Bitcoin’s explosive growth in value, as that of other cryptocurrencies, was one of the most notable trends in 2017. The pace, and quantum, at which the value of bitcoin has grown in the past year is astonishing. From a modest $891.62 for one bitcoin on January 20, 2017, the value of the cryptocurrency catapulted 2,069 per cent to $19,343 by December 16, 2017.
The growth of bitcoin, however, has brought to the fore the inherent risks associated with cryptocurrencies. Spurred by rising concerns that governments would begin regulating — or even outrightly ban — trading in cryptocurrencies, the cryptocurrency fell by 41 per cent in value in just a month, hitting $11,348 on January 16, 2018. Reports of a crackdown in South Korea and China saw other cryptocurrencies tank, too.
Do high volatility, absence of regulations and security risks mean that investors should keep off cryptocurrencies? Experts say there are pros and cons, but cryptocurrencies are high-risk investments.
Security
The very nature of cryptocurrencies exposes investors to losses with experts saying these may be a sitting duck for hackers. “Organisations running such platforms must accept the fact your infrastructure is under constant attack,” says Ankush Johar, director, Infosec Ventures, a security solutions firm.
Lack of regulations also makes any investments in cryptocurrencies unsafe. “If an exchange is taken down by hackers and the investor loses his or her investment, there are no safety nets. Also, the international nature of such theft makes it quite unlikely for police to track down the perpetrators,” said a finance ministry official.
Taxability and government regulations
While the government is still deliberating on the issue and both the Reserve Bank of India and the finance ministry have issued repeated warnings on the risks involved, tax authorities say that any gain from cryptocurrencies will be taxed. “In theory, cryptocurrencies are just another asset. If you gain from trading in said assets, then that gain will be taxable,” an income tax official said. Tax authorities may view anyone trading in bitcoin as traders, with gains viewed as “taxable business income”.
“There is much concern that such instruments will be used to evade taxes and investors should declare these gains to avoid red-flags,” the official added.
Silver linings in a storm cloud
That said, bitcoin as an asset class still has strong fundamentals. Experts say the global nature of bitcoin trade makes offloading stock much easier as volumes increase and blockchain’s potential in the finance sector makes bitcoin, which is based on blockchain technology, inherently valuable. The limited nature of bitcoin volumes (the maximum number of bitcoins that can be mined is 21 million) is also likely to drive value as scalability decreases. Till now, about 16 million units have been mined.
One thing that drives investors to bitcoins is the latter’s decentralised nature. Exchanges seek self regulation arguing government intervention will stifle value growth.
The final word is simple. While bitcoins hold much promise of very high returns, the absence of a regulatory safety net, high volatility and security risks make cryptocurrencies very high-risk investments. If investors do decide to enter the market, Johar of Infosec Ventures says there might be ways to minimise the security threat from hackers. “One not-so-simple solution that will help you keep your crypto-currency a bit safer is to locally host a digital wallet in your backyard and avoid online wallets… though, this also means that you have to then take care of your local wallet in terms of both security and reliability.”