Wednesday, 4 October 2017

Can Bitcoins  still be ignored?

“A pessimist sees difficulty in every opportunity and an optimist sees opportunity in every difficulty”

Asset Class
CAGR* from Jan 2009 to Aug 2017
Bank FD

*CAGR – Compounded Annual Growth Rate

On August 31, 2016, Nifty  waat 8800. Currently, it is 9900, riding on bullish  sentiments and a strong reform- oriented BJP government, giving  a return of 12.5% p.a. Impressive!!
Bitcoin has risen from 575$ to 4600$ in the same time frame,  posting a staggering return of 700%. That’s 55 times the return on the stock market! Do you still think  the bitcoin  can be ignored?

When  bitcoin  was  found in 2009, Nandan Nilekani was  still serving his first  stint  as Chairman of the  IT giant Infosys,  Virat Kohli was  yet to make  his test  debut and Rahul Gandhi was  the blue-eyed boy of Congress and future superstar of Indian politics!  
It has been  almost  a decade since inception, yet the #4 most  searched query on Google(2014) What is Bitcoin? still puzzles most!

Bitcoin is a decentralized, paperless crypto-currency invented by an anonymous programmer in 2009.
Bitcoins are pieces of computer code -- mathematical algorithms, actually -- that  represent monetary units.  They need  no middle man  to transfer the funds. Unlike  modern fiat money, Bitcoins not controlled or backed by any bank or central government authority, like the  RBI. You don‘t  have  to ask anybody to use bitcoin. There is no gatekeeper.

Transaction are propagated nearly instantly in the network and  are confirmed in a couple of minutes. It doesn't matter if I send  Bitcoins to my neighbor or to someone on the other  side of the world, it will take the same time!

One  of  the  limitations of  bitcoin   is  that  once  a  transactions  verified by  network nodes and recorded in  a public  distributed ledger (blockchain), nobody can reverse it. There is no safety net. However, cryptography and the  magic  of big numbers makes  it almost impossible to break this scheme. A Bitcoin  address is more secure than Tihar Jail.

The  biggest  concern of regulatory authorities is that  neither transactions nor  accounts are connected to  real world identities. As  stated by Former Indian Minister of  State  for  Finance  Arjun  Ram  Meghwal, “Usage  of virtual currencies anonymous/pseudonymous  systems could subject  the users  to unintentional  breaches of anti-money launderinand  combating the financing of  terrorism  laws.”You receive  Bitcoins  on  addresses, which are randomly seeming chains  of around 30 characters. It is almost impossible to connect  the  real  world identity of users  with  those addresses. You may be dealing with terrorists or Shah Rukh Khan, you never know!

Barring  these  limitations, what  works  best for bitcoins  is pure economics. The model  is designed in such  a way that  there  is a CAP of 21mn bitcoins that  can be generated by year 2140 and  currently approx. 16.5 mn bitcoins are in circulation. When supply is limited, and demand increases, we all know what  happens to the price.

In a mere  18 days  after  the  demonetization speech  of Prime  Minister Narendra Modi,  the  price  of bitcoins  on Zebpay, having1 million  users, had surged from  $750 to $1,020. 
If adoption by few billion  Indians can lead  to a 33% increment, imagine the level it would reach  when 1.3 billion  Indians get on it!! Now  imagine if the entire world gets on it.

In year  2013, no one thought Sachin  Tendulkar’s records could  be replicated. Four  years  later, with  Virat Kohli in rampaging form,  that possibility is not  far behind. The old  guard has  to make  way  for the  new generation. Bitcoin  is  risky  but  time  changes everything and  this change   brings   lot  of  opportunities to  capitalize. Can bitcoins  still be ignored?

                                                                         -CA Akshay Sirsalewala & CA Amish Makwana

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