Crypto’s wild ride and should you be on it?

By now, most news headlines have reported a bull run in cryptocurrencies led by Bitcoin and Ethereum. While Bitcoin is king, its younger sibling Ethereum isn’t far behind. Even as retail investors try to comprehend all this, high net worth individuals (HNIS) had already parked anywhere between 1-3% of their monies here.

When asked for a perspective, Krishna Jha, a Bengaluru-based private investor, said, “The next bull run has started, and prices will go higher than they did earlier.” But Jha says he is unwilling to bet on cryptocurrencies. “My crypto holdings are zero.” What he does hold are through Exchange Traded Funds (ETFS) based out of the US.

Imagine a treasure chest filled with limited number of gold coins. Their rarity and value makes them highly sought-after. Bitcoin operates on a similar principle. Unlike currencies printed by governments, there’s a cap on the total number of Bitcoins that can ever exist: roughly 21 million. This scarcity fuels its value, especially when demand starts to rise.

What adds to the scarcity value is that every four years, the number of new Bitcoins that can be mined will decline by half. The next halving is scheduled to happen in April this year. Think of it as the treasure chest to which access gets more limited. So, this much anticipated event in April is driving price of Bitcoins higher due to more demand chasing a smaller pool of assets.

Then there is the fact that traditionally, buying Bitcoins involved navigating complex cryptocurrency exchanges and secure storage wallets. This was intimidating for new investors. However, with the government allowing Indian investors to buy Spot Bitcoin ETFS in India, the game has changed.

These ETFS function similar to mutual funds. To place that in perspective, if you need biscuits, you don’t build a biscuit factory. Instead, you buy a packet(s) that suits your needs. As opposed to this, a regular Bitcoin miner has the infrastructure to build a factory. With a Spot ETF, the option to buy a packet of biscuits exists along with other assets, like you would in a mutual fund where you buy a basket of stocks. This is easier to handle, and opens the doors for investors to buy Bitcoins indirectly. The doors have opened up for more people, which explains retail investor interest.

As for Ethereum, the proposition is slightly different. It aspires to be the “World’s Computer”. And of the thing it hopes to do is compete to be a global banking system. That means, it is a potential competitor to Finacle built by Infosys. As we talk, Finacle is a core banking product that banks use to provide digital services. It is a centralized system banks use to manage accounts, process transactions, and offer various services securely and efficiently.

As opposed to that, Ethereum is as a massive, global network of computers (nodes) that can run software applications in a decentralized way. Ethereum’s key feature is its ability to run smart contracts. Think of it as selfexecuting contracts where the terms of agreement are directly written into code. They automatically enforce and execute the terms of a contract when conditions are met, without the need for a middleman. This can be used for a wide range of applications, from financial agreements to voting systems.

And ETH is the native cryptocurrency of the Ethereum network. Call ETH as the fuel or “gas” that powers the Ethereum ecosystem. Critics of Ethereum were unconvinced of its ability to scale. But the upcoming “Dencun” upgrade on Ethereum in midMarch aims to improve its efficiency and scalability. This could attract more developers and users to the platform, potentially driving up the demand for ETH.

Tanuj Bhojwani, a Bengaluru-based public policy wonk and fintech analyst, is clear that “The bull market is most definitely back.” That said, Bhojwani also pleads caution. “Crypto is mostly a degenerate bet that many young people will take. And now that institutions have gotten in, the party will be wild for a few weeks.” Bhojwani’s comments are worth thinking hard about: Is it okay for people to take these bets? For that matter, can they handle a wild party? Perhaps not just yet.

UNLIKE GOVT CURRENCIES, THERE’S A CAP ON THE TOTAL NUMBER OF BITCOINS THAT CAN EVER EXIST: ROUGHLY 21 MN