Bitcoins In India: Safe Investment Or Risky Business?

Bitcoin is one of the most sought-after cryptocurrencies globally, with a market capitalization of over INR 200 million in 2024. However, its extreme volatility and regulatory uncertainty in India make it a risky investment option. While it is not illegal to invest in Bitcoin in India, there is no regulatory protection, and the government has not taken a clear stance on its legality. This lack of clarity, coupled with the high volatility of the cryptocurrency market, makes it a high-risk investment.

Bitcoin's high volatility and security risks

Bitcoin is considered a volatile financial asset. Its volatility is measured by how much its price fluctuates relative to the average price over a period of time. In 2022, the price of Bitcoin dropped from almost $48,000 to lows of around $16,000. Such losses would cause investors to pull out of any other asset class.

The cryptocurrency industry thrives on speculation. Crypto investors bet on Bitcoin's price going up or down to make a profit. This causes a sudden increase or decrease in Bitcoin's price, leading to volatility. Volatility means that an asset is risky to hold, and the more volatile an asset, the more people will want to limit their exposure to it.

Bitcoin's volatility also increases the cost of hedging, a major contributor to the price of merchant services. If Bitcoin volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

Bitcoin's volatility is also impacted by how it reacts to interest rates. Historically, when the Fed raises rates, Bitcoin takes a dip because investors start leaning toward more stable investments.

Bitcoin is also susceptible to various cyberattacks and fraud. While blockchain technology produces a tamper-proof ledger of transactions, blockchain networks are not immune to cyberattacks and fraud. Hackers and fraudsters threaten blockchains in four primary ways: phishing, routing, Sybil, and 51% attacks.

Phishing is a scamming attempt to attain a user's credentials. Fraudsters send wallet key owners emails that appear to be from a legitimate source. The emails ask users for their credentials by using fake hyperlinks. Having access to a user's credentials and other sensitive information can result in losses for the user and the blockchain network.

In a routing attack, hackers intercept data as it transfers to internet service providers. Blockchain participants typically can't see the threat, so everything looks normal. However, fraudsters have extracted confidential data or currencies behind the scenes.

In a Sybil attack, hackers create and use multiple false network identities to flood the network and crash the system.

Mining requires a vast amount of computing power, especially for large-scale public blockchains. However, if a miner or a group of miners rally enough resources, they might attain more than 50% of a blockchain network's mining power. Having more than 50% of the power means having control over the ledger and the ability to manipulate it.

Regulatory hurdles and the possibility of a ban

The biggest risk involved in trading Bitcoin or other cryptocurrencies in India is the lack of regulation and oversight. The government has not been able to take a concrete stand on cryptocurrency, which has resulted in a lack of regulatory protection. This discourages many keen investors from investing in cryptocurrencies.

The problem dates back to 2018 when the Reserve Bank of India (RBI) attempted to impose a blanket ban on such trade. The RBI released a circular cautioning users, holders, and traders of virtual currencies about the various risks associated with dealing in them. It advised all entities regulated by it not to deal in virtual currencies or provide services that facilitate any person or entity in dealing with or settling virtual coins. While the Supreme Court quashed the ban in March 2020, banks remained hesitant in dealing with cryptocurrencies. It is only recently that the RBI clarified its stance, after which banks have started dealing more liberally with cryptocurrency exchanges.

Another issue that poses a risk to crypto trade in the country is the possibility of a ban. Though the government has softened its stance recently, it is still unclear whether it will go for a complete ban or regulation. In case the government decides on a complete ban on decentralised virtual coins, investors in India could face heavy losses. However, experts familiar with virtual currencies and analysts feel that regulating crypto trade would be a better option, considering that it is emerging as the next big asset of the financial world.

The lack of regulatory protection

India's lack of regulatory protection for cryptocurrencies is a significant concern for investors. This is primarily due to the absence of a concrete stance from the government on cryptocurrency, which has resulted in a lack of regulation and oversight. The Reserve Bank of India (RBI) has historically been cautious and restrictive towards cryptocurrencies, even issuing a circular in 2018 prohibiting regulated entities like banks from providing services to individuals or businesses dealing in cryptocurrencies. While the Supreme Court quashed this circular in March 2020, declaring it disproportionate and unconstitutional, the RBI continues to express concerns about the risks associated with cryptocurrencies, including price volatility, cybersecurity threats, and potential money laundering activities.

The regulatory vacuum in India's cryptocurrency space has created uncertainty and challenges for businesses and investors. There is currently no specific legislation or regulatory framework governing the use and trading of cryptocurrencies in the country. This lack of regulatory protection discourages many keen investors from investing in cryptocurrencies, as they seek assurance and clarity before placing their bets. The absence of a regulatory body to oversee and enforce compliance within the cryptocurrency ecosystem further exacerbates the situation.

The Indian government has introduced the "Cryptocurrency and Regulation of Official Digital Currency Bill" to address this issue. The bill aims to establish a legal framework for cryptocurrencies and issue an official digital currency. However, it also proposes to ban all private cryptocurrencies, which has sparked debates and concerns within the industry. The bill is yet to be passed into law, and its provisions are still under discussion.

The regulatory uncertainty in India's cryptocurrency market is a critical issue that needs to be addressed. While the government is taking steps towards creating a legal framework, the lack of regulatory protection currently discourages investment and creates a challenging environment for businesses and investors. It is essential for India to develop a comprehensive regulatory framework that provides clarity, protects investors, and promotes the safe adoption of cryptocurrencies in the country.

Exposure to hacking, malware attacks and scams

Investing in Bitcoin in India, as in any other country, exposes investors to hacking, malware attacks, and scams. In November 2020, a 26-year-old man named Srikrishna Ramesh, alias Sriki, was arrested by the police in a drugs case relating to the dark net. He is accused of several computer hacking crimes in India, including the first-ever hacking and theft of bitcoins from Bitfinex, a cryptocurrency exchange based in Hong Kong, in 2015. The Bitfinex exchange was hacked twice—in 2015 and 2016—resulting in the theft of approximately 120,000 bitcoins, valued at around $7 billion as of July 2024. This incident is considered one of the biggest bitcoin heists ever.

In addition to direct hacks of exchanges, individuals are also at risk of malware attacks that target their cryptocurrency wallets. One such example is the CryptoWallet Address Replacing Virus, which is a type of malware that changes the cryptocurrency wallet address in a user's clipboard to one owned by cybercriminals. This results in any outgoing transactions being diverted to the criminals' wallets. This type of malware has been particularly prevalent in India, along with Brazil and Indonesia, with thousands of users being infected daily.

Scams are another concern for Bitcoin investors in India. In July 2024, the mastermind of a cryptocurrency scam in India was arrested, demonstrating the presence of fraudulent activity in the country. While the specific details of the scam are not provided in the source, it highlights the risk of scams and fraud in the cryptocurrency space, which can result in financial losses for investors.

The risks of losing your Bitcoin

There are several risks to consider when investing in Bitcoin, and you should be prepared to lose all your money. Here are some of the key risks associated with Bitcoin that could lead to a loss of your investment:

Volatility and Risk

Bitcoin is a highly volatile and risky investment. Its price can fluctuate significantly in a short period, as seen in its 28% drop from a record high of $42,000 in 2021. While it has the potential for high returns, it also comes with a high risk of losing value.

Regulatory and Legal Risks

The regulatory landscape for cryptocurrencies like Bitcoin is uncertain and constantly evolving. In some countries, like India, there is a lack of clear regulation and oversight, which poses a significant risk. The possibility of a government ban on Bitcoin or the introduction of restrictive regulations could lead to heavy losses for investors.

Security and Hacking

Bitcoin exchanges and wallets have been targeted by hackers in the past, resulting in significant losses for investors. While Bitcoin itself is challenging to hack due to its decentralised nature, the vulnerability lies in where you store and trade your coins. Choosing a secure and reputable exchange and wallet is crucial to mitigate this risk.

Password Loss

If you lose access to your Bitcoin wallet or exchange account due to a forgotten password or private key, you could permanently lose your Bitcoin. Unlike traditional bank accounts, there is often no way to recover your account or reset your password, resulting in a complete loss of access to your funds.

Scams and Unregulated Firms

Some firms offering crypto investments may overstate potential payouts or understate the risks. Additionally, there are scams and unregulated firms that promise high returns but provide little to no protection for investors. It is essential to research and only deal with reputable and regulated companies.

High Fees and Complexity

Buying, selling, and storing Bitcoin can be complicated and technologically challenging. The software and hardware requirements can be daunting for those unfamiliar with the process. Additionally, the fees charged by exchanges and brokerages for buying and selling Bitcoin can be relatively high compared to traditional investment options.

Environmental Impact and Government Interference

The energy-intensive nature of Bitcoin mining has raised concerns about its environmental impact. Governments and central banks may intervene to regulate or restrict Bitcoin due to these concerns or to protect their fiat currencies. For example, China has taken aggressive steps to shut down mining and transactions.

In conclusion, while Bitcoin can offer lucrative opportunities, it is crucial to understand and carefully consider the risks involved. Investors should conduct thorough research, employ robust security measures, and be prepared for significant price volatility and potential losses when investing in Bitcoin.

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