The RBI has repeatedly warned consumers against investing in bitcoins. However, the valuation of the bitcoin is rallying past all those warnings, more than doubling to $15,000 in just a few months. BusinessLine spoke with Sanjay Mehta, CIO of India Angel Network, and a firm believer in the blockchain technology on which bitcoin is built. According to Mehta, bitcoins are the future but the valuation will soon see a correction despite the current frenzy. Excerpts:

How much have you invested in virtual currencies and what kind of returns have you seen?

If one has invested ₹45 in bitcoin, today it would be worth ₹9 crore. Bitcoin is special. It is not a company that could lose profitability and fail. I have done investments in multiple crypto-currencies besides bitcoins and have a diversified portfolio of altcoins [alternatives to bitcoins]. I would say currently my crypto-currency portfolio would be worth 72 bitcoins and that has grown to 5x in value terms.

What due diligence is needed before investing in cryptocurrencies?

Before investing in any crypto-currency, one needs to closely look at the market size, at problems underlying blockchain technology, and arrive at an answer to the first question: is there money to be made?

Next, is to evaluate the team, their domain expertise, their ability to deliver on their promise and arrive at the second question: are these people who will make money.

Lastly, check their fund raise, terms of investments pre-ICO (initial coin offering) or discount on the coin, price of entry and arrive at the third and last question: how much money can I make? In the altcoin universe, there is no performance history to analyse.

Why the frenzy ?

Bitcoins are scarce. When things are scarce and people want those things, their value will ultimately rise. Supply and demand are at work. Bitcoins can’t be copied, reversed or counterfeited. Transactions are made without middlemen hence the value is increasing. These are highly volatile and risky. So, investors must have the financial ability, experience and willingness to bear the risks of an investment, and a potential total loss of their investment.

What is the potential in this segment?

Digital currencies have the potential to become a trillion-dollar market. While bitcoins are not even the first “virtual currency” to exist, we have seen coupons, airline frequent flyer miles, hotel loyalty point being used as virtual currencies. There are tonnes of start-ups that offer redemption or barter of goods in exchange for there virtual currencies. Blockchain technology is groundbreaking because it allows transactions to be processed without recourse to a central authority, such as a payments company, government, or bank. Businesses and services can be decentralised, cutting out costly middlemen and removing single points of failure.

What are the challenges ? How is the ecosystem addressing these challenges?

It is worth noticing that over the past century, money has lost a lot of its value. A dollar from the 1910s could buy roughly what $25 can purchase today. In one century, the dollar has lost 95% of its value. When central bankers create money out of nothing [printing money] and distribute it, it reduces the purchasing power of the money which is already in circulation ... That also explains why prices are increasing — it is inflation. In reality, prices do not rise but the value of money is decreasing. Hence bitcoin, as it was proposed, is actually the modernised version of the world’s oldest commodity, gold.

What is the future of crypto-currency in India ?

The legal status of digital currencies is undefined in India. Usage of bitcoin or any other altcoin is not illegal or banned in India. We have seen exchanges in India selling gift vouchers to be used in the offline world for bitcoins. The government has constituted an Inter-Disciplinary Committee, chaired by a Special Secretary (Economic Affairs), to examine the existing framework with regard to Virtual Currencies, and the report is yet to come out.

There are concerns that crypto-currencies are being used for illegal trade, by hackers, and for money laundering purposes...

In current times, anyone with an internet connection can create a digital wallet and own these digital currencies. While these digital currencies are pseudonymous, decentralised and encrypted, it makes it harder to track each of the transactions made, and the individuals behind them. But most of the exchanges are making KYC mandatory to trade on the exchange. Because of the anonymity that comes with digital currency, it is appealing to use for illegal activities. But in my view, it is dangerous for money launderers as every transaction of a blockchain-based token is permanently recorded on a publicly viewable digital ledger. If the exchanges or the wallet companies comply with regulators it is easy to identify the real owners of those digital currencies.

Have people globally started to accept these currencies as an alternate asset class ?

Burger King Russia was accepting bitcoins as payment. Now, it has launched its own crypto-currency in Russia called WhopperCoin. Like this I see businesses coming out with their own currency and building their business moat by locking in the complete eco-system with its use.

Lastly, it is a bubble ?

I feel the current valuations are highly inflated and that the real value should be around $1,000 per bitcoin. My guess is by the second quarter of 2018-19, the bitcoin’s value will correct by 80 per cent.

Related Topics
comment COMMENT NOW