Investing in bitcoins—a family office perspective3 min read . Updated: 05 Mar 2018, 01:43 AM IST
Bitcoin does not have many advantages that physical currencies provide. The fact is that bitcoin is a relatively new and young currency but technologically, it is an obvious breakthrough
Cryptocurrencies are just lines of computer code that hold monetary value, and these lines of code are created by electricity and high-performance computers. Digital money of this kind is created by painstaking mathematical computations and supervised by millions of computer users called ‘miners’.
In the year 2009 it was first created by a developer supposedly named Satoshi Nakamoto. The inventor disappeared and left behind a bitcoin fortune. Everyone is so much excited about the returns these coins have made in the last few years which are stored on the internet somewhere. The currency was widely used by criminal traders from 2011 to 2013 by buying them in batches of millions of dollars so they could move money outside the eyes of law. Taxmen also can’t freeze or examine bitcoin accounts and even banks are not required to complete the transaction. So, clearly, no involvement of the traditional banking system.
This currency is completely unregulated and decentralized, and has no collateral like any precious metal behind it. It is a self-limiting currency because only 21 million total bitcoins will ever be allowed to exist, with almost 11 million of those bitcoins already mined and are in current circulation.
There is absence of a regulator of the online exchanges that trade cash for bitcoins. Bitcoin exchanges have no insurance coverage for users. There is neither a central bank nor a government creating and tracking bitcoins. The surge in prices in recent times is mainly because wealthy criminals were purchasing bitcoins in large volumes.
Here, one question comes to my mind: How can a currency which has emerged from the world of criminals become a mainstream investment, with attendant risks of scandals and hacks? Globally, governments are now concerned about the growth of cryptocurrencies. Authorities in China last autumn shut down the country’s biggest cryptocurrency trading exchanges to control speculation. US regulators have been more liberal in the trading of bitcoin futures last year. But officials from Federal Reserve have also warned about the potential damage to investors.
Now, the question is whether bitcoin stays true to its roots as a cryptocurrency free from official meddling, or if it will become just another regulated—but, arguably, safer—financial asset?
“When conventional money fails, bitcoin wins."
Countries like South Africa, Sudan and Kenya which face currency problems have started using bitcoins widely in the last few years, where people often viewed it as a safe harbour from political and economic turmoil. Many people are also using bitcoin to enjoy services of other countries which they can’t access. Some people are turning to bitcoin precisely because they don’t trust the country’s bankers or the state. Buying cryptocurrencies is seen as protection by people who have been constantly disappointed by central banks and politics. It is often seen as a replacement currency in countries shaken by political or economic instability. Increased adoption of smartphones in developing nations is also a reason for the bitcoin boom. Illiquidity of bitcoins is going to be a huge problem when the bubble bursts. It is becoming more and more illiquid as time goes by and the transaction fees are going higher too. Whenever a lot of people try to exit from this currency, prices will crash. Billions get wiped off in minutes and in the case of bitcoins, it seems true as less knowledgeable investors in larger numbers are coming to the market as they have only seen price going up.
Despite negative reports around bitcoin, online brokers are lining up to offer trading in bitcoin futures. While many people are still unaware of digital currencies and bitcoin, it is used to purchase goods from many merchants (including recognizable companies like Expedia and Overstock.com) that accept bitcoin payments.
Bitcoin is still at its infancy, with many of its features incomplete. In conclusion, bitcoins does not have many advantages that physical currencies provide. The fact is that bitcoin is a relatively new and young currency but technologically, it is an obvious breakthrough.
I consider the bitcoin technology itself revolutionary; unfortunately, bitcoins have been used for criminal activities far too often, and as an informed investor, I strongly dislike that practice. We follow a family centric approach that allows us to align the best investment opportunities with legacy and long-standing values integrated to create long-term wealth.
Amit Patni is co-founder and chairman at Nirvana Venture Advisors and is a promoter shareholder of Patni Computers.