Bitcoin soars all time high: Why RBI is warning investors to not bet on cryptocurrency

If you would have invested one lakh rupees in bitcoin seven years ago, it would have worth more than 100 crore rupees today. Its extraordinary gains in short periods are drawing people towards the digital currency.

In fact, the cryptocurrency is hogging headline every now and then for its unprecedented growth. In this year, bitcoin price has increased by over a thousand per cent. In the last week alone, the exchange rate for bitcoin grew more than 20 per cent. On December 3, it reached its all-time high of $11,828, according to Coindesk Bitcoin Price Index. Now one bitcoin is equal to Rs 8 lakh.

Despite its growth, central banks of many countries like China and Russia have warned against making investments in it. Taking a leaf out of other markets, the Reserve Bank of India (RBI) again for the third time (Previously in December 2013 and February 2017) on Tuesday echoed the similar sentiment.

"Virtual currency is stored in digital-electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them. Payments by virtual currency take place on a peer-to-peer basis without an authorised central agency which regulates such payments," stated RBI in a statement.

Bitcoins are also being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of virtual currency on such platforms are exposed to legal as well as financial risks, added the RBI.

This is not all. On Nov 30, finance minister Arun Jaitley said India does not recognise virtual currency as legal tender. Earlier this year, a committee set up by his ministry had reportedly recommended banning cryptocurrencies over fears that they could be used to launder money and perpetuate frauds. JP Morgan chief executive officer Jamie Dimon also termed bitcoin a fraud. However, last month, the Supreme Court asked the government to respond to calls to regulate bitcoin.

So, is bitcoin fraud? Will it offer serious competition to national currencies issued by central banks? Or making a tall promise to give a shock of our life later?

It would be rational to know a bit about Bitcoin before we bring judgement gun out on the cryptocurrency.

What is Bitcoin and how it works?

It is a virtual currency, whose operation is not controlled by a central bank. People buy and sell goods on the internet using bitcoins. The founder of bitcoin is Satoshi Nakamoto, who is an unknown hacker and Silicon Valley geek.

Bitcoin is primarily based on a simple theory of economics - when unlimited demand chases finite supply, the result is sky-rocketing prices. It is created by computers that have a capability of solving complex math calculations or problems.

Bitcoins are available on bitcoin exchanges. There are many companies such as Unocoin, Zebpay, BuyUCoin and Coinsecure that help you buy or sell bitcoin online. You could also purchase bitcoins from other users.

Bitcoin not centralised

It is an electronic or digital currency that works on a peer-to-peer basis. This means that it is decentralised and has no central authority controlling it.

Service providers allow users to store bitcoins and convert them into local currency. Users can open the account with a service provider and get a public key and a private key. If a user loses this, he/she cannot access bitcoins.

Bitcoin arithmetics

Bitcoin has finite number unlike currency notes issued by the central bank. Only 21 million bitcoins can be produced and in circulation. The number cannot exceed this cap. According to a recent report, almost 80 percent bitcoins have been mined and almost 70 percent are in circulation.

About a million bitcoins are reported to have been kept away by Nakamoto, few have gone missing, and some good number are out of circulation because they’re stockpiled by other investors. As per an estimate, the last mined bitcoin will come into existence in 2040.

If the recent upsurge is making you regret choosing stocks over bitcoins, it would do a world of good to keep in mind that you would have needed nerves of steel to stay invested in bitcoins especially when many countries central banks are against it.