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How safe is it to invest in bitcoin?

The current bitcoin might come under great pressure if scalability issue persists

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Finding the right time for investment is very elusive. It is hard to perfect your entry into a specific market. You need to have a long-term perspective for any kind of investment to reduce the risk of volatility and risk of losses. Bitcoin and other cryptocurrencies had a stellar growth in 2017 fetching returns from 1,500% to 15,000%. Bitcoin’s sharp rise from $450 per unit in May 2016 to $19,000 per unit in December 2017 had generated enough excitement across the globe to make bitcoin and other cryptocurrencies as a dream investment asset.

In India too, early investors reaped astonishing profits as the price marched from Rs 65,000 in January 2017 to Rs 14 lakh in December 2017. The volatility of bitcoin has surprised every fund manager of the world. But no one can take away the long-term advantages of bitcoins and cryptocurrencies at large. The current fall of the bitcoin valuation to almost $10,000 levels has certainly created a valuable proposition for new investors.

The exponential price growth has given birth to extreme volatility in Bitcoin and other cryptocurrencies. Even though bitcoin gained considerable traction as a speculative instrument in 2017, the adoption of bitcoin as a payment system has largely been muted. Additionally, the advent of several other cryptocurrencies such as ethereum, ripple and its own rival bitcoin cash, has contributed to the scepticism of losing more value of bitcoins.

Does that mean that the best time to invest in bitcoins has passed? Let’s figure out the factors that are in favour of Bitcoin and against it.

Bitcoin as an asset class: With traditional investment avenues like real estate and gold underperforming in the recent years, riding on a revolutionary technology, bitcoin produced an amazing return on investment (ROI) for the investors. The decentralised nature of bitcoin offers investors the opportunity to diversify their investments from underperforming assets to cryptocurrencies, the most performing asset of 2017. Bitcoin investors have enjoyed a higher ROI in a short span of time. This trend will continue in 2018 if more people accept bitcoin.

Bitcoin halving continues: Unlike other investment resources that are increased when demand is on a rise, bitcoin production follows the strict protocol of introducing no more than 21 million units. More than 16 million units have already been launched and creation of the remaining bitcoins will be spread over the next 12 years.

Global nature of bitcoin trading: Since bitcoin is traded on multiple exchanges and extensively traded among peer-to-peer globally, as and when volume increases, investors can be assured to offset their holdings wherever they want. The acceptance of bitcoin in multiple countries makes the cryptocurrency easily tradeable instrument. This is by far the most differentiating advantage that bitcoin has over other asset classes.

Complete control of bitcoins: The decentralised structure of bitcoin network ensures that no one but the holder has the control over their money. Users do not have to worry about sending or receiving money anywhere in the world without worrying about authoritarian regulations or bank holidays.

Now that we have talked about the positive factors of bitcoin, let's dig into the possible obstacles for bitcoin’s future to establish a global currency.

Government restrictions: Due to the anonymous nature of bitcoin transactions, it is highly impractical for the governments to allow the bitcoin transactions in its current state. Anti-money laundering (AML) and know your customer (KYC) guidelines from the regulators, will put the privacy-loving bitcoin users under scrutiny and can impact the bitcoin’s price movement to a great extent. Having said that, it is imperative for the government to regulate cryptocurrencies to ensure accountability and transparency in the industry.

Stiff competition from forked brothers and other peers: Now that the forking of bitcoin blockchain has become a regular affair, it comes up with better operational capabilities. The current bitcoin might come under great pressure if scalability issue persists. Smart contract enables blockchains like ethereum also can give a tough competition to bitcoin in future.

With odds weighing on both sides, 2018 will provide a clear direction for bitcoin’s status and its sustainability in the mainstream financial market. Irrespective of whether bitcoin is going to reign as leader of the crypto pack or not, a long-term investment spread across the top cryptocurrencies can yield a handsome return for the investors.

THE OTHER SIDE

  • It is highly impractical for the governments to allow the bitcoin transactions in its current state
     
  • The current bitcoin might come under great pressure if scalability issue persists
     
  • With odds weighing on both sides, 2018 will provide a clear direction for bitcoin’s status

The writer is chairman and CEO, Belfrics Global

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