The dizzy Bitcoin price rise: Time to get rich quick or get out?

In March 2020, almost every market crashed when the world went into lockdown due to the coronavirus pandemic. Even cryptocurrencies weren’t spared the panic. However, the cryptocurrency market has been one of the first to bounce right back and how! If one had invested Rs 3.7 lakh ($4,945) at that time to buy just one Bitcoin (BTC), as of 4 January this year that one BTC would have been worth nearly Rs 26 lakh – an almost 7x return in nine months.

Even the equity or bullion markets haven’t bounced back that dramatically. But investing in cryptocurrency isn’t for the faint-hearted as it is highly risky, with no solid fundamentals backing it.

Fear of missing out

Why then is BTC rallying so rapidly?

“It’s FOMO – the fear of missing out!” says Meghan Naik, an avid cryptocurrency investor who has been dabbling with Bitcoin and other cryptocurrencies since 2013.

“A lot of people missed getting on the cryptocurrency train since the COVID crash in March – and this time there are a lot of institutional investors who have entered the space, holding hundreds of thousands of BTC. That has made a big difference and that’s why retail investors are getting in, buying every time the price dips, fuelling the rally.”

Naik points to two companies in particular – Grayscale, which is an asset management firm, and Microstrategy, a business intelligence firm. These companies have been mopping up BTC aggressively. They did so even before the price hit $20,000, creating a supply issue, furthering the rally.

It must be mentioned here that Bitcoin is in limited supply. When Bitcoin was created its founder, who goes by the pseudonym Satoshi Nakamoto, said there won’t be any more than 21 million BTC, which technically should all be “mined” (mining is a series of mathematical addition puzzles being solved) in another 120 years.

So far about 18.59 million BTC has been created. Of this, not all BTC will ever be in full circulation because many people have stored BTC in virtual “wallets” and some have lost the “keys”, which means those BTCs are lost forever.

“It’s the first time in Bitcoin’s history that the price has rallied without a 30-40 per cent correction in a bull run. Since March of last year, the biggest correction has been only 20 per cent,” says Naik.

Time to cash out?

Cryptocurrencies like Ethereum, XRP, Neo and others have been following a similar trend to BTC, albeit at a much lower value. These lower-value cryptocurrencies are also enticing investors to get in hoping to cash in on the quick returns.

Naik predicts that once BTC gets past $35,000, even $50,000 would come in fast because of a retail investor frenzy. However, it could also all go down equally fast. He says, “I wasn’t expecting BTC to break $20k so easily. I was expecting it to drop, but surprisingly it hasn’t.” That has got him watching the charts very closely, buying on dips and selling on highs. “I’m losing sleep over this because cryptocurrency is a 24×7 market.”

Interestingly, that’s quite like the behaviour of “bitcoin whales”.

Says Tushar Chaudhary, co-founder of Digital Assets India, a cryptocurrency advisory firm, which also set up a BTC ATM in India: “We have been advising our clients to buy BTC on dips, but we are also equally asking them to cash in on the highs.”

High risk, high returns

Chaudhary says that while BTC investments are high risk, he places the risk potential at par with the stock market. He says, “Equities are subject to risks of a company going bankrupt or getting affected by takeovers, policy decisions, or even fake news for example. Bitcoin can also be affected similarly.”

The volatility in BTC is very high. It can swing 5-7 per cent within minutes, dropping even by 15 per cent or gaining that much in intra-day trade. But lately, prices have been stabilising quickly. Naik attributes this to large-scale buying by institutional investors, who aren’t selling in the short term.

Chaudhary also says online payments firm Paypal is another huge institutional investor in Bitcoin. He simplifies the reason a company like Paypal chooses to buy Bitcoin, to diversify its investments.

“If my neighbour is selling oranges and I’m selling bananas, I would also think of selling oranges so that I can get those customers to buy my bananas as well,” says Chaudhary, talking of why a Paypal would want to invest in Bitcoin, while also having its own online payments system.

Also read: Why India needs Bitcoin and other cryptocurrencies

Highly speculative

Another reason for the volatility in most cryptocurrencies is that they don’t have strong fundamentals pegging them. Most of the products or communities against which cryptocurrencies are floated are still under development, so the price volatility is high, based only on speculative trading.

Chaudhary says his firm has been getting a lot of calls from people wanting to invest in Bitcoin the moment it crossed $20k. He validates what Naik said about the rally being driven by retail investors purely because of FOMO – the fear of missing out. He says there will be scary dips, but they will be countered by huge rallies, so much so, if investors can ride out the dips, there is much to be gained. Every time any government announces a stimulus package and there is more money in the system, cryptocurrencies gain because retail small investors are looking for quick profits.

“The thing is with Bitcoin you won’t really realise the bear market trends even if you look at the chart for the past 10 years,” says Naik. “I just view cryptocurrencies as an investment vehicle, which is obviously very high risk, but also high return. Not even gold comes close to such returns.”

In April 2018, the Reserve Bank of India had issued a circular barring entities regulated by it (read all banks and financial institutions) from trading in cryptocurrencies. This meant that it became difficult for investors to wire money to cryptocurrencies through banks and hence many opted for a peer-to-peer system.

However, in March 2020, the Supreme Court overturned the RBI circular making it easier for investors to transfer money to cryptocurrency exchanges or wallets from their bank accounts, bringing on board many more retail investors. And that has fueled this frenzy so far.