Bitcoin In India: Worth The Investment Risk?

Bitcoin is a highly sought-after cryptocurrency, but investing in it comes with risks. While it has the potential for high returns, it is also highly volatile. Before investing in Bitcoin, it is important to understand the risks involved and assess your financial situation. In India, Bitcoin is legal, and there are several crypto exchange platforms to choose from, such as CoinDCX, ZebPay, and WazirX. However, as the industry is still evolving in the country, individuals should educate themselves about this asset class before investing.

Bitcoin's volatile nature

Bitcoin is a highly volatile investment vehicle, and its price is influenced by a complex interplay of market factors. Its volatility is largely due to its relative nascency as a financial asset. Unlike traditional commodities or currencies, Bitcoin lacks the historical data and long-term stability that contribute to more predictable price movements.

The inherent volatility of Bitcoin stems from several factors, including its limited supply, the influence of large-scale investors, and the immaturity of the cryptocurrency market infrastructure.

Limited Supply

Bitcoin has a fixed supply cap of 21 million coins, which introduces a scarcity factor that can amplify price fluctuations as demand fluctuates against this unyielding supply limit. As the circulating supply gets closer to this limit, prices are likely to climb higher.

Large-Scale Investors

The actions of large-scale investors, often called "whales", can significantly impact supply and demand dynamics. If these whales were to suddenly sell a significant portion of their holdings, prices would plummet as other investors panic and follow suit.

Market Infrastructure

The relative immaturity of the cryptocurrency market infrastructure can lead to liquidity issues. The capacity to buy or sell large amounts without significantly affecting the market price is limited compared to more established markets, which can result in substantial price changes as investors attempt to enter or exit positions.

Market Sentiment

Market sentiment, shaped by news coverage, investor commentary, and broader economic events, also plays a crucial role in Bitcoin's volatility. For example, announcements from influential figures or entities within the cryptocurrency space can lead to sudden surges or drops in Bitcoin's price as investors react to perceived opportunities or threats.

Media Coverage and Regulatory News

Positive media attention can increase investor interest and demand, while negative news or rumours of stringent regulations can lead to fear-induced sell-offs.

Investor Behaviour

Investor behaviour, driven by fear and greed, often results in panic buying or selling, further intensifying Bitcoin's volatility.

Global and Indian Crypto Capital Markets

As India is still developing its crypto market, individuals considering investing in Bitcoin should educate themselves on this asset class and the overall scenario of the global and Indian crypto capital markets before investing.

RBI's stance on Bitcoin

The Reserve Bank of India (RBI) has consistently maintained a strong stance against cryptocurrencies, including Bitcoin. RBI governor Shaktikanta Das has expressed concerns about the potential impact of cryptocurrencies on financial stability and has called for a ban on private cryptocurrencies. He has also equated crypto trading with gambling, stating that it can create financial instability and affect the central bank's ability to determine monetary policy.

In an interview with ET Now in August 2022, Das highlighted the risks associated with crypto, including its potential adverse effects on the exchange rate, capital flows, and banking sector stability. He also mentioned the possibility of cryptocurrencies being used for money laundering and illicit fund transfers.

The RBI has not made Bitcoin or other cryptocurrencies legal in India, and there is a risk of losing capital when investing in them. The central bank's stance on crypto has not changed, and it continues to view these assets as a danger to the financial system. However, the Indian government has actively pitched for a global framework to regulate crypto assets during its G20 presidency.

Despite the RBI's anti-crypto stance, the adoption rate of cryptocurrencies in India has not taken a major hit. People, especially those between the ages of 18 and 35, continue to explore crypto investments. Additionally, some industry experts believe that cryptocurrencies have already established their presence in the Indian market, particularly among investors.

Pros and cons of investing in Bitcoin

Investing in Bitcoin can be a risky venture, but it also has its advantages. Here are some pros and cons to help you decide if investing in Bitcoin is a good idea.

Pros of Investing in Bitcoin

• Poignant: As the first-ever cryptocurrency, Bitcoin has led to the creation of thousands of alternative coins, making it a prestigious and desired asset.
• Decentralised: There are no centralised authorities or central banks that may impose high fees or restrictions. Bitcoin is also global, so there are no exchange rates to deal with, making it a tempting investment option.
• Highly liquid: Bitcoin is among the most liquid investment assets, making it attractive to traders who can trade it for other assets in the short term or buy and hold it for the long term.
• Transparent: Bitcoin is a decentralised platform and a public ledger that allows everyone to see transactions as they are stored permanently on the blockchain, making it more efficient at fighting criminal financing.
• Portfolio diversification: Investing in Bitcoin can help investors spread their investments and reduce exposure to risks.
• Hedge against inflation: Due to its supply cap of 21 million coins and decentralised nature, some believe Bitcoin is immune to economic turmoil, geopolitical problems, and inflation.
• Business features: Bitcoin has various features, such as multi-signature authorisation, that can improve transparency and security for businesses.
• Return on Investment: Figures show that Bitcoin has a significant ROI compared to other assets.
• Backed by major investors: Huge names like Michael Saylor, CEO of MicroStrategy, and Mark Cuban have become major investors in Bitcoin and vocal supporters.

Cons of Investing in Bitcoin

• High volatility: As a scarce asset, Bitcoin's value is influenced by demand and supply principles and market sentiment, making it unpredictable and risky.
• Slow transactions: Many users are frustrated with Bitcoin's slow processing times, which can take up to 10 minutes or longer on busy days.
• Limited use: Bitcoin has limited use compared to other cryptocurrencies and depends on internet availability. It is mostly limited to financial transactions.
• Not 100% safe: While Bitcoin's blockchain is almost unhackable, it is not completely safe. Bitcoins can still be stolen if held on an exchange, and managing private keys can be difficult, potentially leading to the loss of wallets.
• Lack of regulation: There is little regulatory oversight in Bitcoin investing, and crypto regulations and taxation vary and are often unclear or non-existent globally. This lack of regulation can lead to fraud and scams.
• Misunderstood: Despite its innovative technology, Bitcoin investing is still veiled in misconception, often associated with Silk Road, illegal services, and scams, making cryptocurrency adoption difficult.
• Not energy-efficient: Bitcoin uses a proof-of-work mechanism to validate transactions, consuming a large amount of power, which is harmful to the environment.
• Won't make the financial system fairer: Bitcoin is now dominated by excessively big investors who can easily influence prices. The lack of regulation also allows large investors to buy up huge amounts of Bitcoin, making it harder for small-time traders to buy at a reasonable price.

In conclusion, investing in Bitcoin has both advantages and disadvantages. It is a high-risk investment with the potential for significant rewards. Before investing, it is essential to carefully consider your risk tolerance, investment objectives, and the regulatory environment in your country.

How to buy Bitcoin in India

Bitcoin is currently the most coveted cryptocurrency in the world and also the top cryptocurrency in India. Here is a step-by-step guide on how to buy Bitcoin in India:

Choose a Crypto Exchange:

Select a reputed cryptocurrency exchange operating in India, such as ZebPay, CoinDCX, Mudrex, Unocoin, or WazirX. These platforms allow you to buy and sell cryptocurrencies by balancing ease of use with low fees and high security.

Place an Order:

After choosing an exchange, you must fund your account before you can start investing. You can do this through bank transfers, net banking, Mobikwik, a cryptocurrency wallet, or UPI. Once your account is funded, place an order to buy Bitcoin. The amount you invest will determine the percentage of Bitcoin you own.

Make the Payment:

After placing the order, you can transfer the amount from your bank account to the crypto exchange. Other payment methods include NEFT, RTGS, debit and credit cards, and other digital payment options.

Store Your Bitcoin:

You can store your purchased Bitcoin in a crypto wallet provided by the exchange or in a third-party cold wallet. Crypto exchanges usually store most customer assets in cold storage for added security. Remember that if you use a third-party wallet, you may be unable to access your coins if you lose the private key/password.

Important Considerations:

• Minimum Investment: There is no minimum amount to buy Bitcoin in India. You can invest a small amount, such as Rs. 100 or Rs. 500, to get started.
• KYC and Documents: Before trading in Bitcoins, you must complete a basic Know Your Customer (KYC) process and submit essential documents, including your Aadhaar Card and PAN card.
• Volatility and Risk: Bitcoin is a highly volatile and risky investment. It is not backed by the RBI, so there is a risk of losing your capital.
• Security: Ensure your chosen platform has robust security measures to protect your investments.
• Diversification: Consider diversifying your portfolio by investing in other popular cryptocurrencies like Ethereum.
• Research and Education: Educate yourself about the crypto market and research price movements before investing.

By following these steps and considerations, you can start investing in Bitcoin in India while being mindful of the risks and potential rewards.

Bitcoin's performance compared to other cryptocurrencies

Bitcoin is currently the most valuable cryptocurrency by market capitalisation. However, there are thousands of other cryptocurrencies, known as altcoins, that compete with Bitcoin. Here is how Bitcoin performs compared to other cryptocurrencies:

Transaction Speed

Bitcoin transactions are slow, taking about 10 minutes to mine a block. In contrast, other cryptocurrencies like Ethereum, Solana, and Cardano can process transactions in a matter of seconds.

Scalability

Bitcoin's scalability is limited by its block size of 1mb, which restricts it to processing only seven transactions per second. Other cryptocurrencies like Bitcoin Cash and Litecoin have larger block sizes, allowing them to process more transactions per second.

Energy Efficiency

Bitcoin's mining process is energy-intensive, requiring specialised equipment. Ethereum, on the other hand, has transitioned to a proof-of-stake validation method, which is less energy-intensive and more efficient.

Supply

Bitcoin has an upper limit of 21 million coins, making it a deflationary currency. In contrast, cryptocurrencies like Ether and EOS have an unlimited supply, which could potentially lead to inflation.

Decentralisation

Bitcoin is a fully decentralised cryptocurrency, with no central authority or group controlling it. However, other cryptocurrencies like NEO are tightly controlled by a central group, which could be a drawback in terms of decentralisation.

Transaction Fees

Bitcoin transactions can be expensive due to high fees, especially during periods of high network congestion. Other cryptocurrencies like Litecoin offer faster and cheaper transactions, making them more attractive for smaller transactions.

Security

Bitcoin's blockchain is highly secure, having never been hacked in its history. However, other cryptocurrencies like Ethereum and Cardano also have robust security measures, making them relatively secure.

User-Friendliness

Bitcoin has a steep learning curve and can be challenging for beginners to navigate. Other cryptocurrencies like Ethereum and Binance Coin have more user-friendly interfaces, making them more accessible to new users.

Regulatory Compliance

Bitcoin is not subject to regulatory compliance, which is one of its key features. However, some cryptocurrencies like NEO are designed to be compliant with regulations in multiple jurisdictions, which may appeal to risk-averse investors.

Real-World Use Cases

Bitcoin's primary use case is as a store of value and a means of payment. Other cryptocurrencies like Ethereum and Ripple have expanded use cases, such as creating decentralised applications and powering payment networks used by major banks and financial institutions.

Volatility

All cryptocurrencies, including Bitcoin, are highly volatile and subject to dramatic price swings. However, stablecoins like Tether and USD Coin are designed to minimise volatility by pegging their value to external assets like the US dollar.

In summary, Bitcoin has its strengths and weaknesses when compared to other cryptocurrencies. While it excels in brand recognition, security, and decentralisation, it falls short in transaction speed, scalability, and energy efficiency. Ultimately, the performance of Bitcoin relative to other cryptocurrencies depends on the specific metrics and factors that investors prioritise.

Frequently asked questions