7 reasons why you should not invest in bitcoins, cryptocurrencies
Extreme volatility
Investing in cryptocurrencies involves very high risk, as prices have been extremely volatile. Many experts are sceptical about bitcoin as an investment primarily because there is nothing for them to analyse. Vivek Belgavi, Partner and Fintech Leader, PwC says, “There isn’t enough of an ecosystem surrounding bitcoins to allow fundamental analysts to study it as an investment. People are therefore investing with imperfect information and joining the herd of speculators.” Since these cryptocurrency prices are not regulated, as more people enter the market lured by the high prices, the prices climb ever higher. This might lead to formation of a bubble that will eventually burst and cause widespread losses.Neither commodity, nor currency
The lack of clarity about its origin is another big issue related to bitcoin. In olden days, highly priced metals like gold, silver, etc. were used as currencies. Then came currencies printed by governments (or central banks) and these are called ‘fiat currencies’. Though its proponents claim that cryptocurrency is ‘mined’ using complex mathematical formulae, they are reluctant to call it a commodity. They also claim that it is not controlled by any government and so, it is ‘democratic’. Therefore, cryptocurrencies don’t fall into the ‘currency’ category either. “It can be very risky for businesses, industry and people to trade or invest in bitcoins as it is just a formula, not backed by any tangible asset, but by sheer demand,” says S.P. Sharma, Chief Economist, PHD Chamber of Commerce and Industry.Don’t invest if you don’t understand
Some global bankers and experts have warned investors against investing in cryptocurrencies, because they are of the opinion that it is nothing but a bubble that is just about ready to burst. Jamie Dimon, CEO, JP Morgan, for instance, has recently expressed his doubts about the value of bitcoins, saying “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.” However, owners and operators of bitcoin exchanges are of an entirely different opinion. Sandeep Goenka, Co- Founder and COO, Zebpay, says, “The comment from JP Morgan’s CEO was his personal view, and there is a possibility that he doesn’t understand the evolution of bitcoins. On the other hand, we have former Citigroup CEO Vikram Pandit investing in bitcoins.”
The problem is apparent: If global bankers don’t understand the phenomenon, retail investors might not have much of a chance either. So what should you do? Follow the simple yet profound wisdom of Warren Buffett—if you don’t understand it, don’t invest in it.
An unregulated space
Unlike other investment avenues, cryptocurrencies are not regulated by government entities or banks. “There is no authority like Sebi that you can approach for grievance redressal,” says Vikram Pandya, Director, Fintech, S.P. Jain School of Global Management. Sharma concurs, “If we buy something with a credit card and get ripped off, we can call the bank and ask to be compensated. But if we get ripped off in a bitcoin transaction, it is impossible to get the money back.” As Pethe has realised a little too late, therein lies the pain of investing through unregulated schemes.The issue of legality
One major hurdle in the path of Indian investors who are interested in investing in cryptocurrency, is the confusion about its legal status. While they haven’t been declared illegal, cryptocurrencies are not recognised by the Reserve Bank of India (RBI) or any other authority in India, as a ‘currency’. In December 2013, the RBI issued a press release cautioning users, holders and traders of virtual currencies, including bitcoins, about the potential financial, operational, legal, customer protection and security related risks. In its latest press release dated 1 February, 2017, the regulator has further stated that it has not issued licences to companies for trading in any virtual or digital currencies. RBI also added, that the user, holder, investor, trader, etc. dealing with virtual or digital currencies will be doing so at their own risk.
However, bitcoin exchanges want to draw investors’ attention to the fact that the RBI has not banned them. “While the RBI has voiced its concerns, bitcoin transactions haven’t been rendered illegal. So, in our opinion, investors shouldn’t lose hope, just exercise caution,” says Hesham Rehman, Co-founder and CEO, Bitxoxo.
- Ponzi schemes abound
Aside from the operational issues of trading in cryptocurrencies, there is also a high risk of fraud. There is still a good deal of misinformation and lack of clarity regarding bitcoin trading, and fraudsters have taken advantage of this to launch Ponzi schemes, which promise ‘guaranteed high returns’. Some companies claim to double the initial investment within a very short period of time. “The growing use of virtual currencies in the global marketplace makes it easy for miscreants to lure investors into Ponzi schemes. Investors should be careful to steer clear of such unrealistic promises,” says Rajendra K. Sinha, Professor and Chairperson, Centre of Excellence in Banking, IFIM Business School. “Keep in mind that bitcoins are highly volatile, so it’s not possible to offer guaranteed returns,” says Hesham Rehman, Co-founder and CEO, Bitxoxo.
Prakash Pillay learnt this the hard way. He invested Rs 5 lakh and accumulated 6.5 bitcoins through bitcoin trading company GainBitcoin in February 2017. Though he was able to recover Rs 3 lakh by selling one bitcoin in July, the company is no longer allowing him to sell the remaining bitcoins in his wallet. Instead, it is asking him to exchange them for MCAP, another cryptocurrency. “Gainbitcoin is a Ponzi scheme like Shavers and Gaw Miners. Investors should be careful to steer clear of such schemes,” says Jaju.
- Prone to illegal activity
Due to the lack of government control, terrorists and extortionists are also utilising the cryptocurrency space to their advantage. “Bitcoins users on either end of a transaction can remain relatively anonymous and cybercriminals have found ways to mask their addresses, so it can be difficult for government authorities and companies to trace such illegal activities,” says Reshmi Khurana MD and Head of South Asia, Krollsays, a cyber security and risk consultation firm. Kishore Jeswani, 50, fell victim to such hacking in September 2016. Jeswani’s computer was remotely accessed and locked by hackers, who demanded a payment of three bitcoins. However, although Jeswani met their demands, they did not unlock his computer and he ended up losing his data anyway.
Incidents like this make it abundantly clear that it’s much more difficult to track illegal activities in the cryptocurrency space. “Since there is a lack of information about the trading parties, such a peer-topeer non-regulated system may expose the investors to unforeseen risks including breaches of anti-money laundering and financing of terrorism laws,” says Khurana. This risk also lowers the chances of cryptocurrencies becoming mainstream in India, leaving the future of the market mired in uncertainty.
So please be safe.
My Idea is to aware you not scare you.