Bitcoin soared in its value to over USD 400, safe enough to invest ?

bitcoinsWhen FBI seized USD 28.5 million worth of bitcoins from the alleged mastermind behind the online drug market Silk Road, Bitcoin was believed to be the biggest loser – given that its value instantly dropped from around USD 125 per bitcoin to USD 90 the next morning. Many thought that the bubble has burst ‘once again’ and may be for the final time.

But here we go. It has been approximately a month and a half since that incident and Bitcoin has soared in its value to over USD 400 per bitcoin – as per MtGox at the time of writing.

So what drives the value of Bitcoin ?

Well one thing is clear – Bitcoin is volatile, very volatile. But what is not clear is when someone adds or deletes a significant percentage of bitcoins from the system – what happens to the fundamental or intrinsic value of BitCoins ?

To better understand what happens in such a case, we need to understand that one can’t just add bitcoins to the system unless someone mines them. According to Raoul Pal, head of the Global Macro Investor, mining requires such a high level of computing power that it will not be wrong to say that the last bitcoin would be mined in many years from now. Bitcoins can not be destroyed or deleted from the system except when someone loses the BTC wallet. Furthermore, he believes that there will be a way to discover lost bitcoins at some point but that is going to require a lot of software development.

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Now lets assume that some bitcoins leave the system. Then there will be an ever declining amount of bitcoins in circulation and an ever decreasing rate of supply. This will give the bitcoin the theoretical characteristic of normally appreciating in price or purchasing power over time, unlike a normal fiat currency which tends to lose purchasing power. This is a fascinating quality for a currency. “However, it does cause a problem that if we know the value of a bitcoin will go up  over time then why spending bitcoins and not store them” claims Raoul. “The marginal propensity to save will go up – which is obviously a good thing for a debt laden world – and that in itself will drive up the price.”

So its normal for bitcoin to have bubble like tendencies from time to time as BTC users get gripped by speculation. But that is no different to gold or even the US dollar. However, we aren’t claiming that possessing bitcoins is a safe long term investment option.

Going Mainstream – safe enough to invest ?

Launched in 2008, bitcoin has become the most popular virtual currencies of all time and has been traded within a global network of computers.

Local/global retailers all around the world are increasingly adopting bitcoins as currency. Several online and offline stores today are selling their products in exchange of bitcoins.

In another recent development of bitcoin – a coffee shop in Vancouver has opened a Bitcoin ATM allowing people to quickly buy bitcoins. The machine did over USD 100,000 worth of business and racked up 348 transactions in its first eight days.

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Despite being a hot topic in the industry today – its very hard to say if the future of bitcoin is secure, as it suffered a spectacular crash in April followed by its value falling to under USD 90, and there’s no guarantee that this won’t happen again.

State of Bitcoin in India

In comparison to the US and many European countries, activity around bitcoin is quite calm in the Indian market and maybe that is why India’s central bank is only “watching” Bitcoin with no intention of having it regulated, unlike the US.

However, the trend is slowly picking up. According to a report published in October end, there have been an estimated 29,400 downloads of Bitcoin wallets from Indian IP addresses, with the possibility that one person has downloaded more than one wallet.

There are a few traders selling bitcoins online in India with several payment options including SWIFT bank transfer, Online transfer or cash deposit to the ICICI bank and other online platforms like INRBTC. But given its value against Indian Rupee – how many would try to invest in bitcoins is the real question. One can buy a single bitcoin in India for almost INR 40,000 as per the current value of bitcoin.

To contact author, email devesh@wirefootindia.com

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