The Bitcoin Alternative

Cryptocurrency is gaining currency in cashless times. Shailesh Menon & Saikat Das explain why
Nobody in the lecture hall was taken aback when Sahil Shah, a second-year BBA student of Nirma University, Ahmedabad, secured a perfect 10 in his class project on bitcoins. “A man who can make money selling bitcoins can also yap about it,” jibed his close friends.It is almost lore on Nirma campus–18-yearold Sahil Shah made a cool `42,000 profit selling two bitcoins on Zebpay (a bitcoin exchange) a week after Prime Minister Narendra Modi announced the withdrawal of `500 and `1,000 notes.The youngster, like many other early adopters of bitcoin, surfed the rally in bitcoin prices that followed the PM’s announcement.

The price of bitcoins on Zebpay, which claims to have over 1.3 lakh users, surged from `51,600 to `69,500 (per bitcoin) in a mere 18 days after the demonetisation speech of November 8. Sahil sold his two bitcoins purchased four months ago at `40,000 apiece for a neat sum of `61,000 per piece. “I knew I’d be able to sell them profitably as bitcoins in India were trending at a premium to US prices. The demonetisation announcement stoked the rally and presented a good selling opportunity,” says Sahil.

Bitcoin prices in India have remained firm in a tight upper range of `59,000-`61,000 apiece since the early days of demonetisation.

In the US (benchmark market for most cryptocurrencies), bitcoins are trending at $770 apiece (roughly `52,360), marking a clear premium of `7,000 on Indian bitcoin e exchanges. A few ingenuous players may have indulged in price arbitrage 3 -buying bitcoins in the US (through relatives in that country), getting them transferred into their own accounts and selling the batch on Indian bourses at a premium.

High Bids Flowing In

Some part of the price buoyancy in bitcoins could be attributed to market-making initiatives of Indian exchanges. In order to maintain a tight order book, exchanges increase the bitcoin price when there is high demand. Post-demonetisation, exchanges like Zebpay have raised prices marginally to quieten demand (from prospective buyers) and also to lure coin owners to sell their holdings.This strategy seems to have paid off as 350-600 coins are traded on Indian exchanges everyday.Average transaction size (per user) has also moved up to `1.3 lakh on exchanges like Zebpay.

“Demonetisation may not have impacted directly, but it has definitely triggered interest in all things cashless, including bitcoins,” says Sandeep Goenka, cofounder of Zebpay. “People are looking at options to transact without using cash… In the case of bitcoins, they’re also trying to speculate and pocket some gains… Many of our users are also using bitcoins as an investment vehicle. A few people residing abroad are using our platform to remit money back home as well.”

A bitcoin is a form of digital currency, created and held electronically. These are not printed like fiat money, but are `mined’ (or produced) by technocrats around the world. No central bank owns it or controls it. (See box) Going by broad estimates, combined bitcoin trading volumes (at all exchanges) in India could be in the range of `150­200 crore per month. Roughly `1,200-1,500 crore worth of bitcoins are traded in the country every year, exchange owners opine.

“Demonetisation could just be an indirect trigger,” says Benson Samuel, founder of Coinsecure, another bitcoin exchange. “People have become a wee bit worried about fiat money… they’ve seen how the value of money can erode when there is intervention from the top. Bitcoin interests them because it is not controlled or regulated by anyone.Beyond that, these people are simply trying out a new mode of payment,” feels Benson.

Where To Use Bitcoins?

As of now, there aren’t many avenues to use bitcoins in India. Most merchant outlets do not accept payment in digital currency. Ecommerce players like Flipkart, Amazon and MakeMyTrip run voucher programmes for people using bitcoin exchanges (like Zebpay), but they do not accept payment in bitcoins. Most of the time, the exchange converts the bitcoin into normal currency (on behalf of the bitcoin exchange user) and pays off the ecommerce player.

The real adopters of bitcoins in India are people who use the cryptocurrency as an investment vehicle. The exchanges abound with speculators punting on volatile bitcoin prices.

“I’ve made three times the gains in a little over two years… Now that is very impressive, considering that even mutual funds, in the best of years, double up only once in four years,” says Madhur Todi, owner of Mera Money Advisors, an Ahmedabad-based wealth advisory firm.

Todi, a certified financial planner, is quick to point out that one should not invest large sums in bitcoins as it is not a very “investor friendly” asset class. Bitcoins are not issued or backed by banks or governments. Nobody knows how investments in bitcoins can be taxed. Also, the absence of a regulator makes legal recourse almost non-existent.

“Bitcoins can be an alternative asset class; you can at best put in 5% of your risk capital,” says Todi.

Lavin Mirchandani, a bitcoin investor and founder of GetEvangelized (an entrepreneurs’ marketplace), equates investing in bitcoins with startup investments. According to him, investing in stock markets is much more predictable than betting on bitcoin prices. “Investing in bitcoins is much like investing in startups… It’s either a home-run or a zero,” Mirchandani says.

Most bitcoin users like Lavin Mirchandani are worried about the legality of using digital currencies. There are no prescribed laws or guidelines around cryptocurrencies in India.

“No one’s sure about the usability of bitcoins; banks do not want to touch bitcoins as it is unregulated cur rency, merchants are not willing to accept them,” says Sameer Arora, senior manager (products), Arora, senior manager (products), Worldline (South Asia & ME), an enabler of payments and trans actional services. “Bitcoin is at a very nascent stage around the world. In India, it is at least two generations ahead of where we are right now,“ Arora added.

Till such time that there are clear legal definitions and framework around digital currencies, bitcoins will remain the preserve of savvy investors and speculators in India.

Demystifying Bitcoins

What is a bitcoin?

It’s not literally a coin, but a code or a virtual token that can be freely transferred from one user to another through a secured network.

Bitcoin can be equated with gold; it is limited in supply. In all, only about 21 million bitcoins will ever be generated through till year 2140.Only 14 million bitcoins have been `mined’ so far. All bitcoin transactions are marked in a public register called the blockchain.

How’s a bitcoin `mined’?

Mining of bitcoin (BTC is the unit of bitcoin) is an expensive affair. It needs a host of powerful computers (bitcoin hardware), uninterrupted power supply and several people working as a team.

Once you’ve the hardware in place, you can join a `bitcoin mining pool’, where several people are working together to validate `blocks.’ A block is a record of recent transactions carried out using bitcoins. Miners, upon clearing a block, are `paid’ in bitcoins (by the bitcoin network) for their services.

Why can’t they mine all bitcoins in one go ­ and not wait till year 2140?

The number of bitcoins mined would go down as the years pass by. The limited production is aimed at curbing inflationary tendencies in the ecosystem. The bitcoin network has put in place rules regarding the release of bitcoins (through mining). Each time a new block is validated, freshly minted bitcoins are used to reward miners (in effect released into the transaction sphere). The reward, initially, was 50 BTC, which fell to 25 BTC in 2012 and more recently to 12.5 BTC. This process of reducing the `fresh release’ of bitcoins is called `halving.’

If bitcoins are limited in supply, how will they reach the whole world?

Consider bitcoin as a rupee coin now; it can be fragmented into small bits. So if you successfully solve a block as a miner, you may get 0.2 or 0.3 bit of a bitcoin. Bitcoins can be fragmented far more times than a fiat currency.

How can we own a bitcoin?

Owning a bitcoin is easy. You have to first open (simply free-download) an account with one of the many exchanges like Zebpay or Coinsecure.Most bitcoin exchanges ask for KYC documents like PAN card and bank account details.

Once the account is opened, the new user is asked to deposit money into one of the several bank accounts of the exchange (using NEFTRTGS). The money deposited (in the exchange’s bank) would be used to buy bitcoins on the bourse.

How many bitcoins are traded in India currently?

Combined trading volumes (all exchanges put together) could be in the range of `200­250 crore per month. Roughly `1,200­1,500 crore worth of bitcoins are traded in India every year.

Which transactions can bitcoins be used for in India?

A few ecommerce sites accept bitcoins.A few users -residing abroad -use the cryptocurrency to remit money home. Most Indians buy bitcoins as an investment vehicle. They buy bitcoins when prices are low, and sell when prices go up.

The Economic Times (Delhi)

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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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