‘Is my capital or/and returns safe, can I liquidate my holdings during a crisis, and will I make any money?’ These are questions you always ask yourself before you invest in a financial product, like a mutual fund or stocks. And chances are, you will only invest if the answer to all these questions is ‘yes’.

However, when it comes to cryptocurrencies like bitcoins – which are all the rage right now – the answer to these questions is an emphatic no, at least as far as India is concerned. The only exception being its massive returns. Which could be the prime reason why it has found a fan following in India despite there being so much uncertainty surrounding it.

Bitcoin prices have surged from Rs 7,304.24 on 28 April, 2013 to Rs 6,26,396.07 on 30 November, 2017 – a whopping increase of over 8,400 percent! With such returns, it is no wonder the cryptocurrency has emerged as a new attraction among Indian investors.

Movement of bitcoin price in rupees from April 2013 till November 30, 2017 5 reasons why you should not get swayed by bitcoin's sky-high returns
Source: www.coingecko.com

But, are such almost unrealistic returns a good enough reason for you to invest in the cryptocurrency? Forget the risk of volatility, as it is inherent to most investments, there are other reasons why should stay away from cryptocurrencies.

1) Growth is speculative
When you buy stocks of a company, you know that the growth of your investment is directly proportional to the company’s growth, its earnings, turnover, expansion, and other internal and external factors. Similarly, behind every investment product there’s a mechanism as to how your money grows. However, in bitcoins, price is determined solely on the basis of demand and supply, and speculation is what is driving its prices right now.

Karan Bharadwaj, chief technology officer of Singapore-based fintech firm, XinFin says, “Bitcoin was invented to be a peer-to-peer digital cash system with a limited supply of 21 million bitcoins. Its price is driven because it is limited supply and decentralised. There is huge speculation around it, and that is what is driving the prices. Several things drive bitcoin prices. Often when the demand for bitcoin goes up in politically/economically volatile regions, there is a general increase in bitcoin prices.”

2) Remittance issues: you can’t buy anything with it
By and large, at least in India, the acceptance of bitcoins is low and people are purely buying it out of speculation and not with the intention of using it as a tool to transact. Deepak Kinger, vice president, banking and financial services, Virtusa Corporation, a fintech firm says, “Like we have Visa, MasterCard and RuPay networks, for bitcoins to become mainstream something like that needs to happen. The Reserve Bank of India (RBI) has clearly said that they are not regulating this industry and have warned people against investing in it.”

Kinger adds that at the moment there are only a handful of cryptocurrency exchanges in India and there’s a huge risk involved since this space is not regulate.

Corroborating these views, Bharadwaj says, “Historical data has shown that bitcoin can become 1/4th or double in price within span of days or even hours. Remittances cannot be realistically implemented on bitcoin because of its price volatility and delay in transaction confirmations. Even at the protocol level, it takes an entire hour before most participants consider a bitcoin transaction as valid. Volatility can seriously affect remittance ‘losses’ if built on bitcoin.”

“Besides there are no tangible assets under compliant environment that can be traded in India with bitcoins,” Bharadwaj adds. What this means is that you cannot buy anything using bitcoins, you have to convert it to currency.

3) If the exchange goes down, your money is gone
The capital market and products like mutual funds are regulated by the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India watches over the insurance industry, and RBI regulates the banking system, but there is no such watchdog for bitcoins.

So, if by any chance you make investments in a fraudulent bitcoin exchange, there’s no one you can approach, not even the government can help you in getting your money back.

You buy and sell cryptocurrency solely on the face value of the exchange. Some of the popular exchanges include Zebpay, Unocoin, and Coinsecure. But if there’s a fraud, your money is gone, and in the absence of a regulator there’s no way to address it.

Kinger adds that further, there’s no mechanism to validate the authenticity of bitcoins.

Also, there have been instances where investors have faced challenges while trying to sell their bitcoin holdings. So, even if you have holdings worth crores in bitcoins, if you can’t remit or liquidate it easily, what good does that do?

4) If RBI bans cryptocurrencies, what options do investors have?
Right now, there is ambiguity regarding cryptocurrencies’ legal status – it is neither legal nor illegal in India. Bitcoin exchanges, like Zebpay, have been stressing on the fact that they aren’t illegal. However, if RBI says that these virtual currencies are illegal and bans such transactions, these exchanges will have to shut down.

“If there’s the ban in India, all these exchanges will have to shut down, and in the absence of a regulator, it is likely that you’ll lose your money,” says Kinger.

However, according to Bharadwaj if RBI decides to ban cryptocurrencies, all will not be lost. “When an investor buys cyrptocurrencies from an exchange, they create accounts on that exchange where the cryptocurrency is held. Hence, in some cases the private keys for their accounts on the blockchain are also held by the exchange. If the entire exchange goes down, the private keys of the investors are compromised and they lose their holdings. However, if you transfer your holdings from the exchange wallet to a dedicated wallet or client-side wallets or hardware wallet, the private key of your account will remain discreet and the risk of losing the money is minimised. If you have stored your holdings in these wallets and RBI bans the cryptocurrencies, you can conveniently convert it into any fiat currency other than the rupee.”

5) Bitcoin and ponzi schemes
Investors interested in bitcoins might fall prey to bitcoin cloud mining services or investment schemes promising fixed or assured returns. Remember, there is no such thing as fixed returns in bitcoins due to the extreme volatility in its prices.

Historically, bitcoins started with the concept of mining. While it is quite clear that mining is an essential part of the bitcoin ecosystem, how it works is complex.

“Bitcoin operates in a totally trust-less and anonymous environment which may be misused by bad elements. Potential investors should be fully aware of its risks. They should also hold their bitcoins in reliable online wallets or cold storage wallets. They should never share their private keys or click on any links that could potentially be associated with phishing attacks,” says Bharadwaj.

Quoting an instance of bitcoin fraud, Bharadwaj says, “A popular exchange called Mt.Gox got hacked a few years ago and lost millions of dollars worth of bitcoin to fraudsters. Another bitcoin startup, BitInstant, which was launched in 2011, went defunct in 2013 due to its links with the dark web, and subsequently its co-founder and CEO Charlie Shrem was arrested for the fraud. Investors should only use exchange wallets as temporary storage, while keeping long-term holdings should be kept in dedicated wallets.”

What you should do
Yes, the cryptocurrency has made bitcoin billionaires out of everyday people. And yes, the rally in prices seems like it won’t end anytime soon. However, what people don’t realise is that when something is too good to be true, there is always trouble brewing. Think about the three questions you always ask yourself before buying a financial product, and now consider bitcoins. It is a totally unregulated space, so your money is not safe. Liquidity is a major issue with bitcoins, especially if prices crash or if a bitcoin exchange goes bust. And about the returns, well, such inflated returns in less than five years, is an indicator that the cryptocurrency is inching towards bubble territory. And history has taught us that when an asset bubble bursts, it is the small investor who gets hurt the most. Besides, even though it is a crypto’currency’, can’t really buy anything with it. Added to this, finance minister, Arun Jaitely, said on Thursday that the government does not recognise bitcoin as legal tender as of now.

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