Bitcoin vaulted over 29,000 USD to reach another record level before 2020 ended. It quadrupled in value last year amid the global coronavirus pandemic.
There is a lot of confusion in investors' minds about Whether to add cryptocurrencies to their portfolios? Is it an asset class?
The latest 10K filing shows that Tesla invested 1.5 billion USD into cryptocurrency, which again makes the topic more interesting.
In this blog, we will understand all about cryptocurrencies, should they form part of our portfolio and whether it suits our long term goals.
Bitcoin is a digital and global currency. It allows people to send or receive money across the internet, even to someone they don't know or don't trust.
Prima facie the rally in cryptocurrencies looks like a bubble as it has shown exponential growth for a very long period of time.
The idea of cryptocurrency was to have an alternate currency management system. The founders wanted to challenge the existing system for currency management in which money is printed infinitely.
They thought of introducing a currency which would be finite in supply. The current data shows that there are more than 8200 different cryptocurrencies present today.
The basic idea of its origin seems to be changed as 8200 now and many more to come. New cryptocurrencies will make the supply again infinite.
It is important to understand that bitcoins are not the same as blockchain. Blockchain is a concept that is used in many industries, and bitcoin is just one application of it.
Bitcoin or cryptocurrency became popular in India during 2016. At that time, also volatility in bitcoin was very high. During December 2017 bitcoin was trading at 18000 USD and just a year later it came down to 3200 USD.
The major reason for its popularity was volatility. Initially, only a few cryptocurrencies were present in the markets, but many new ones were invented with time.
Liquidity is high in the markets which are evident from the equity markets also. People always look for alternative classes to park their funds. Some investors understand the concept and believe that cryptos will give phenomenal returns going forward also.
Most of the investors are the ones coming in due to fear of missing out, when an asset rises with that momentum, commonly, many people will invest even without knowing the full story.
Bitcoin is a form of currency but one with no underlying regulator. If USD rises, we know the reason can be the US economy performing well, etc. With bitcoin, a common investor can not comprehend the reason behind the rise and fall of such instruments.
When we analyze a company, we focus on its financial parameters, ratios, products, competitors, etc. With bitcoin, the situation is complex due to the unavailability of information and lack of required skills to measure its real value.
An individual who can judge the real value can try investing their money in it, but it is a highly risky instrument for the layman.
When we look at the equity markets or debt markets, they are highly regulated. With the presence of SEBI, Depository, Exchanges, etc., it is very less risky.
There have been cases about bitcoins, in which people demanded a ransom in the form of bitcoins. So even if it is not illegal, it is an unregulated instrument.
No government intervention or regulatory authority is present in the case of bitcoin in India.
It is much better to focus on our circle of competence. Invest in assets that we understand and that are regulated. To put our hard-earned money into some instrument that is not even regulated and preferred by criminals as a mode of payment is never advised.
Focusing on companies that are understandable and which have an underlying business that one can analyze is a good way to invest. Chasing extraordinary returns can damage our portfolios severely if we park our funds without understanding the asset class.