Decoding the Crypto Bull Market

Decoding the Crypto Bull Market

With investors around the world have been reported of being entitled to extremely high profits of even around more than 1,000 per cent over a number of years simply through investments made in cryptocurrencies and a leading company like Tesla expressing interest in Bitcoin, the new financial phenomenon has caught the attention of investors across the world. Join Geyatee Deshpande to explore more about cryptocurrencies. 

Bitcoin and other cryptocurrencies make up the new dazzling asset class in the markets. The cryptocurrency bull run has indeed caught the attention of millions of people who previously had never considered digital currencies like Bitcoin to be an alternative asset. Mohan Naik, an avid cryptocurrency investor says, “I had never expected Bitcoin to cross the 25,000 mark this soon. But when it began rapidly rising, crossing the mark of 50,000-60,000 was an easy task. I couldn’t believe that my portfolio included such gigantic returns from investments made in Bitcoin and cryptocurrencies.”

Investors around the world have been reported of being entitled to extremely high profits of even around more than 1,000 per cent over a number of years simply through investments made in cryptocurrencies. Let us consider that you jumped into the game at a very early stage when it had just been launched in 2009. At that time since the initial value of the asset was around USD 0, by now investors like you would have earned around millions or billions in returns, making it the best-performing asset of the last decade in your portfolio.

Nevertheless, even if an investor realised the growing excitement in Bitcoin a bit late and invested around USD 100 in October 2010 for 1,000 Bitcoins, when one Bitcoin was for 10 cents, the asset’s current value in an investor’s portfolio would surely be more than USD 40 million. Those investors who missed the opportunity to benefit from the increasing gains from Bitcoin weren’t left disappointed when the pandemic shook the world in 2020. Amid signs of broad investor interest, Bitcoin and other cryptocurrencies returned to prominence over the past year. Bitcoin has gained by more than 90 per cent in 2021, after quadrupling in value in 2020.

While the prices of cryptocurrencies remain extremely volatile with an edge over the rising inflation, hedge funds prefer to go with Bitcoin and much bigger investment in cryptocurrency is likely to come with the level of wide adoption in the world. Weakness in the dollar index is also said to support the price of Bitcoin. Bitcoin and cryptocurrency are being seen as a new asset class by many investors to be included in their portfolio due to their nature of rewarding investors with bedazzling returns outperforming other investment assets.

Is Bitcoin the New Gold?

Well, Bitcoin is commonly referred to as ‘digital gold’ due to its scarce and limited supply, but the argument whether Bitcoin can truly replace the yellow metal in your investment portfolio has had bears and bulls locking heads for quite some time now. Both assets are looked at by investors as a way to diversify a portfolio or use as a hedge against the volatility in markets, fiat currencies and risks arising due to fluctuating inflation. Bitcoin and other cryptocurrencies can be easily traded on platforms. For investors, cryptocurrencies offer ease of exchange and wider use in the modern economy.

Fact : At the beginning of 2017, Bitcoin jumped above USD 1,000. By mid-summer, it had more than doubled. With the craze, by the year-end it hovered above USD 14,000. But as swiftly as it ran up, it fell even faster. By the end of 2018, Bitcoin barely budged above USD 3,000. Bouncing back shortly after its crash, it embarked on another huge rally, this time crossing the USD 13,000 mark in the summer of 2019. And soon it crossed 20,000. Picking up with the pace, in no time Bitcoin touched a new high in March 2021, surpassing USD 61,000 mark for the first time. The rest is history.

While gold was one of the best performing asset classes for investors in FY20, gaining by more than 25 per cent, since August 2020 it has been witnessing volatility after economic indicators improved and equities started to rally. Since then, the growth of gold returns has been tepid with investors moving away from the asset class and exploring other options such as Bitcoin and other cryptocurrencies.

Fact : Digital currency is generally said to be issued by a country’s central bank and can be denominated to a sovereign currency. On the other hand, as of now, cryptocurrency is privatised without being under the control of the government of a country and generally is not backed by a strong commodity reserve.

Currently, the gains in Bitcoin are strongly boosted by the ‘Fear Of Missing Out’ (FOMO) sentiment. It is seen that many people missed getting on to the cryptocurrency train since the pandemic-triggered crash in March 2020. Hence, now, there are a lot of institutional investors who have entered the space, holding hundreds of thousands of Bitcoins and that has boosted the confidence of retail investors who seem to be taking advantage of the emerging opportunity and getting in – buying every time the price dips and thus fuelling the rally.

Shying Away from the Spotlight

While the Sensex has jumped by more than 90 per cent and Nifty by around 89 per cent since March 23, 2020, Bitcoin crossed the USD 60,000 mark, witnessing a dizzying rally. Bitcoin has been zooming since March 2020 from the levels of USD 5,000. Even while equities have cheered investors with outstanding returns, cryptocurrencies were quick to bounce back from the March 2020 crash, outperforming the stock markets. In the global markets, the modern-age gold rush has seen stocks of companies associated with Bitcoins and cryptocurrencies gaining from the optimism in the rally of cryptocurrencies.

There are a number of publicly traded companies whose stocks are said to be linked to the performance of Bitcoin because the companies are either directly engaged in Bitcoin-related activities such as mining, are holding a substantial amount of Bitcoin in reserves or because their target market is cryptocurrency users. The cryptocurrency mining stocks have outperformed in the past year and will continue to do so till Bitcoin stays in the bull territory for a long term. Since miners play a critical role in ensuring that the Bitcoin network functions properly, investors have sought opportunities to gain exposure to mining companies, thereby generating revenue in the form of mined Bitcoin.

It is thought that as the Bitcoin price increases, miners spin up new rigs or upgrade hardware in pursuit of higher block rewards. Subsequently, more efficient mining machines will help some firms remain competitive, further boosting profit margins. Some of the well known listed entities include Riot Blockchain, Hive Blockchain, Marathon Patent Group, Nvidia, Argo Blockchain, BitFarms, Diginex, Silvergate Capital, Square, etc.

Bitcoin and Correlation

From the table above, we can see that the highest correlation between Bitcoin and the stock market with a value of 0.22 is the S & P 500 which is considered as an index of the largest 500 companies in the United States. A likely cause for this could be a rise in institutional investment entering the cryptocurrency market and large significant players adding Bitcoin to diversify their respective portfolios. It is usually said that when the stock market falls or sees a dip, the ripple effect is seen across other markets as well. On the other hand, the highest overall correlation overall seen between two safe heaven assets – Bitcoin and gold – have risen in times of economic uncertainty as per historical data.

Big Names Promote Cryptocurrency

Recently, big names showing their support for Bitcoin and cryptocurrencies had driven its prices upwards. The Bank of New York Mellon had said that it would provide custody services for digital assets, citing growing client demand as the reason. Also, Mastercard had said that it would begin to offer support for cryptocurrencies on its network soon. In a recent news filing with the Securities and Exchange Commission, Tesla had announced that it had bought around USD 1.5 billion worth of Bitcoin to offer more flexibility and to further diversify and maximise returns on cash.

By being the first automaker to do so, Tesla intends to accept cryptocurrency for payments. Once the company starts to accept it for payments, Bitcoin is expected to give Tesla much more liquidity in cryptocurrency. Earlier positive tweets by Elon Musk indicating his support and bullishness to cryptocurrency were credited to increasing prices of cryptocurrencies such as that of Bitcoin and Dogecoin. Online payments firm Paypal is another huge institutional investor in Bitcoin. According to experts, a company like Paypal has chosen to buy Bitcoin to diversify its investments.

Investment banks as well aren’t far behind. Goldman Sachs is set to re-launch its cryptocurrency trading desk while Morgan Stanley is the first US bank to offer its wealth management clients access to Bitcoin funds. It is expected to be launching access to three funds that will enable ownership of Bitcoin. Bitcoin’s rally in the past year has put Wall Street firms under pressure to consider getting involved in the asset class when clients started demanding exposure to the cryptocurrency. Morgan Stanley took this step first, considered significant for the acceptance of Bitcoin as an asset class.

Two of the funds on offer are from Galaxy Digital, a crypto firm founded by Mike Novogratz, while the third is a joint effort from asset manager FS Investments and Bitcoin company NYDIG. The Galaxy Bitcoin Fund LP and FS NYDIG Select Fund have minimum investments of USD 25,000 while the Galaxy Institutional Bitcoin Fund LP has a minimum investment of USD 5 million. With this being available for its investors, wealth management divisions of firms such as Goldman Sachs, JPMorgan Chase and Bank of America currently do not allow their advisors to offer direct Bitcoin investments.

A Jump to the Basics

These days more and more youngsters or first-time investors are looking to invest in cryptocurrencies in India as well. But the truth is that most investors do not understand the cryptocurrency markets fully. Excited simply by the percentage figures of its returns, most investors jump in without any proper knowledge. Though the picture of cryptocurrencies as a promising asset class looks rosy, it has its own drawbacks as well. Before taking a step towards investing in cryptocurrencies, it is necessary to understand what this buzz is all about. To state in simple terms, a cryptocurrency is a digital asset that works as a medium of exchange that is used or can be used for payments.

All individual coin ownership records or transaction histories related to one Bitcoin are stored in a ledger existing in a form of computerised database using cryptography to secure transaction records or to control the creation of additional coins and also to verify the transfer of coin ownership. The word ‘crypto’ refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs and hashing functions. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government control.

Many cryptocurrencies are decentralized networks based on blockchain technology. Blockchain is a distributed ledger enforced by a disparate network of computers. Or, in other words, it is a growing list of records of one Bitcoin that are further linked using cryptography wherein each block contains a cryptographic hash of the previous block, a time stamp and transaction-related data details. Hence, it is considered that by design, a blockchain is immune to modification of its data and further allows for greater transparency for its users. This is because once recorded the data in any given block cannot be altered retroactively without alteration of all subsequent blocks in a blockchain.

Fact : Bitcoin mining refers to the process of digitally adding transaction records to the blockchain. Mining is a recordkeeping process executed through higher computing power. Each Bitcoin miner around the world contributes to a decentralized peer-to-peer network to ensure the payment network is trustworthy and secure. To securely add to the blockchain ledger, Bitcoin mining computers solve complex mathematical problems. When a solution is found, the latest block of confirmed transactions is added as the next link in the blockchain. As an incentive to mine and contribute to the network, the miner who solved the problem is rewarded a block of Bitcoin.

The first actual mainstream use of blockchain technology that popularised it was after the launch of Bitcoin. Bitcoin was first launched in 2009 by an individual or group known by the pseudonym ‘Satoshi Nakamoto’. Emerging through the tough phase of the 2009 financial crisis, Bitcoin was predominantly created as a bypass to the banks and government agencies mired in Wall Street’s greatest calamity in decades. In the beginning, Bitcoin was surrounded with scandals, frauds, thefts and scams that instigated fear among many to stay away from cryptocurrencies and thus brought close regulatory scrutiny.

But later with its increasing popularity in the mainstream when it was recognised as a medium for transactions, an investor was said to have bought a pizza by paying with Bitcoins and cryptocurrency saw a rush of investors. As of March 2021, there are said to be over 18.6 million Bitcoins in circulation with a total market capitalisation of around USD 927 billion. With the ever-growing evolution in technology, the story does not end with Bitcoin. Paving its way into the newly formed asset class, Bitcoin as of today has various competitive peers.

The aggregate value of all the cryptocurrencies in existence is said to be around USD 1.5 trillion of which Bitcoin currently represents more than 60 per cent of the total value. Cryptocurrencies such as Bitcoin and Ethereum are getting competitive day by day in terms of returns. High returns have attracted many retail investors to dip their toes in this new and intriguing asset class. Popular cryptocurrency names other than Bitcoin include Litecoin, Ethereum, Cardano, Binance Coin, Ripple's XRP, Dogecoin, Bitcoin Cash, etc.

Rahul Pagidipati, CEO, ZebPay
Cryptocurrency is 100 per cent Legal in India”

What is the future of cryptocurrencies?
We have reached a tipping point. Bitcoin has become a mainstream reserve asset for large, establishment companies like Tesla and is finally being recognised as a trustworthy store of value, a kind of digital gold. People no longer mistakenly think of it as a fad or something you can trade for a quick buck but which has no underlying value. We are going to see more long-term investors buying a diverse portfolio of cryptocurrency assets, not just Bitcoin, because they recognise that they are backed by the power of blockchain and innovations built on blockchain technology. As for blockchain itself, it’s going to penetrate every aspect of human life, far beyond finance to healthcare, entertainment, voting, and pretty much anything with a supply chain.

Is the demand for cryptocurrency increasing in India? Why so? Isn’t it illegal and risky to buy cryptocurrency assets in India?
Cryptocurrency is 100 per cent legal in India and it always has been! There has been a common misunderstanding. For a while between 2018 and 2020, the RBI told banks not to do business with cryptocurrency firms, which forced us to stop some services. But now we have plenty of banking partners. Anyone can download the app, complete KYC in minutes, and buy their first Bitcoin. There is risk in any market and because Bitcoin and other cryptocurrencies are new markets, they are still volatile. That volatility will go down as more investors come in. But the risk of loss is no more or less than a volatile stock or a commodity like crude oil futures or soybeans. The other risk is fraud. Fraudsters and scammers prey on people’s lack of knowledge or experience using the same old-fashioned tricks that they used when the internet was new. They send phishing emails to get people’s account information or post fake messages on social media. These tricks have nothing to do with cryptocurrency. It’s just plain con artist tricks and we do our best to educate our members and the public to protect themselves.

Do you believe gold has lost its lustre partly due to huge demand for cryptocurrency assets globally?
It’s unlikely because gold has been established in people’s minds for thousands of years and the cryptocurrency market, while growing, is nowhere near the size of the gold market. Young people’s faith in Bitcoin and cryptocurrency may be the 21st century alternative to their grandparents’ faith in gold, but multiple factors are affecting the gold price right now.

Risks of Cryptocurrencies

Even with its huge run-ups and subsequent mega-crash, the performance of Bitcoin has left everyone in awe while other investment assets look dull in front of it. The popularity of cryptocurrencies is ever rising and yet uncertainty and volatility make it a risky affair. Primarily, since it isn’t governed or controlled by national authorities or the central banks of any country, governments over the globe have been taking an uncertain stand regarding this form of investment. This is just one of the many risks associated with investing in cryptocurrencies. In April 2018, the Reserve Bank of India had issued a circular barring entities regulated by it from trading in cryptocurrencies or approving cryptocurrency-related transactions. This simply meant that it would be much more difficult for investors to wire money to cryptocurrencies through banks and hence many opted for a peer-to-peer system. 

However, in March 2020, the Supreme Court overturned the RBI circular, making it easier for investors to transfer money to cryptocurrency exchanges or wallets from their bank accounts, bringing on board many more retail investors. According to the new developments in 2021, the Indian government during the budget session of parliament in February 2021 announced a plan to create a facilitative framework for creation of the official digital currency and the bill was further also expected to prohibit all private cryptocurrencies in India. This had led many to believe that dealing in Bitcoin, Ethereum and other cryptocurrencies and related products would become illegal in the country. 

Hoping that a blanket ban would not be made effective, recent comments by Union Finance Minister Nirmala Sitharaman that the government will take a ‘calibrated’ approach to cryptocurrency trading in the country has somewhat brought relief to investors. “Implementation of a blanket ban is extremely scary,” says Sujit Roy, a cryptocurrency frenzy investor. Roy further adds that as prices of cryptocurrencies gain on speculation, bans and illegality can create a steep crash, leading many to incur solid losses. Along with risks of government regulations and bans, cryptocurrencies stand a risk from its peers. Currently the rise in prices is due to scarce supply but higher demand in anticipation of strong future growth.

However, stronger and better versions of peers can shift attention of investors from one type of cryptocurrency to the other very quickly. Currently, cryptocurrencies such as Ethereum, XRP, Neo and others have been following a similar trend that has been witnessed by Bitcoin but at a much lower value. And it is these lower-value cryptocurrencies that have come forward, enticing investors to get in on the cryptocurrency rally, hoping to cash in on the quick returns.

Apart from its peers, private cryptocurrencies fear facing stringent regulators’ norms if nations start rolling out their own.

Darshan Bathija, CEO, Vauld

“Investment in Cryptocurrencies Carries Some Other Risks”

Why is Bitcoin such a popular cryptocurrency?

Bitcoin is the world’s first widely-adopted cryptocurrency. With Bitcoin, people can securely and directly send each other digital money on the internet. Its popularity comes from the fact that it is decentralised – any two people can send Bitcoins to each other without the involvement of a bank, government or institution. Every transaction involving Bitcoin is tracked on the blockchain, which is similar to a bank’s ledger. The blockchain contains a record of every transaction made using Bitcoin and a network of computers around the world validates those transactions. This means no company, country, or third party is in control of it and anyone can become a part of the network. Bitcoin can be bought on specialised cryptocurrency exchanges in India such as Vauld.

What are the risks involved in buying cryptocurrency assets apart from the obvious volatility in prices?

Apart from price volatility, investment in cryptocurrencies carries some other risks. They are stored in a digital wallet where the owner possesses a private key. If the key is lost, destroyed, or compromised through malware, all access to the cryptocurrencies inside the wallet will essentially be lost. With cryptocurrencies being a relatively new concept, regulators may restrict the right to acquire, own, hold, sell or use cryptocurrencies.

Apart from the Bitcoin which are the other most popular cryptocurrencies?

The most traded cryptocurrencies apart from Bitcoin are Ethereum, Ripple XRP, Litecoin, NEO and IOTA.

Conclusion

There is no doubt that the world is becoming increasing digital. This digitisation has impacted many aspects of our daily life, especially in terms of how money is created, spent and invested. Cryptocurrency is just an innovative fall-out of this digitisation process. Bitcoin is nothing but the first decentralised cryptocurrency that has made waves across the world. The rise in the value of Bitcoin is what has made it so special and very few people could have predicted the success of this mysteriously innovative asset class. Experts, meanwhile, remain divided on its future though with several of them not even willing to label cryptocurrency as an ‘asset’.

The views shared on Bitcoin by the experts are extreme unlike on equities or any other asset class. Experts are either very bullish or downright bearish, calling it a fake asset that can destroy wealth faster than any other asset class in the world. Several experts have been sceptical about the prospects of Bitcoin since its inception. However, Bitcoin has marched ahead with vengeance as if to prove a point to its naysayers. Today, the list of naysayers is huge but a shrinking one with several corporates and investors backing the logic of having a cryptocurrency. While governments across the world ponder on how to manage the risks of cryptocurreny, the thirst for innovation and curiosity in the new ways of transacting business or finance is helping cryptocurrencies such as Bitcoin become popular.

While it is difficult to predict how the governments will behave and decide on putting curbs on buying and selling of Bitcoins and other cryptocurrency, one thing that looks certain is that cryptocurrencies are here to stay. They are getting popular and in the process making several early adopters wealthy. For investors looking to take exposure to cryptocurrency assets, the rules of investing and portfolio management can be applied. For example, allocation to cryptocurrency assets can be kept at conservative levels while diversifying investments across different cryptocurrencies even though Bitcoin seems to be the most popular cryptocurrency right now.

One may take exposure to cyptocurrency assets only after knowing and studying the risks of doing so. Also, one has to live with the psychological risk of losing it all while being invested in cyptocurrency assets. Remember that on absolute terms the returns on crytocurrency assets look very tempting. However, on risk-adjusted basis the returns per unit of risk may not be as attractive. With that being said, investing in cryptocurrency definitely isn’t for the faint-hearted as it is highly risky with no solid fundamentals backing it and hence it is a bet that only risk-lovers should prefer.

 

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