Business Standard

High demand, supply shock could boost Bitcoin further

New entrants should invest systematic­ally with at least a 3-year horizon

- KARTHIK JEROME

The price of Bitcoin has surged from $24,327 to approximat­ely $52,088 over the past year, more than doubling in value. Although there is still a chance to profit from the ongoing rally, it is important to approach this asset cautiously.

Spot ETF launch driving rally

The primary reason for the increase in the price of Bitcoin is the approval of spot Bitcoin exchange-traded funds (ETFS) in the United States (US). They have attracted substantia­l institutio­nal interest. “Entities like Blackrock and Fidelity are required to purchase actual Bitcoins to offer spot ETFS. The daily buying pressure from these large funds is driving prices up,” says Parth Chaturvedi, investment­s lead, Coinswitch Ventures.

Another factor is the halving event scheduled for April. “Typically, after a bear phase of one-two years, excitement builds up around an upcoming halving event, which cuts Bitcoin’s production rate to half, triggering a supply shock,” says Rajagopal Menon, vice-president, Wazirx.

At present, around 900 new Bitcoins are mined daily, a figure that will drop to 450 post halving. With recent demand from spot Bitcoin ETFS averaging over 5,000 Bitcoins a week, the increasing demand against the backdrop of reducing supply is pushing Bitcoin’s price higher. The expectatio­n that the US Federal Reserve may cut interest rates this year is boosting all risk assets, including equities. Bitcoin, too, has benefited from this.

Investor sentiment, too, is playing a part. “As Bitcoin’s price rises, the fear of missing out is pushing more people into buying it,” says Menon.

Beware its high volatility

A key concern when investing in Bitcoin is its significan­t volatility: its value can soar or plummet sharply.

There is also the risk of a global regulatory clampdown on Bitcoin, though the probabilit­y of this happening seems increasing­ly remote after the launch of a regulated product in the US and growing acceptance in other regions. In India, the Reserve Bank of India frequently cautions about Bitcoin’s unregulate­d status and the government has not yet issued regulation­s for cryptocurr­encies.

Cryptocurr­encies are at times used for illegal activities. This poses a risk as a regulatory crackdown could erode the value of investment­s.

Cryptocurr­encies do not yield any value. “A share derives its value from a company’s earnings performanc­e. Bonds pay interest. Cryptocurr­encies do not generate any value. Their prices are determined solely by demand and supply,” says Arnav Pandya, founder, Moneyedusc­hool. When demand evaporates, the price falls sharply.

Cybercrime also poses a risk. Many investors hold their cryptos in online wallets belonging to an exchange. “If these accounts are compromise­d, there is no recourse as there is no regulator one can turn to,” says Pandya.

Rally may continue

While the price of Bitcoin has more than doubled over the past year, market participan­ts say there is steam left in the rally. Some believe it could even surpass it previous peak of $68,789 (reached on November 10, 2021), following the halving in April.

The ETF launch marks the legitimisa­tion of Bitcoin as an asset class, with more institutio­ns likely to hold it in their portfolios. Fidelity Investment­s Canada has begun a 1-3 per cent Bitcoin allocation into its “All-inone” asset allocation funds, which include spot Bitcoin ETFS. More investment managers may allocate a portion of their portfolios to Bitcoin in the future.

Currently Indian investors do not have access to bitcoin ETF via crypto currency exchanges. They may, however, invest in them via the liberalise­d remittance scheme route.

Limit your exposure

Financial planners suggest that investors with a conservati­ve or moderate risk profile should steer clear of cryptocurr­encies because of regulatory and other risks. “If you do invest, treat it as part of the speculativ­e portion of your portfolio, allocation to which should not exceed 5 per cent of the total portfolio,” says Pandya.

Menon recommends that newcomers focus on blue-chip cryptocurr­encies. If investing in Bitcoin, adopt a three to five-year horizon and invest systematic­ally to gain from its volatility.

Existing investors with goals within the next year should consider booking profits gradually. Those whose goals are more than three years away may stay invested.

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