As Bitcoin hits highest valuation since 2017, India remains a silent spectator

“How many cryptocurrency traders does it take to change a lightbulb?” 

“Trick question. It never gets changed. The bulb is purchased but sits in the box for years until it’s useless.”

Dozens of versions of this joke have been floating around for years -- but Bitcoin on Wednesday had the last laugh. The cryptocurrency rallied to a record high of $18,450 (Rs 13.7 lakh), witnessing a 140% year-to-date increase, even as it touched a March 8 low of $5,103 (Rs 3.77 lakh as per exchange rates then).  

Industry insiders have routinely compared Bitcoin to gold as a potential investment asset. The only similarities, however, are their decentralised natures, limited availability and the ability to run up in valuation despite crashes in other asset classes. Although the cryptocurrency surpassed the 30% jump in gold prices in 2020, its journey has been a bumpy roller coaster compared to the steady increase of the precious metal.

Bitcoin sees cycles of boom and bust on the back of ‘halvings’, every four years. Halving refers to the drop in the number of coins that miners receive for adding new transactions to the blockchain. The halving event causes a surge in price due to the increase in demand, which is corrected over the next cycle. The last such spike was in 2016, which propelled the cryptocurrency valuation to $19,783 (Rs 12.74 lakh as per exchange rates then) at the end of 2017. 

According to Sumit Gupta, co-founder and CEO of cryptocurrency exchange CoinDCX, Bitcoin’s growth is largely attributed to how it is designed. 

“In May 2020, we witnessed the third halving, a supply shock event, where the number of daily mined Bitcoin gets cut in half. In the previous two halvings, Bitcoin and the overall crypto market cap rose exponentially. A similar trend is expected this time around,” Gupta told TechCircle. 

The global shortage witnessed in the past few months is likely the combined result of investors looking for alternative ways to make money in light of the May halving; institutional investors, companies and hedge funds buying or offering Bitcoin-based services; and stock market crashes.

“This time around, we’re witnessing participation not only from retail but institutional investors globally. MicroStrategy has included Bitcoin in their company’s treasuries. Many payment rails like PayPal and Square are integrating cryptocurrencies in their services due to rising demand for cryptocurrencies from retail investors,” Gupta said. 

In October, PayPal Holdings said it would make crypto investments available to over 200 million US users by the year-end and enable crypto payments for 26 million merchants in the first quarter of 2021. 

“This could more than double the number of crypto investors overnight, considering that the most accurate estimate of crypto users we’ve seen is at around 100 million,” Sanjay Mehta, founder and partner of 100X VC, and a CoinDCX investor, said.

The entrepreneur-turned-investor is one of the earliest active participants in the ecosystem, holding Bitcoin as well as altcoins -- alternative cryptocurrencies -- such as Bitcoin cash, peerplays, civic and EOS. 

Nischal Shetty, founder and CEO of India’s largest cryptocurrency exchange WazirX, echoed Mehta’s opinion. “PayPal allowing Bitcoin is big. It has one of the largest customer bases,” he said.

“Today, corporates such as MicroStrategy feel confident that Bitcoin is less risky than holding cash, less risky than holding gold,” Mehta said. 

US business intelligence and computing software company MicroStrategy was the first public company to invest the lion’s share of its treasury in Bitcoins. It bought $250 million of the cryptocurrency in mid-August, followed by $175 million in September.

But what is Bitcoin halving?

The Bitcoin network is a peer-to-peer decentralised network where Bitcoin (BTC) is the medium or currency of transaction. At any given time, there is a limited supply of 21 million Bitcoins. 

BTCs can be acquired or mined. Miners participate in the blockchain network as transaction processors -- they add transaction records to Bitcoin’s public ledger and confirm its legitimacy. A group of transactions create a block, and for each of these blocks, miners receive a pre-determined number of Bitcoins as reward.

Precisely after 210,000 blocks of such transactions, which takes approximately four years to complete, the incentive for miners is halved. For instance, the 2016 event issued miners 12.5 BTC per block, whereas the May 2020 halving only issued 6.25 BTCs per block. This will go on for every 210,000 blocks, until the last bitcoin is mined in 2140.

Each halving marks a drop in Bitcoin’s supply, which can drive up the price if the demand continues to increase. 

Will the price momentum continue?

While Bitcoin’s valuation is on a roll, top cryptocurrencies such as Ethereum and Ripple (XRP) have increased only by 2% and 4%, respectively, according to an Economic Times report. 

Investors believe other cryptocurrencies will have a hard time reaching Bitcoin’s gold standard, given the limited number of coins and their decentralised nature. The use cases of these currencies may vary too. 

“There is some correlation between Bitcoin and the other top cryptocurrencies. However, I believe it is tough for any altcoin to replace Bitcoin as the gold standard of cryptocurrencies. The blockchain use case with coins like EOS will continue to see new applications as its adoption multiplies,” 100X VC’s Mehta said.

On the soaring Bitcoin valuation, he said, “Like any other market, this one will also have cycles. But I believe that Bitcoin, as an asset, is still undervalued. Institutional participation in crypto has hit an all-time high, measured by the number of large institutions holding significant positions in CME Bitcoin futures — up 20% in a single month. There is more value to be created.”

CoinDCX’s Gupta expects a strong correction in the price eventually. “With respect to every previous run up in Bitcoin and major top cryptocurrencies, we saw a healthy correction and strong consolidation in the market. We will witness a similar trend in the short term.” 

He also expects the other top cryptocurrencies to do well from the first quarter of 2021.“This is mainly because Bitcoin and Ethereum fundamentals are strong. Ethereum is expected to perform well in the next few years as ETH 2.0 releases in December.”

Is this a good time to invest? 

Gupta said most CoinDCX customers are holding on to their currencies, while Shetty said WazirX customers are gauging the market.

“People are trying to figure out if they should sell or hold -- especially those who have had it since 2017. I think we should see if the prices will stabilise in the next couple of weeks,” Shetty said. 

A long-term investor of three to five years is unlikely to have losses due to the cyclical nature of the currency’s halving mechanism, he said. Nearly 60-70% of the Bitcoin holders in his exchange have held the asset for long-term gains, he said.

The number of active addresses on the Bitcoin blockchain has hit 1.18 million, said Mehta. The Bitcoin network is getting as busy as the 2017 bull run — with similar prices but much lower fees. “The increase in active addresses indicates that Bitcoin is seeing increased usage and adoption,” Mehta said.

Moreover, if the number of Bitcoin investors increase, the demand uptick will lead to an assured price rise.

What’s the India story?

As the growth story continues to unfold worldwide, India’s reality remains a far cry. The country, which houses one sixth of the world’s population, currently has only 5 million active Bitcoin investors. This mostly comprises retail investors and almost no corporate or institutional investors. 

 The country witnesses a daily trade volume of $25-30 million in Bitcoins, according to Shetty.

WazirX, he said, facilitates $13-15 million daily across various cryptocurrencies. 

The sector witnessed increased investments in March, when the Supreme Court lifted the ban on usage of cryptocurrencies. 

Exchanges and startups in the segment also saw a significant increase in customer base. In fact, CoinDCX, one of the petitioners challenging the RBI ban, saw 50,000 users sign up on the platform within 50 days of its #TryCrypto initiative, which was also launched in March. 

“In Q1, we saw 10x growth in signups on the trading platform, 150% growth in daily active users since the Supreme Court judgement in March 2020, $10-15 million (across cryptocurrencies) in average trading volume on the platform and 47% growth in trading volumes,” Gupta said.

In October 2020, the firm saw a 25% month-on-month user growth. Consequently, trading volume was up  21%.

Meanwhile, WazirX, which only caters to Indian customers, saw trading volumes go up by 400-500% since March. For the same period, customer sign ups increased over two-fold. 

New Bitcoin startups and exchanges, such as BitBuddy, have emerged in the recent past too. Existing startups such as Unocoin raised funding from global investors including Tim Draper.

“We are at a very initial stage of bull run, and I expect a major bull run to start once Bitcoin’s price crosses $20,000 (its previous ATH). The coming bull run is expected to affect all countries including India as Bitcoin is getting recognized as a full global digital store of value,” Gupta said.

However, there things may not be as easy as they appear. The Indian government currently has in the works a bill to ban cryptocurrency trading in the country, while permitting blockchain technology with set regulations.

Edited by Rashmi Ramesh