IS IT A FAIRYTALE STORY OR DAYDREAMING? – Rs. 1 Lac investment in BTC (“Bitcoin”) in Nov– 2010 is worth Rs. 657 cr now. Eventually, giving a BIG BLOCKBUSTER Return of 65700 times. And translating into an annualized CAGR of near 400%.
What a really maddening and spectacular Return Show? Bitcoin: A digital currency or speculative commodity? Read more in depth.
On the current prices, the total market capitalization of BTC is US$ 300 Billion roughly. Equally, Rs. 20 lacs crore of Indian rupees i.e. representing around 20% of the total market capitalization of Indian Equity.
Can’t Agree, see the Graph below:
|Month||Bitcoin||USD Value||Y-o-Y (Growth %)||BTC Investment Value (in Lacs)|
|Dec – 17||1 BTC||17098.97||142.19%||65761|
“The mind falls short of thinking and expression while making any attempt to do financial analysis of BTC Bitcoin.”
From a genuine invention of a novel business idea, BITCOIN unprecedented rise has raised many questions
- If its rise real and sustainable?
- Is Bitcoin turning out to be digital currency or speculative currency or commodity?
- As it is fastly growing, whether crypto-currency (Digital Currency) will become alternative to Paper Currency. Else whether it will continue to defy all market research about its valuation and may position itself as a gambling tool which is easily accessible by all participants through common sharing of the platform…
Although, the elaborate meaning of the BTC concept and its advantage has been interpreting by various market analysts as Digital Currency as the alternative to Paper Currency. Herein we will make an attempt to understand whether BITCOIN is serving its real purpose as the alternative currency.
Bitcoin Idea – A Digital And Independent Currency
- BITCOIN’s idea is to provide an alternative platform to Paper Currency, which is regulated by different Governments and Money Regulators in various countries with a Common Currency. Common Currency means a currency which is accepted globally and is given and accepted freely just like existing world currencies.
- BITCOIN does not have any physical appearance like Paper Currency. It is developed through a Pre-set computer program through which the money transfer takes place from one source to another.
- There is no physical control on its value and transfer which solely takes place through a common platform (Computer Program) through the participation of people from various geographies. The Computer Program lends maximum safety which prevents its steal & fraud by any means
- As there is no underlying variable in Bitcoin which defines its value, it is called a Virtual Currency. Its value is derived totally from the interactive platform of prospective buyers and sellers who bid for their respective contracts for buying and selling. Resultantly, the valuation of BITCOIN is more perception and volatile in nature.
- The Virtual Money Bitcoin is transferable between parties in a few moments. The transactions carried out on the network are not only safe but also very economical.
In short, the launch of BITCOIN is to provide an alternative platform to settle trades between the parties in a hassle-free and safe financial environment.
Need Of Separate Currency
What Purpose A Currency Serve?
Just go back to the ancient trading style where the traded merchandise was used to change hands on the barter system where you could buy a commodity by giving another commodity to the seller. Thus the transactions settlement used to be carries out otherwise than in monetary assets being use as of today. However, it was always difficult to work on the barter trade as the valuation of the exchanged commodity used to have a different economic value to the different parties involved. Then with the passage of time, there was the advent of physical currencies which were exchanged between the parties to settle the trade transactions. The utility of such exchange grew constantly as the trading parties found a common economic value while buying and selling a commodity. Thus, the trade transactions got increasingly facilitate as a standard currency came into existence.
Global Trade Prompted For Need Of Common Currency
The Globalization and increasing level of cross-border trade and financial transactions, the earlier problem of a non-standardized monetary value of exchange (“currency”) arose once again especially in case of export and import transaction. As different participating trading countries had a different currency form. The exchange of one nation’s (“importing country”) currency in settling trade with other countries (“export country”) did not find its easy acceptance between various trading parties involve due to the following factors:-
- Non Usage of other’s nation (importing nations) currency in the country of exporting goods and merchandise
- Statutory Restrictions imposed by Government / Banking Regulators on free conversion of one nation’s currency with another
- The non-existence of a wide and liquid platform for currency exchange. Further, extreme volatility in financial markets also resisted free trade between two different nations.
The above instances prompted the need for globally accepted currency which can facilitate the trade transactions globally. However, the search for global currency continued to be a dreaming task till today even after the lapse of many decades and centuries due to conflicting ends of trading countries.
Dominating Currency Form In Global Trade – USD, EURO, YEN ETC.
Historically, at different times many leading currencies of the world such as US Dollar / British Pound / Euro / Yen have come out with their appeal to become global currencies. US Dollar predominantly dominated the list for the longest time period. Resultantly, US Dollar has become the major source for settlement of Global Trade. The main reasons for the dominance of US Dollar were attributable to the fact that the trading countries found it safer to accept their realization from sale of goods and commodities in US Dollar as the same was found to be most stable and consistent currency.
The developed financial markets and stricter financial regulations in the US economy had also supported its appeal to become a global currency. However, of late with some early signs of fall out in US Economy, there is the increasing fear amongst various economies about the financial safety of their monetary resources parked in USD.
Therefore, the world is in look out for an alternative to USD for settling their trade and parking their surplus funds.
In order to qualify any currency as a Global Currency, the following requirements must be satisfying.
Pre-requisites Of Common Currency
- Its valuation must be acceptable by all in a common way which is independent of any country’s internal policy and conditions
- The value must be stable without many fluctuations
- Easy conversion into local currency as and when desired
The emergence of another monetary asset earlier like Gold (as the alternative form of common currency) did not last for long as the fundamentals had caused extremely volatility in their prices and therefore in the long run their appeal to become an alternative to USD did not last for long.
Is Bitcoin Serving its Purpose? As Currency Or Speculative Commodity
“It is also important to understand what the purpose of a currency is? Is its real purpose to facilitate a trade transaction? Or to make returns by investing in it just as another asset class? By large the currencies are considered to be passive monetary assets which can generate returns when put into Productive Assets.”
BITCOIN does not have any physical appearance just like in case of Paper (“Flat Currency”). Its Birth is based on the concept of creation of a virtual currency form. The development of Bitcoins is a computer device. Additionally, only the computer program records all transactions of BITCOIN (“transfer”). This computer program directly connects to thousands and millions of devices. Only through the internet who are using the BITCOINS for settling their trade transactions. There is no Government / Regulator’s intervention in the process. Also, the exchange transactions (“BITCOINS”) never passes through any banking channels. No Point of Sale/Digital Payment Wallet solution/No Credit Card or Debit Card/SWIFT is needed to transfer this virtual money through BITCOIN.
Therefore, the transactions cost minimizes and spontaneous fund transfer takes place. The mode of transfer is electronic devices to the beneficiary. High possibilities are there that this virtual currency can convert into Flat Currency. This will be possible by using BITCOIN Network. In this network buyers and sellers are directly connecting. It is to be the strongest alternative to paper currency. As the time is passing, its acceptability is increasing day by day. Therefore, it is the most convenient, safer and faster mode of transmitting of funds from one party to another
In-spite of having so many attributes, there is a big problem with BITCOIN. The problem arises due to its core issue which tend to insulate its value independent of any economic process or regulatory purview. Like for instance, the value of any currency is dependent upon money circulated in the system / financial and fiscal policies of the Government. Where macroeconomic policies and balance of payment situations take place? This prompts a lot of blind speculation in the market.
As per the genesis of the development of BITCOIN, it’s value is decided by a demand and supply theory. The millions of the people worldwide collectively determine it’s pricing through their respective participation in the open market. This participation makes BITCOIN value highly volatile. The volatility also gets accentuated as BITCOIN valuation is totally derived on a virtual basis. In this manner also, the value of BITCOIN is always dependent upon the price of the local currency. And the price of the local currency will necessarily impact the price of BITCOIN.
“While volatility is ideal for catching the attention of speculative money. It is equally deterrent in the way of inviting of the serious long-term investment. Also, to become a global resource for settling trade transactions.”
This volatility in the currency may substantially expose traders & participating countries to greater financial risks. The stability in the price of any currency is the best quality for its global appeal as the common currency. Due to this volatility, BITCOIN is largely behaving as a commodity rather than as a currency.
Therefore, in our view BITCOIN may not come out as a global currency as it lacks the fundamental feature of a currency. Neither, it can come out as a serious contender in the way of becoming a global currency unless it shows the huge amount of stability in its price for a long period of time. Till then, it may only be termed as a commodity or speculative commodity.
Reasons For Unprecedented Upswing In Bitcoin’s Value
Is there any method to do the fundamental value of BITCOIN? The Answer is absolute “NO”. Actually, many people claim and talk about the furthermore quantum jump in its value. But no one can guarantee the stability of the current price. The Long-term price movement of any asset class or currencies is by the reference to its fundamental or intrinsic value. While in the short term, the price of any asset class may show some irrational behavior. However, the same may not hold well in the long term. BITCOIN is a virtual currency. If it is virtual, how can it have real value?
If the above is the case why the price is rising exponentially? The reasons for the rise is “Rise itself”. To understand this, the money chases money especially raising money. Such type of money is speculative money whose investment is in order to make quick returns. Such type of money generally does not have any reference to long-term valuation. This money constantly supports the upswing in any asset class until the time it continues to deliver quick returns…
What is the risk?
There may be a possibility of heavy melt-down and correction in the price of BITCOIN in case of sudden flash out of any negative news due to any regulatory intervention or stagnation tendency in the price for long. There is no doubt that the movement in the price of BITCOIN has topped all previous up-swing in any asset class. But in spite of the same, the fact remains that no one can guarantee the protection of money invested in BITCOIN. Since BITCOIN has not come out as a common currency till now, it’s movement is more driven due to psychological factors rather than any real fundamentals. Therefore, there is always a doubt whether BITCOIN has enough credentials to become a digital currency in future.
Therefore, in our opinion, BITCOIN lacks sufficient fundamental reasons to maintain its upsurge. However, in short-term, the price may show further upswing as there are new investors coming out on the market. However, as of today, it is a most riskiest asset to park the money in bitcoin. Any amount of negativity can cause a meltdown and sudden collapse in the price. We advise a cautious while investing in bitcoin.