Decrypting cryptocurrencies: Bitcoin crash, Dogecoin investments and more
Wednesday, 19 May 2021 was one of those heart-stopping moments for investors in cryptocurrencies. Bitcoin, Ethereum, Dogecoin, XRP, almost all cryptocurrencies crashed on the back of news about China banning financial payment institutions from providing cryptocurrency services. As part of Financial Express Online’s series on cryptocurrency – Decrypting Cryptocurrencies – we spoke to Gaurav Dahake, CEO of one of India’s largest cryptocurrency exchanges, BitBns. Bitcoin is down nearly 40% from its highs. And this is making investors a bit jittery.
Watch the full video:
FE Online: What’s your take on the way Bitcoin has been moving, because in the last few days, it has seen highs and it has seen lows driven mainly by the news?
Gaurav Dahake: To a large degree, Bitcoin usually moves this way. The thing is, you need to understand that Bitcoin is a smaller asset class as compared to other more established asset classes. So what happens is that in the more established asset classes, as in where it has traded for a longer period of time, the volatility is lesser. So, in gold the volatility is really low; in stocks, it is higher, so on and so forth. In crypto, things kind of move a lot faster. It operates 24×7. So even if there is news at 3 am in the morning India time, it might be afternoon somewhere else, and people would take action based on that news. Almost every single crypto user is on Twitter. Twitter is kind of the information dissemination platform for a lot of these sorts of events. That kind of amplifies a lot of things. It is truly global in nature. So anything that happens in China or the US or anywhere affects the market. So that’s how it has been overall. Crypto operates in a four-year sort of cycle. There are bull runs and there are bear runs. We still don’t have a bear market sort of a structure that has formed yet. Things are still optimistic. But we are seeing a lot of changes in the market.
FE: With equity, you have some fundamentals backing it. With gold, people are seeing it as a store of value. There was talk about cryptocurrency, especially Bitcoin, also being seen as a store of value for the long term. But it takes some kind of investor appetite to be able to stomach this kind of volatility, doesn’t it?
Gaurav Dahake: Well, in Bitcoin, to a large degree, a 40% drop breaks a bit of the store of value narrative here. But if you kind of put that into perspective, Bitcoin has appreciated 100 times with respect to gold in the last five years. Now, if gold is a store of value, and with respect to that store of value Bitcoin has appreciated so much, then how are we kind of placing those bets? That’s how they are in the short term. This sort of dip kind of feels really large. Bitcoin has had these sort of 30% plus dips almost seven to eight times every single year. Typically, these dips feel a lot more pronounced in bull-market years, like 2017 2021, and so on. However, it kind of gets covered a lot by mainstream media. A lot of new users are coming and those new users can feel stuck here. Imagine if someone invested when Bitcoin was $55,000 and now it is $40,000. It is hard for them to kind of stomach that sort of a delta in terms of price movement. Overall, why is Bitcoin valuable? One, is the decentralized nature. Only gold has that sort of nature. It is transmissible like you can transfer it anywhere across the globe. So 7% of Mexico’s remittance right now happens via crypto. There is a lot of utility for oppressed nations and regimes, where it is kind of driving value where their own fiat currency is not stable – Iran, Turkey and these sort of jurisdictions. The third part is, Bitcoin is the largest asset in terms of overall cryptos. So Bitcoin also serves as collateral for any kind of trading. Some of these aspects drive value to Bitcoin. A lot of them are long-term holders who have bought Bitcoin earlier. For a person who is entering now, they should kind of figure out their risk appetite. For a person who had bought Bitcoin when it was $1,000 or $5,000, their risk appetite would be drastically different from someone who’s buying it at $50,000.
FE: This raises the question – shouldn’t a regulator then step in to protect investor interest? That’s exactly what the government has also been talking about in regulating cryptocurrency.
Gaurav Dahake: That is something we have also been really keen on. We are right now self-regulated. We’ve been kind of trying to work with the government to try and create a sort of framework to ensure investor protection. Things have grown dramatically over a period of time. We want to ensure that we remain compliant and also ensure that investors’ interests are protected. One of the ways to do it is, we give nudges if a user’s usual wallet balance is Rs 50,000 and he’s at once trying to invest Rs 50,000, we give him a nudge to say he should not invest this much at once, and start trading with a smaller amount. We have created products like an SIP. An SIP average for users is less than $15,000. There is a difference between someone who has been investing for the last eight or nine months compared to someone who is trying to bulk invest. We are seeing serious interest from the government in terms of regulating this. We are really optimistic that this would happen as soon as possible.
FE: There’s also the question of liquidity. On one side, there is the ease of taking your investment out from what you’ve put in cryptocurrency, and on the other side, banks are reluctant to give money to investors to actually put into cryptocurrency. So how do you see that play out?
Gaurav Dahake: Currently, I guess, a couple of banks have done that. Not all banks have done it. We try and tell our users to not link your actual salary account or an EMI account to using crypto trading. Because if there is a restriction on your bank account that might be detrimental. Create a different account and use that for trading. Make the bank aware while creating the account as to what it will be used for. That has been our stance. Right now, banks do not have any sort of logical reason to restrict accounts as there was a Supreme Court circular that came in. We’ve tried telling banks about that. Yet, we are not getting anything in writing, if they’re kind of curbing an account. It’s a backhanded sort of a ploy to get the RBI to do that. We are seeing that this is happening with 1% or 2% of the users, but 98% of the users are still freely able to trade. We are hitting new peaks in terms of deposits and withdrawals in trading every day.
FE: Bitcoin is still a fairly expensive asset for people who are entering the market, buying 0.001 bitcoin or BTC. But then there are other cryptocurrencies that are seemingly affordable, a case in point being Dogecoin. This crypto was driven up by one man, Mr. Elon Musk, who has also driven Bitcoin to its peaks and brought it down. Even with Dogecoin, aren’t his tweets the main reason for its rally?
Gaurav Dahake: Dogecoin has kind of gone up roughly around 150x to 200x in the last seven or eight months. One of the primary reasons, of course, is Elon Musk driving it through some of his tweets. Surprisingly, I would say, it is not something that you should get into predominantly because of the fact that Elon has been influencing it. He has also done this for Tesla stock earlier and he has got penalized by the Securities and Exchange Commission. When you have 55 million followers on a social media platform, and if you kind of use that to a certain effect, it is going to have a certain value. I would suggest investors stay away if they are looking at the long term, because an asset that has already appreciated 150 or 200 times and has a plan of seven to eight months, is not something to get into, especially considering when there is no fundamental value linked to it. For Bitcoin, as I already explained, there is value creation for remittance. It is useful as a trading asset or collateral. That’s not true with Dogecoin. The faster it appreciates, there is a high chance it might drop equally fast.
FE: What about the new interest that’s coming in NFTs or non-fungible tokens. We saw one trending on Twitter recently called Richie. What’s your view on NFTs?
Gaurav Dahake: Overall, crypto is getting mainstream, not just with respect to investing, also on the speculation side. People are discovering what is decentralized finance and what is an NFT. Suppose you have a Monalisa painting at your house, you would want to show it off to maybe five or 10 different people. Now you can digitally prove the ownership of an asset. That is driving a lot of the NFT hype. Some of it is valuable, but a lot of it is hype. The value creation keeps happening over a period of time. And that drives the market forward. That has typically happened with Bitcoin. Bitcoin last time went to $20,000, then went back to $3,000. Then it went to $60,000, and it is down at $40,000. It might again go up to $100,000 and kind of start dropping back from that. Overall, it would then seem that the next dip is larger than the last peak. So this is what typically happens. In 2013, Bitcoin went to $1,200 and back to $200, then it went to $20,000, then it went back to $3,000. It never went below $1,200. This is what is being anticipated that it will never go below $20,000 again.
FE: But it’s also fairly easy now for even exchanges to come up with their own tokens and coins, or for that matter, anybody can come up with their own digital currency. Do you think this is going to create some confusion in the market as to what to invest in?
Gaurav Dahake: It would. I would suggest most investors should kind of stay away from a lot of these tokens. Invest in something that’s more tangible? Etherium is a pretty good alternative. You can also hold USDT, which is an alternative. From the newer tokens try and understand what is the total supply and what does it look like. Question the team aggressively. What are the future plans? Have they delivered on the last thing that they promised? Is there an actual product? If you’re thinking of investing $100 into crypto do not invest more than $5 into something like this. Benchmark them on a lot of aspects and then try and invest a small amount.
FE: What kind of an investment strategy would you suggest for somebody who is interested in the cryptocurrency market, but is getting into it for the first time?
Gaurav Dahake: I would say start with a systematic investment plan or SIP in something like Bitcoin, Etherium or some of these assets. If something dips, an SIP would average it out when the market goes down. Overall, the market is growing. The crypto market in 2015 was $10 billion, it went to $100 billion in 2017. It is now $2 trillion. It is on a growth path but there would be 20%, 30%, or even 40% dips as well. That’s where you accumulate more using an SIP strategy.
FE: Would you call getting into cryptos gambling, because a lot of people who are hardcore equity market investors think of cryptocurrency as a gamble?
Gaurav Dahake: A person who invests in a fixed deposit says the stock market is a gamble. So the perspectives change. My perspective is that generations make wealth in different formats. In the 1980s and 90s it was real estate. In the 2000s it was stock market. In 2020 it is cryptocurrency and so on. The generational wealth format keeps changing. Millennials and Gen Z would have that format where they probably would make more returns on crypto as an asset class, because it’s a social media-driven sort of asset class and the younger crowd gets influenced quickly by a messiah like Elon. That’s precisely why older people trash it like it is something like a scam or gambling. It is a function of where the youth of the world is kind of concentrated. And right now it is cryptocurrency and they are going to take major decisions over the next 15 to 20 years and that would drive where things go.
(The suggestions and recommendations around cryptocurrencies in this post are the opinion of the respective commentators. Financial Express Online does not bear any responsibility for their advice or views. Please consult your financial advisor before dealing with or investing in cryptocurrencies.)