Cryptocurrency

Cryptocurrencies - Investor’s Dilemma  !!!

Since last 2 years either everyday or alternate day you see an article on Cryporcurrenies in one of the leading business newspapers, discussion about it on news channels and people talking about it being the future who hardly know about the same. Many people have invested considering they are investing in Blockchain technology. Many people have now invested their savings in various Cryptocurrencies and high fluctuations have bought them into Dilemma - have they invested rightly or not, is their investment safe ? I will try to address most of these questions in this article.

Current Scenario of Cryptocurrencies:

There are more than over a thousand Cryptocurrencies active globally. The total market capitalization of all the crypto currencies has reached $500BN in December 2017 (equivalent to daily turover of Currency Markets Globally), a 10x increase in just 12 months. The top 5 traded being Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin. NEO, Stellar, EOS and Dash are other few most traded Cryptocurrencies.

(Source: https://coinmarketcap.com/ )

I believe that the following factors to be understood for taking a call on Cryptocurrency Investment:

1. Cryptocurrencies use as Currency/ Mode of Transaction: The objective of any currency is that it must be used as mode of transaction/ payment. This is the biggest challenge for the growth of Cryptocurrencies, with the presence of central currencies of each Country and organised market for equivalence of currencies of other countries , the change of mode of transaction from normal currency to digital currency is very tough. The objective of the currency is to be used for mode of transaction and not trading, Cryptocurrencies are traders and speculators favourite. There are green spots where few countries have allowed to transact with the use of Cryptocurrencies with the equivalence of the local currency- the challenge here is the volatility in Cryptocurrency , a trader sells a TV for X Bitcoin on 23.2.2018 and on 24.2.2018 the currency is down by 15% and vice versa. A person who has X Bitcoin on 23.2.2018 can buy 1 car from the same but if the markets go up within a week , he may buy 2 cars in same Bitcoins. So even if the governments will all the transactions the Cryptocurrencies will not be used widely.

2. Underlying Asset into Investment : There are various investment options available in the market from Physical Assets like Real Estate, Precious Gems, Metals, Crude, Commodities, Energy, Liquor, Forex, Stock Markets and so on - the common in all is an underlying asset which determines the value of the asset. In case of the market price being even zero you still have the asset with you. In Cryptocurrencies there is no underlying asset, each Cryptocurrency have a cap of the currency to be issued in life time. The price is purely based on trading of the Cryptocurrencies, no underlying asset, which make the investment highly risky. Even as there is no use of Cryptocurrency it become difficult to do a valuation of them, the trend of trading is the only data avalable for analysis.

3. Volatility : The Cryptocurrencies are very sensitive to information  and the volatility is high. Which can be learnt from the price volatility of the highest traded Cryptocurrency Bitcoin. To understand further i have taken data from the Cryptocurrencies Index - CCI30 (this is an index of the 30 most traded Cryptocurrencies and these 30 have market cap of more than 90%). The below data explains it all. In just 2 months Bitcoin value have come down more than 50%. Investors must be prepared for such volatility.

Index Real Time (23.2.2018)	10,157.10
52 Week High	20,796.64
52 Week Low	365.22

4. Legality : This is a big confusion when it comes to Cryptocurrencies. They are not considered as legal tender in any country of the world. The central banks of majority of the countries have raised a red flag against the Cryptocurrencies. No country will allow the Cryptocurrency to be a legal tener when the Currency issues by the the country is in place for very strong reasons. Few countries have allowed to be used to buy or sell products or services, but it is very limited. The Indian Finance Minister during the Budget speech also raise a stern warning recently. The Cryptocurrency is not issued by the Central Banks so they cannot even control them.

5. Taxation : As majority of the countries do not consider Cryptocurrencies as Legal Tender, there is also confusion on the taxation applicable to the investments in Cryptocurrencies. They consider it as an instrument which is being traded and majority countries have imposed Capital Gains of the same. The Capital Gains are from 10% -40% in various countries. In India the Government have not yet taken a call on the taxation of Cryptocurrencies but it is rumored that the tax will be 30% of Cryptocurrencies.

Hope this article will help you to take an informed and logical decision on investing in Cryptocurrencies. Would like to end with a famous quote of Great Warren Buffet:

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

You can reach the author on japan@jmsadvisory.in/ Twitter - @japanshah