- Date : 24/04/2021
- Read: 5 mins
Keen on investing in bitcoin? Here are some things you should know.
The identity of the person(s) behind the concept of bitcoins may still be a mystery, but the popularity of the currency is a well-documented fact. Bitcoin is a digital currency that has been around since 2009. It is a type of cryptocurrency where you don’t own the physical currency; instead, it is stored in a transparent and publicly accessible ledger. The ledger itself is decentralised and the system behind it is known as the blockchain. Therefore, it is the opposite of the centrally issued fiat money issued by governments.
At a more technical level, bitcoin transactions run through a chain of computers that are known as nodes. All the nodes in a blockchain are connected and the activities in it can be publicly viewed, leaving no room for fraud or cheating. The blockchain itself is a collection of blocks, which in turn is a set of transactions. It is in these blocks that bitcoin transactions are updated. Bitcoin transactions facilitate instant payment via peer-to-peer technology.
Pros of investing in bitcoin
- User autonomy: Bitcoin appeals to investors due to the autonomy it provides. It faces no intervention from governments or banks. There is very little transaction fee involved and no banking fee. All bitcoin transactions happen through P2P technology, which, along with the blockchain system, provides secrecy of ownership and safety of transactions. It can be done instantly and is not deterred by the international nature of transactions.
- Early days: The benefits of bitcoin have remained intact for over a decade now. And yet, it is still the early days of bitcoin investment, if you consider the global market that it can disrupt in the future. It can be possibly used as a value-storage investment like gold, and also become the de facto mode of payment for new-gen transactions like mobile payments.
- Transfer of generational wealth: As wealth passes on from older generations to their heirs, new-age assets like bitcoin can become even more sought after.
- Increasing acceptance: More and more merchants are accepting bitcoin as a mode of payment. Given its simple mode of payment, bitcoin acceptance only stands to increase.
- Portfolio diversifier: With increasing acceptance, the potential of bitcoin as a new addition to the investment portfolio is rising. It is gradually gaining relevance as an inflation hedge, trading asset, or a long-term wealth conserver.
Related: Important things to know before investing in the stock market
Why bitcoin is soaring
Among the major reasons that led to a sudden spike in bitcoin value recently is its increasing acceptance at an institutional level. US-listed business intelligence company MicroStrategy deployed USD 425 million of its cash reserves to splurge on bitcoin, and many companies have made similar moves recently.
With over 350 million users, PayPal added bitcoin trading to its platform. Their about-turn from being a harsh critic of bitcoin to jumping on the bandwagon is an important development towards bitcoin’s popularity.
Access to bitcoins is quite easy and its legitimacy has increased with the RBI lifting its ban on cryptocurrency. These factors have led to a greater acceptance of bitcoin as a distinct asset class among investors, thereby increasing its demand.
Bitcoin halving, or the event that introduces new bitcoins into circulation resulting in a halving of the bitcoin mining rewards, also boosts demand for the currency. This year’s halving, too, has increased the demand for bitcoin.
Bitcoin as an inflation hedge
A prominent argument in favour of bitcoin’s inflation hedge status is that it is designed to be limited in supply. Normal currency can fluctuate in purchasing power depending on the government’s distribution and prices of oil, real estate, industry profitability etc. Experts believe that, on paper, bitcoin can be a good inflation hedge – like gold – over a very long time horizon.
However, within its limited life, bitcoin has seen high volatility, effected primarily by speculative forces and increasing demand. Therefore, its short-term reliability against inflation will need some time to solidify. For instance, an economic downturn may see investors withdrawing from speculative assets like bitcoin and invest in safer options.
Bitcoin price in USD from 1 January 2014 to 9 April 2021
How to invest in bitcoin
There are several ways you can invest or trade in bitcoins.
You can trade bitcoins in a cryptocurrency exchange, or fractional shares for as low as Rs 100 in India. But if you want to avoid the transaction fee or having to use an external platform for the investment, you can buy bitcoins using the P2P mode. Here the exchange is involved in only finding you a matching seller, which can take more time than purchase through the cryptocurrency exchange.
Bitcoin experts also invest their time in mining to earn bitcoins. It is a process of adding a block of transactions to the blockchain network, which may seem complex for an average investor.
In India, many exchanges offer bitcoin transactions after completing the KYC formalities with the exchange. The KYC norms may be more stringent to ensure the safety of trading. For the same reason, it is better to opt for an exchange with robust KYC formalities. Choose an exchange that you find easy to use and understand, and do the necessary research before putting your money in this new-age currency. Don't want to go the traditional way? Try these alternate investment options.