitcoins. Gains in bitcoin trading are subject to a 30% tax in India apart from 1% tax deducted at source on transactions exceeding Rs 50,000.
Investors also need to know that Bitcoins don’t declare dividends or pay interest or rent. At best they can be compared to gold, though they do not have the intrinsic value or alternate use as ornament. Further, not being strictly regulated, investors could be exposed to security risks & scams. Bitcoin investing is also not suitable for ethical investors who believe in ESG investing (Environment, social & governance) since the mining of bitcoins consumes a significant amount of energy, raising concerns about its environmental impact.