BITCOINS: For Online Payment and Speculative Trading
KIRAN KUMAR K V
One of these days, I was trying to purchase a book from Sapna Book House, a famous brick & mortar book store in Bangalore, and now they were selling books online. During the online purchase transaction, I saw that Sapna Online was allowing the payment mode through Bitcoins. This was the first time I was exposed to Bitcoins as a payment mode. Bitcoin that was fairly a foreign word to most Indians and was largely being associated with disguised transactions, to my surprise was active here in a legal transaction, standing as an alternate to other payment modes like traditional payments, cards, PayTM and the likes. Bitcoins are alternate currencies, held digitally and usable for online purchase and sale transactions. Accepted by more than 100000 online stores around the world, bitcoins are making their way into the market places for retail products, alternative investment products, and many other purposes. In fact, one of the initiatives by a group of volunteers during Chennai floods recently, included accepting donations through bitcoins (later converting them to Indian rupees and sending it to NGOs working on relief). Despite being unorganised, unregulated and opaque to a large extent, bitcoins are finding their arena for operations even in markets like India.
Before proceeding further, it may be important to mention here one of the major arguments against bitcoins. And that is, that Bitcoins are profusely used for illicit activities, as it has come to light through various criminal investigations around the world. The case of Ross Ulbricht, a convict of money laundering and other crimes, has been running Silk Road, an online black market that was selling illegal drugs providing anonymity to the buyers and sellers. And when he was caught, approximately $ 3.6 million worth of bitcoins were seized from him. Incidents such as these have led to slowing down the pace of permeation of bitcoins across markets. Add to the chaos, the basic tenet of bitcoin structure, that there is no centrally controlling entity to assure the error free transaction. While that is also the advantage of bitcoins over existing payment options, it cannot be denied that manipulation is still possible. The red flag keeps waving when we hear news like the recent theft of roughly USD 60 million bitcoins from BITFINEX (one of the very active bitcoin exchange from HongKong).
Few of the major Bitcoin exchanges in the world are Bitfinex, Bitstamp, and OKCoin. In India, there are few online self-regulated exchanges that are operating, Unocoin, CoinSecure, BTCXIndia, ZebPay, Bitcoin India and many other local agencies. It is said that there are more than 30000 bitcoin owners in India to count the least. Most of the above exchanges are payment gateway providers rather than the real bitcoin miners/creators. Their operational procedure is simple. They network with online retailers like Sapna Book House, Highkart.com etc., and provide payment gateway service, wherein the retailer allows the user to pay for his purchases by depositing bitcoins. When the buyer chooses to pay by bitcoins, the sites are redirected to these exchanges. They buy the bitcoins and pay the equivalent rupee value to the retailers.
Trading in Bitcoins
Any asset or variable whose price fluctuates welcomes traders and a secondary market gets created. Bitcoins are no different. The secondary market for bitcoins, that is, those buying and selling transactions executed only to make a gain out of price change, has also gained traction in the recent past. What leads to such opportunities is the volatile movement of price of bitcoins. Below graph presents the monthly price movement of bitcoins (in US$) from Mar-2014 to Oct-2016.
Investment products are expected to satisfy three criteria – safety, liquidity and profitability – extent of satisfaction depending on individual investor’s risk tolerance, source of capital and greed. If bitcoins were to be analysed as investments, we may discuss the same in their ability to deliver above three criterions.
Safety
As can be seen, sufficient volatility is present to create trading opportunities for tho
se who could reasonably estimate the price movement in advance. The standard deviation as a measure of volatility is 16.4%. The lowest price during the period was 213.99 and the maximum has been 662.31, with a range bounding 448.32. With an average standard deviation of gold in the last three years being 15%, equity market world over at approximately 12% and realty being untraceable, we can say that bitcoins will rank the lowest in terms of safety. In addition, lack of transparency, literacy and regulations, bitcoins pose higher risk on the face of it.
se who could reasonably estimate the price movement in advance. The standard deviation as a measure of volatility is 16.4%. The lowest price during the period was 213.99 and the maximum has been 662.31, with a range bounding 448.32. With an average standard deviation of gold in the last three years being 15%, equity market world over at approximately 12% and realty being untraceable, we can say that bitcoins will rank the lowest in terms of safety. In addition, lack of transparency, literacy and regulations, bitcoins pose higher risk on the face of it.
Liquidity
With the increasing number of self-regulating exchanges and the payment gateway service providers (including the online retailers) the liquidity of bitcoins is increasing. Yet, the usefulness of the bitcoins is not established. They are still not inevitable. The liquidity can be said to be increasing, but, a guaranteed counterparty tracing is not assured.
Profitability
In the last 25-26 months, average monthly return of bitcoins has been 1.9%. Not a great return per se. But the maximum intra-month change in price has been close to 40% and a minimum of -32%. What this signifies is that bitcoins, when seen as long term investment option, may still be not sophisticated yet, whereas, as a clear speculative instrument, it does prove to be worth a shot.
Bitcoins, like gold or oil, are supposed to be scarce commodity and thus, theoretically their price is supposed to be increasing with the passing of time. Bitcoins are generated by miners during the process of using their computing power to verify and record other bitcoin transactions. The supply of such bitcoins is restricted by the monetary policy created by the inventor of bitcoin (supposed to be anonymous Satoshi Nakamoto), at the introduction of the concept itself, that, there can be a maximum of only 21 million bitcoins. And this is expected to be reached by 2140 (as the speed at which bitcoins are created and release is roughly one in ten minutes currently and speed will decline linearly at 50% velocity). Such being the scarcity defined already, bitcoins continue to derive price like other commodities, with a difference of holding no physical entity.
As a whole, we can say bitcoins are strengthening their niche and percolating around. As alternate payment options, they are already in the marketplace and they will only be getting standardised as time progresses. As far as the trading is concerned, considering bitcoins as a saving or investment option may happen in a far distant future, but, right now they are a great gambler’s product to play with.
By the way, in India, currently one bitcoin is priced at Rs. 45637 (as quoted on 24-Oct-2016 by UnoCoin).