Nine things to know before investing in bitcoin

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Bitcoin has been buzzing in the investing world due to its superlative performance in recent months. From a low of around Rs 3 lakh in mid-March last year, the price of has spiked 788% as on January 15, 2021. The dramatic increase has raised interest from investors across the globe.

If you are thinking of investing in bitcoin, here are some key things you should know.

What is bitcoin?

Bitcoin is a decentralised cryptocurrency that uses peer-to-peer technology for instant payments between people or businesses. It was invented by an unknown person or a group using the name Satoshi Nakamoto.

How to buy bitcoin in India?

You can buy bitcoin through platforms like Zebpay, Coinsecure, Bitxoxo and UnoCoin, among others. You need PAN card, Aadhaar card, bank account and other contact details for opening an account with these exchanges.

Why are people buying?

Some investors see their bitcoin investment as part of a broader strategy to position for new opportunities in an increasingly digital world, while fear of missing out is also playing its part. Cryptocurrencies are also seen as alternative stores of wealth, similar to precious metals, commodities, or other real assets, that are beyond the reach of public authorities and can be moved quickly at comparatively lower cost.

Is it a bubble?

According to UBS, it is a tricky call to make and only time will tell whether bitcoin is a bubble or not. Its aid determining the intrinsic value of bitcoin was a challenge. The key reason, it said, was that cryptocurrencies don’t have future cash flows that they can discount.

Should you buy?

Global financial firm JP Morgan recently said that bitcoin could rally as high as $146,000 in the long term as it competes with gold as an “alternative” currency. Bitcoin was hovering around $38,440 on January 15. However, UBS thinks that the price could continue to climb in the near term given strong price momentum and the potential for further institutional adoption.

Fraction of bitcoin

Bitcoin can be divided up to 8 decimal places. That means you can easily buy fractions of the digital currency through exchanges.

Can cryptocurrency diversify portfolio?

Market watchers believe that bitcoin has a low correlation to a wide range of other asset classes including gold and stocks. However, correlations spiked substantially in 2020 due to the pandemic, but have normalised since. “Low correlation, if maintained, can help to diversify a financial portfolio. However, a low correlation to other asset classes is not a sufficient reason to add. Investors also need to look at risk-adjusted returns to determine whether they are sufficiently compensated for taking a risk,” UBS said.

Will volatility subsidise?

UBS believes that as long as the demand for cryptocurrencies is exposed to regular business fluctuation, the volatility of bitcoin and other cryptocurrencies is likely to remain elevated when compared to most legal tenders and traditional stores of wealth.

Here’s why investors may sell

Any shift in sentiment, regulatory risk and rise in the competition can change the bullish trend in the digital currency.