After the big crash, cryptocurrency prices are slowly starting to stabilize. Should investors use this crash as an opportunity to buy into the market? Experts don’t think so. Here’s why.
1. Extreme volatility
Investing in cryptocurrencies involves very high risk, as prices have been extremely volatile. Many experts are sceptical about bitcoin as an investment primarily because there is nothing for them to analyse. Since these cryptocurrency prices are not regulated, as more people enter the market lured by the high prices, the prices climb ever higher. This might lead to formation of a bubble that will eventually burst and cause widespread losses.
2. Neither commodity, nor currency
The lack of clarity about its origin is another big issue related to bitcoin. In olden days, highly priced metals like gold, silver, etc. were used as currencies. Then came currencies printed by governments (or central banks) and these are called ‘fiat currencies’. Though its proponents claim that cryptocurrency is ‘mined’ using complex mathematical formulae, they are reluctant to call it a commodity. They also claim that it is not it is ‘democratic’. Therefore, cryptocurrencies don’t fall into the ‘currency’ category either. “It can be very risky for businesses, industry and people to trade or invest in bitcoins as it is just a formula, not backed by any tangible asset, but by sheer demand,
3. Don’t invest if you don’t understand
Some global bankers and experts have warned investors against investing in cryptocurrencies, because they are of the opinion that it is nothing but a bubble that is just about ready to burst.
4. An unregulated space
Unlike other investment avenues, cryptocurrencies are not regulated by government entities or banks. But if we get ripped off in a bitcoin transaction, it is impossible to get the money back.
5. The issue of legality
One major hurdle in the path of Indian investors who are interested in investing in cryptocurrency, is the confusion about its legal status. While they haven’t been declared illegal, cryptocurrencies are not recognised by the Reserve Bank of India (RBI) or any other authority in India, as a ‘currency’. In December 2013, the RBI issued a press release cautioning users, holders and traders of virtual currencies, including bitcoins, about the potential financial, operational, legal, customer protection and security related risks. In its latest press release dated 1 February, 2017, the regulator has further stated that it has not issued licences to companies for trading in any virtual or digital currencies. RBI also added, that the user, holder, investor, trader, etc. dealing with virtual or digital currencies will be doing so at their own risk.
Incidents like this make it abundantly clear that it’s much more difficult to track illegal activities in the cryptocurrency space. “Since there is a lack of information about the trading parties, such a non-regulated system may expose the investors to unforeseen risks including breaches of anti-money laundering and financing of terrorism laws. This risk also lowers the chances of cryptocurrencies becoming mainstream in India, leaving the future of the market mired in uncertainty.
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