Bitcoin fever grips India amid global rally | Economic Times

Mumbai: The cryptocurrency frenzy worldwide has rubbed off on Indian investors too. With prices of bitcoin — the most popular cryptocurrency — soaring to a record high of $23,000 and bringing its returns so far in 2020 to over 200%, local retail and rich investors are flocking to this unregulated new-age asset despite expert warnings about abrupt price reversals.Over a million new investors have flocked to the bitcoin market in the six months taking the total investor base for this new-age asset in India to 5-6 million, according to various industry estimates. Trading volumes too have grown multi-fold with the average daily turnover now around $80 million. The global rally in bitcoin along with the Supreme Court judgment earlier this year quashing an earlier Reserve Bank of India ban on cryptocurrencies has contributed to this euphoria locally.“We are seeing a flow of both retail and high networth individuals buying the cryptocurrencies,” said Nischal Shetty, CEO, WazirX, a bitcoin exchange. “While the volumes have gone up as much as 8-10 times in India during the last one year, we have seen at least a million new investors putting money into bitcoin.” 79831650Inflationary Hedge for InstitutionsWhile most local investors are in it because of the potential of some quick gains, globally bitcoins are being lapped up even by institutions because they are seen as an inflationary hedge. Cryptocurrencies are now being included in the traditional asset allocation baskets which so far have been stocks, fixed income securities, real estate and gold. Television shows have been name dropping cryptocurrencies. In the popular American series Billions, billionaire hedge fund manager Bobby Axelrod compensated one of his traders with crypto and is also seen debating with nemesis US attorney Chuck Rhoades on the merits of bitcoins.Limited in supply like gold, bitcoins are seen as a protection against the weakening dollar with the US Fed and the government flooding the economy with liquidity as part of their massive stimulus packages to boost recovery. But, unlike gold, which is mostly preferred by boomers, cryptocurrencies are favoured by millennials. A lot of gold bulls are now shifting to bitcoins.“Gold bugs have to face up to the real risk that risk averse capital, which would have otherwise gone to gold to hedge the obvious ongoing fiat paper currency debasement in the G7 world, will now go to bitcoin. In fact that process has already begun,” said Christopher Wood, global head of equity strategy at Jefferies in his newsletter Greed & Fear. “It is also the case that the supply of bitcoin is shrinking, under the quantitative tightening dynamic, which is certainly not the case with gold.”Convenient & Cheap to BuyIn India, almost 30-40% of the bitcoin investor base comprises small-time investors, according to industry estimates. These investors are attracted to cryptos because they are convenient and cheap to punt on compared with regulated securities such as stocks and derivatives. The minimum ticket size for buying bitcoin is as low as Rs 100 without various regulatory requirements.“Unlike traditional equity or derivative markets which are led by institutional investors, the bitcoin market in India is dominated by a large number of small-ticket investors,” said Shetty.The asset class, however, continues to be in the regulatory twilight zone. The Supreme Court judgment in March 2020 has made it clear that bitcoin isn’t illegal but there are no regulations that make the asset legal, keeping it out of institutions’ bounds.Bitcoin witnessed a major boom in 2017 when its value against the dollar went up 20 times between January and December of the calendar year. Its price rose from $970 apiece to $20,000. So, if someone invested Rs 1 crore in January 2017, the same investment would be worth Rs 20 crore by the end of the year. However, the bumper run came crashing in 2018 when the value of this crypto asset fell to $3,700 from $20,000, resulting in many small investors burning their fingers.Risks Remain“Bitcoin popularity is on rise as volumes are picking up and startups engaged in bitcoin related businesses are getting funding from international investors,” said Tanvi Ratna, founder, Policy 4.0 — a boutique consultancy that advises on cryptocurrencies and blockchain solutions. “Globally we have seen some instances where certain large investors had used the ‘pump and dump’ strategy to take the prices up, so one should be mindful of the risks involved.”So, if an investor is buying a bitcoin on a cryptocurrency exchange, there is no guarantee that the seller actually possesses the bitcoins he claims to have. Again, there is no clearing and settlement system and hence the exchange wouldn’t guarantee the settlement of your trade.