The Future Of Bitcoin: Invest Or Avoid?

Bitcoin is a decentralised, digital peer-to-peer transactional tool and speculative commodity that has attracted the attention of investors since it first hit the market in 2009. Created by the mysterious Satoshi Nakamoto, Bitcoin is built on blockchain technology, which uses a combination of private and public keys and network consensus for both validation and security.

Bitcoin is prone to price volatility, with wide swings to the upside and downside. Its value is influenced by supply and demand, public interest and media coverage, and the economic and geopolitical environment.

If you're considering investing in Bitcoin, it's important to understand the risks involved, do your research, and only invest what you can afford to lose.

Bitcoin's value and volatility

Bitcoin is prone to price volatility, with wide swings to the upside and downside. Its value has rallied over the last few quarters, increasing from about $26,000 in mid-September 2023 to an all-time high of around $73,000 in mid-March 2024. Since the Bitcoin halving, the price has fluctuated within a wide margin, ranging from $55,000 to $71,000.

The volatility of Bitcoin prices is extreme and almost 10 times higher than the volatility of major exchange rates (US dollar against the euro and the yen). The excess volatility adversely affects its potential role in portfolios.

There are several reasons why Bitcoin has such a volatile price history. Understanding the factors that influence its market price can help you decide whether to invest in it, trade it, or continue watching its developments.

Like most commodities, assets, investments, or other products, Bitcoin's price depends heavily on supply and demand. As an asset adopted quickly by investors and traders, speculation about price movements plays a critical part in Bitcoin's value at any given moment.

Media outlets, influencers, opinionated industry moguls, and well-known cryptocurrency fans create investor concerns, leading to price fluctuations.

Bitcoin's daily volatility = Bitcoin's standard deviation = √(∑(Bitcoin's opening price – Price at N)^2 /N). You can use the following formula for a general timeframe volatility calculation: √timeframe * √Bitcoin's price variance.

The volatility of Bitcoin is measured by how much Bitcoin's price fluctuates, relative to the average price in a period of time. The cryptocurrency industry thrives on performance based on speculation. Crypto investors make bets that Bitcoin's price will go up or go down to make profits. This causes a sudden increase or decrease in Bitcoin's price, which leads to volatility.

Volatility is a measure of how much the price of a financial asset varies over time. Volatility means that an asset is risky to hold—on any given day, its value may go up or down substantially. The more volatile an asset, the more people will want to limit their exposure to it, either by simply not holding it or by hedging.

Bitcoin's legality and tax implications

Legality of Bitcoin

Bitcoin is not centrally administered or regulated by any specific body like the RBI, which administers physical currency in India. In fact, peer-to-peer transactions with bitcoins are managed using blockchain technology, which serves as a public ledger for all transactions.

Bitcoin is not a legal tender in India. However, there is currently no law that bans the use of Bitcoin or other virtual digital assets (VDAs). Thus, you are allowed to trade in Bitcoin.

The Supreme Court of India, in its ruling pronounced on 25 February 2019, required the Government to come up with cryptocurrency regulation policies. The matter was adjourned in the hearing on 29 March 2019 and has been rescheduled for a hearing in the second week of July 2019.

The Finance Ministry has repeatedly stated that Bitcoin or other cryptocurrencies are not legal tender. Thus, such crypto can be considered an asset instead of a currency.

Tax Implications of Bitcoin

The IRS currently treats cryptocurrencies as property, not a currency. In the eyes of the IRS, cryptocurrency transactions are taxable events, which means when you sell a bitcoin and turn it into U.S. dollars or trade it for another asset, a taxable event has taken place. It's a situation that often catches many cryptocurrency investors off-guard—paying for a product or service with cryptocurrencies can also trigger a tax liability.

Because cryptocurrencies are treated as property by the IRS, they fall under the same tax rules as other assets, which means the capital gain and loss tax rules apply to cryptocurrency transactions. If you hold a cryptocurrency for a year or less, any realized gain will be subject to the short-term capital gains tax rates, which are the same as the ordinary income tax rates that apply to wages. Meanwhile, gains on cryptocurrencies held for over a year are subject to the lower long-term capital gains tax rates.

If you sell a cryptocurrency at a loss, you'll be able to use that loss to offset other capital gains, and if the loss exceeds your gains, you'll potentially be able to use the remaining loss to offset up to $3,000 of your ordinary income. Any leftover losses would be carried forward infinitely to offset gains in future tax years.

The Finance Act 2022 introduced Section 115BBH, which imposes a levy on income earned from trading in Bitcoin, Virtual digital assets, and cryptocurrencies. Income from the transfer of virtual digital assets is taxed at a rate of 30%.

No deduction, except the cost of acquisition, will be allowed while reporting income from the transfer of digital assets. Loss from digital assets cannot be set off or carried forward against any other income. Gifting digital assets will attract tax in the receiver's hands. Losses incurred from one virtual digital currency cannot be set off against income from another digital currency.

From 1 July 2022, a 1% TDS will apply to all sell transactions of Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs.

Bitcoin wallets and security

As the popularity of Bitcoin and other cryptocurrencies continues to grow, so does the number of cyber attacks on cryptocurrency exchanges and wallets. Therefore, it is important to understand how to keep your Bitcoin secure.

Types of Wallets

There are generally two categories of storage: custodial and non-custodial, and four types of wallets: desktop, mobile, hardware, and web-based.

• Desktop wallet: A program that resides on your computer. Not the safest storage method.
• Mobile: A program that is hosted on a mobile device. Not very secure.
• Hardware: A device similar to a USB drive. Secure, depending on if it is connected and how it connects to another device.
• Web-based: A wallet that is hosted by a web service. Not secure, as you're letting someone else store your keys for you.

Whether a wallet is connected to or resides on the internet determines whether it is a hot or cold wallet. Hot wallets are those that are connected to the internet, while cold wallets are not. Cold wallets are considered to be the safest option for storing your keys.

Security Precautions

• Use a strong password: A strong password must contain letters, numbers, punctuation marks and must be at least 16 characters long.
• Backup your wallet: Back up your entire wallet regularly to make sure that all recent Bitcoin change addresses and all new Bitcoin addresses you created are included in your backup.
• Encrypt your backups: Any backup that is stored online is highly vulnerable to theft. Even a computer that is connected to the Internet is vulnerable to malicious software.
• Use multiple secure locations: Single points of failure are bad for security. If your backup is not dependent on a single location, it is less likely that any bad event will prevent you from recovering your wallet.
• Keep your software up to date: Using the latest version of your Bitcoin software allows you to receive important stability and security fixes.
• Multi-signature protection: Bitcoin includes a multi-signature feature that allows a transaction to require multiple independent approvals to be spent, which can help protect against theft.
• Testament: Your bitcoins can be lost forever if you don't have a backup plan for your peers and family. Taking the time to ensure that someone knows how to access your wallets or passwords can make a huge difference.

In addition to these precautions, it is important to treat your Bitcoin wallet like a real wallet. Only keep small amounts of Bitcoin on your computer, mobile phone, or server for everyday use, and keep the remaining funds in a safer environment, such as a cold wallet.

Bitcoin's future as a global currency

Bitcoin is a global, decentralised currency that operates independently of governments and banks. Its value is highly volatile, and it is prone to wild swings in either direction. Bitcoin's value increased from about $26,000 in mid-September 2023 to an all-time high of around $73,000 in mid-March 2024. Since then, it has fluctuated between $55,000 and $71,000.

Bitcoin's value is influenced by five key factors: supply and demand, public interest and media coverage, the actions of prominent individuals and organisations, economic conditions, and the regulatory landscape.

Bitcoin's value is also impacted by its limited supply, with a cap of 21 million coins. This scarcity, combined with growing institutional demand, has driven up prices. Additionally, Bitcoin's decentralised nature and independence from traditional financial systems have contributed to its appeal.

However, there are concerns about Bitcoin's future as a global currency. Here are some perspectives on its potential:

• Zac Townsend, CEO of Meanwhile: Townsend believes that Bitcoin's biggest impact will be in "denominating business and trade." He highlights the advantages of using Bitcoin as a medium of exchange, a unit of account, and a store of value. Townsend's company, Meanwhile, is a regulated life insurance company that operates entirely in Bitcoin. They conduct all their business in Bitcoin, from policy payments to regulatory filings. This approach ensures that their business is not affected by exchange rate fluctuations, and they view Bitcoin as a store of value that will appreciate over time.
• Critics of Bitcoin: Some critics argue that Bitcoin's volatility limits its usefulness as a global currency. The rapid fluctuations in Bitcoin's value make it unreliable for everyday transactions, as buyers and sellers prefer a more stable medium of exchange. Additionally, critics point out the challenges associated with holding Bitcoin, such as the technical knowledge required to set up digital wallets and the lack of password recovery options. Bitcoin also exists outside of the regulatory framework, which can make it risky for investors.
• Proponents of Bitcoin: Proponents of Bitcoin view it as a democratising force, giving people more control over their money and facilitating faster and cheaper transactions. They argue that Bitcoin can be a hedge against inflation due to its fixed supply, and it has gained popularity in countries with high inflation rates. Additionally, Bitcoin's decentralised nature makes it attractive to those seeking to circumvent government controls and sanctions.
• Regulators and governments: The regulatory landscape for Bitcoin is complex and varies across the world. While some countries, like El Salvador, have embraced Bitcoin as legal tender, others, like China, have imposed strict bans. Regulators are concerned about consumer protection, fraud, tax evasion, and the potential for criminal activity. The U.S. Securities and Exchange Commission (SEC) has approved Bitcoin exchange-traded funds (ETFs), but SEC Chair Gary Gensler emphasised the risks associated with Bitcoin and the need for cautious investor behaviour.

In conclusion, Bitcoin's future as a global currency is highly debated. While it offers advantages such as decentralisation, faster transactions, and a hedge against inflation, it also faces challenges due to its volatility, regulatory concerns, and technical complexities. Only time will tell if Bitcoin can overcome these obstacles and become a widely accepted global currency.

How to buy Bitcoin

Step 1: Choose a Crypto-Trading Service or Venue

There are several ways to buy Bitcoin, including through a Bitcoin wallet app, a brokerage, or a cryptocurrency centralized exchange (CEX). You can also use a traditional stockbroker, a money transfer app, a Bitcoin ATM, or a Bitcoin exchange-traded fund (ETF).

Popular exchanges in the U.S. include Coinbase, Kraken, Gemini, and Binance, which offer Bitcoin and a growing number of altcoins. You can also use a mainstream brokerage like Robinhood or Fidelity.

Step 2: Connect Your Exchange to a Payment Option

Once you've chosen an exchange, you'll need to connect it to a payment method. Most exchanges allow you to connect your bank account directly or link a debit or credit card. Note that using a credit card to buy Bitcoin can be costly due to the associated processing fees and interest charges.

Step 3: Place an Order

With your payment method set up, you can now place an order for Bitcoin. You can purchase as little as $30 worth of Bitcoin, or even buy a percentage of a Bitcoin.

Step 4: Safe Storage

Finally, you'll need to safely store your Bitcoin in a digital wallet. There are two main types of wallets: hot wallets and cold wallets.

• Hot wallets are online wallets that are apps on devices such as computers, phones, or tablets. They are considered less secure than cold wallets because they are connected to the internet.
• Cold wallets are offline wallets that are not connected to the internet, making them more secure. Examples include hardware wallets (like a USB drive) and paper wallets (which you can print and store in a safe place).

Things to Keep in Mind

• Privacy and security are important when dealing with Bitcoin and other cryptocurrencies. Keep your private keys and passwords secure, and be aware that transactions are available for public view.
• Understand the legal, regulatory, and tax status of purchasing Bitcoin in your country or region.
• Bitcoin is a risky and volatile investment, so carefully consider your financial goals and strategy before investing. It's generally recommended that cryptocurrencies make up no more than 5% of your portfolio.

Frequently asked questions