Cryptocurrencies as an Investment Bet?

Cryptocurrencies like Bitcoin have just retreated about 26% from historic highs yet they are 64% up from the beginning of the year 2021.  As an instrument of investment, Bitcoin has risen more than 10000% i.e. 100 times in just the last 5 years. What is cryptocurrency? Which cryptocurrency is best? What is Bitcoin and what is contributing to this meteoric rise and corrections?

What is a Cryptocurrency?

A cryptocurrency is a form of digital asset or simply digital money that one can hold & trade through a digital account. It is almost like a form of payment that can be exchanged online for goods and services. Examples of such payment forms can be seen widely when companies issue tokens, coupons or paper currencies that can be used to pay for a specific product or service by anybody who carries that token provided by the company. This model has matured formally into a plethora of such digital cryptocurrencies across the world. Currently, more than 6,700 different cryptocurrencies are reported to be traded publicly.

Also Read:- Top 50 MBA colleges

BlockChain- the underlying architecture

The word “cryptocurrency” is derived from the encryption techniques which are used to signify a “secure” network.  Blackberry phones in the past, Whatsapp are examples of encrypted communication. The underlying value and the trade transactions in cryptocurrencies are dependent on a digital internet-based network that is distributed across a large number of computers across the world.  And this technology is collectively called BlockChain. A Blockchain thus serves as a decentralized technology spread across many computers that manage and record transactions.  Since the transactions are encrypted, they are secure and hence there is almost 100% surety that the transaction will not go bad. Read more about BlockChain on Wikipedia.

Permissions & patterns of usage

Since the decentralized computer-based blockchain structure allows them to remain anonymous and simultaneously exist across geographic nations, these transactions exist outside the control of governments and central authorities. A lot of countries including India have not allowed to invest and trade in cryptocurrencies from an Indian financial company.  Similarly, even globally, in the same country, some companies may allow paying for goods and services in form of cryptocurrency while a vast number of other companies do not allow it.

What drives interest in cryptocurrencies

Cryptocurrencies have continued to proliferate ever since they first came into being in 2015.  Since this form of investment, trade and payments are more secure, it creates a level of confidence that is increasing with time.  It is increasingly being seen as a global currency of the future that could be used to pay for any product or service across the world.  Some investors also believe that central banks of countries manage the money supply of their currencies in order to manage inflation but cryptocurrencies are not subject to any such control.

Must Read:- Top 100 MBA colleges in India

Valuations

Increasing interest in cryptocurrencies is leading to a huge valuation, some of which is driven by sheer speculation about the future. One statement by Billionaire Elon Musk in the beginning of 2021 sent the price up and a recent thumbs down by the same person has led to a 25% decline.  Bitcoin has risen more than 100 times in 5 years.  Rs. 1 Lakh invested in May 2016 would have become Rs. 1 Crore today.  Ethereum has blasted 360 times in the same period.  The total value of all cryptocurrencies was approximately $2.2 trillion in April 2021 out of which Bitcoin itself accounted for about $1.2 trillion. The bullishness is also visible in the easy way in which the Cryptocurrency backing companies raise initial money through initial coin offerings (ICOs) in allowed markets to invest in blockchain technology and marketing etc. Every cryptocurrency can be further subdivided for trading making smaller investment values and transactions possible.

The future & risks in crypto investments

While there is positive bullishness, a number of countries and companies do not approve of cryptocurrencies. They are criticised for various reasons, including their use for illegal activities, price volatility, and vulnerability of the technical infrastructure underlying them.

So should one invest in Cryptocurrencies like Bitcoin?  Well, it all depends on your risk appetite. While the huge upside is still possible given these are early years and there is increasing worldwide interest, the periodic fluctuations are too wild to make any safe prediction. It remains one of the riskiest investments of today.

Read some of the most popular posts…

1.  What is Business Analytics?
2. Top 50 Business Schools in India
3. Top 100 MBA Colleges in India
4. India’s New Education Policy
5. MBA or PGDM