Title : Bitcoins- For an investor

Author : Prachi Kapoor & Garvit Trivedi

Institute of Management & Entrepreneurship
Abstract :
Over recent years, interest has been growing in Bitcoin, an innovation that has the
potential to play an important role in e-commerce and beyond. The aim of our paper is
to provide a comprehensive empirical study of the payment and investment features of
Bitcoin. Since network externality theory suggests that the value of a network and its
take-up are interlinked, we investigate both adoption and price formation of bitcoin.
We discover that its returns are driven primarily by Bitcoin’s popularity, the sentiment
expressed in newspaper reports on cryptocurrency, and total number of transactions
done. The analysis has been done on the basis of comparing the risks and benefits
provided by it. Empirical data of the volatile price and the increasing number of
cryptocurrency wallet users has been used to analyse the growing popularity among
the consumers for bitcoins. Case Study method has been implemented for the analysis
of the worthiness of the investment in bitcoins.

Keywords : Bitcoin · Blockchain · Cryptocurrency · Graph analysis Worthiness

Growth
Introduction :
India is witnessing an epidemic growth in the field of digital payment these days.
With the advancement of technology, e-commerce giants are establishing themselves,
which hints of a massive surge in the acceptance of digital payment in the form of
bitcoins.
Bitcoin is a new kind of money being used in the worldwide payment network based
on cryptocurrency. It offers the promise of low transaction fees than traditional online
payment mechanisms and is the first decentralized digital currency, as the system
works without a central bank or single administrator. The network is peer-to-peer and
transactions take place between users directly, without an intermediary. Bitcoin was
invented by an unknown person or group of people under the name Satoshi
Nakamoto and released as open-source software in 2009. These transactions are
verified by network nodes through the use of cryptography and recorded in a
public distributed ledger called a blockchain.
Objectives : To analyse the worthiness of investment in Bitcoins and to know the
nature of Bitcoins.
Literature Review:
 Is Bitcoin a Real Currency? An economic appraisal By- David Yermack
 Bitcoin can reliably serve as a store of value and as a unit of account in
commercial markets. The excessive volatility is more consistent with the
behavior of a speculative investment than a currency. As described above,
bitcoin also faces difficulties due to its unorthodox decimal pricing of common
household goods, the scarcity of merchants who accept it, and the cumbersome
process of procuring bitcoins from a vendor
 Hedging capabilities of bitcoin. Is it the virtual gold? By- Anne
HauboDyhrberg
The paper sets out to explore the hedging capabilities of bitcoin by applying the
asymmetric GARCH methodology used in investigation of gold. The results
show that bitcoin can clearly be used as a hedge against stocks in the Financial
Times Stock Exchange Index. Additionally bitcoin can be used as a hedge
against the American dollar in the short-term. Bitcoin thereby possess some of
the same hedging abilities as gold and can be included in the variety of tools
available to market analysts to hedge market specific risk.
 The False Premises and Promises of Bitcoin By- Brian P. Hanley
Designed to compete with fiat currencies, bitcoin proposes it is a crypto-
currency as an alternative. Bitcoin makes a number of false claims, including:
bitcoin can be a reserve currency for banking and that we should believe
bitcoin can expand by deflation to become a global transactional currency
supply. Bitcoin's developers combine technical implementation proficiency
with ignorance of currency and banking fundamentals. This has resulted in a
failed attempt to change finance. A set of recommendations to change finance
are provided in the Afterword: Investment/venture banking is recommended for
the masses. Venture banking to bring back what investment banks once were.
Open-outcry exchange for all CDS contracts. Attempting to develop CDS type
contracts on investments in startup and existing enterprises and Improving the
connection between startup tech/ideas, business organization and investment.
 Beware the Middleman: Empirical Analysis of Bitcoin-Exchange Risk By-
Tyler MooreNicolas Christin
Bitcoins’ success has also attracted the attention of fraudsters who have taken
advantage of operational insecurity and transaction irreversibility. The study is
conducted to analyse the risk investors face from Bitcoin exchanges, which
convert between Bitcoins and hard currency. The track record of 40 Bitcoin
exchanges established over the past three years was examined, and it was found
that 18 have since closed, with customer account balances often wiped out. As
per the findings, Nine exchanges experienced security breaches.
 Bitcoin: a primer By- François Velde
The literature does not even provide adequate tools to assess under which
economic and social assumptions. On the whole, we simply don't have a
scientific model with sufficient predictive power to answer questions about
how Bitcoin or related systems might fare with different parameters or in
different circumstances.
  Anonymity or speculation? Risks and sources of legitimacy for virtual
currencies By- Beccalli, Elena
The empirical findings will show that in a first phase Bitcoin’s risk-adjusted
performance, and especially volatility, are much higher than for any other
financial instrument (even the more speculative ones), thus suggesting the
prevalence of anonymity as a driver of their diffusion. In a second phase,
Bitcoin’s riskadjusted performance becomes similar to the one of speculative
investments (hedge funds and private equity) rather than traditional currencies
thus suggesting the prevalence of speculation as a driver of their diffusion.

 Statistical Analysis of the Exchange Rate of Bitcoin By- Jeffrey Chu, Saralees
Nadarajah,* and Stephen Chan
We have analyzed the exchange rate of Bitcoin versus USD using fifteen of the
most popular parametric distributions in finance. We have found that the
generalized hyperbolic distribution gives the best fit, as assessed by the log-
likelihood value, AIC value, etc. These conclusions are consistent with the
following: “Bitcoin exchange rates exhibit somewhat complicated dynamics. In
the past 24 months, the USD-BTC exchange rate increased more than 50-
fold”,“Bitcoin investment exhibits very high volatility but also very high
returns”.
 Bitcoin Intelligence – Business Intelligence meets Crypto Currency By- Horia
Mircea BOTOŞ Bitcoins may not replace the “Fiat Currency” anytime soon,
but there has been a growth in the acceptance of crypto currencies around the
world. Intelligence is and always will be a powerful element of security.
Business and Competitive Intelligence by being at the core of a nation
economic security and stability will have to adapt and enter fields as Bitcoin
and Blockchain in order to protect its population from any threats. Bitcoin is
one the biggest future currencies, but we will still have to perfect it, as the
Intelligence shows what it’s needed in order for it to gain traction and have a
wider scale of acceptance. As the currency that it’s analysing, Bitcoin
Intelligence will need to evolve and to adapt to the future need of the market.
Background of the Study
Functioning of the Bitcoin Transaction:
The blockchain is a public ledger that records bitcoin transactions. The maintenance
of the blockchain is performed by a network of communicating nodes running bitcoin
software. Transactions of the form payer X sends Y bitcoins to payee
Z are broadcast to this network using readily available software applications. Network
nodes can validate transactions, add them to their copy of the ledger, and then
broadcast these ledger additions to other nodes. The blockchain is a distributed
database – to achieve independent verification.
Bitcoin is basically a digital code which is hidden in "data blocks" and could be mined
by solving those datablocks via solving various hash functions and math problems.
Features of Bitcoin:
 Security- The authenticity of each transaction is protected by digital signatures
corresponding to the sending addresses therefore allowing all users to have full
control over sending bitcoins. Thus, there is no fraud, no chargebacks and no
identifying information that could be compromised resulting in identity theft.
People can send bitcoins to each other using mobile apps or their computers.
It’s similar to sending cash digitally. People compete to “mine” bitcoins using
computers to solve complex math puzzles. This is how bitcoins are created.
 Storage- Bitcoins are stored in a “digital wallet,” which exists either in the
cloud or on a user’s computer. The wallet is a kind of virtual bank account that
allows users to send or receive bitcoins, pay for goods or save their money.
 Anonymity-Though each bitcoin transaction is recorded in a public log, names
of buyers and sellers are never revealed – only their wallet IDs are, which
keeps bitcoin users’ transactions private. It also enables them to buy or sell
anything without being traced back. That’s why it has become the currency of
choice for people buying drugs or other illicit activities online.
 Availability- Every four years the number of bitcoins created is scheduled to
be cut in half until 2040 when creation is supposed to go to zero. Mining is
done by volunteers who operate servers running bitcoin software. The system
operates by clearing transactions in a peerto-peer decentralized system. Bitcoin
provides for division of bitcoins into 108 parts, dubbed satoshis. The 21 million
limit on the number of tokens is intended to create scarcity, in order to support
pricing of those tokens in standard currencies. At time of writing, an estimated
11-12 million bitcoin tokens have been created, and an unknown number have
been lost and cannot be remade.
 Bitcoin Pricing- Since pricing in bitcoin transactions is demand based, it is
exceptionally volatile. Volumes of trading happen every second. The price of a
bitcoin is largely dependent on the trading i.e. demand and supply factors.
More the demand, higher is the price.
 Benefits
 Low inflation risk : With Bitcoin you don't have inflation problem because the
system is designed to make Bitcoins to be finite. Only about 21 milion Bitcoins will
ever be released (mined). The release of new Bitcoins is slowing down and it will stop
completely within a few decades.
 Low collapse risk : Regular currencies depend on governments which fail
occasionally. Bitcoin is not regulated by any one government. It's a virtual global
currency.
 No Third-party Interruptions : One of the most widely publicized benefits of
Bitcoin is that government, banks and other financial intermediaries have no way to
interrupt user transactions or place freezes on Bitcoin accounts. The system is purely
peer-to-peer; users experience a greater degree of freedom than with national
currencies.
 Purchases Are Not Taxed : Since there is no way for third parties to identify, track
or intercept transactions that are denominated in Bitcoins, one of the major advantages
of Bitcoin is that sales taxes are not added onto any purchases.
 Mobile Payments : Like with many online payment systems, Bitcoin users can pay
for their coins anywhere they have Internet access. This means that purchasers never
have to travel to a bank or a store to buy a product.

Risks

 Untraceable. This feature of Bitcoin attracts crime. People can buy and sell drugs and
other illegal items with significantly less risk of being traced by authorities.
 Easy to lose. if you lose Bitcoin you lost it . There is no mechanism to recover stolen
or lost Bitcoins. The best way to store your Bitcoins is on disk that is disconnected
from the internet.
 Hard to trade. You can't just use a credit card to buy Bitcoins online specifically
because of the reasons outlined above. There is no easy way to buy them or sell them.
There are many exchanges that offer such services in various ways, but it's not as easy
as transferring money to and from a PayPal account just yet. This is likely to improve
fast as more services will compete to offer convenient solutions.
 Still too new. Bitcoin is only a few years old. It's possible that a competing crypto
currency becomes more successful than Bitcoin or that somebody somehow finds a
major flaw in the system.
 Can't buy stuff. There aren't a lot of places where Bitcoins are accepted as payment.
This is likely to change, but for now the average person will mostly buy Bitcoins as
investment.
 Too volatile. Currently Bitcoin prices are going up like crazy. Currently the price is
going up so fast. It's not very convenient.
 Lack of awareness : Another issue pertains to awareness. Lot of consumers has little
or no information regarding risks associated with bitcoins lending them into unwanted
trouble under regulations such as anti-money laundering.

Data Analysis:
 Coinbase shows 4.4 million customers served.
 ARK Invest & Coinbase estimate “roughly seven million people around
the world hold a material amount of bitcoin” & “Coinbase stores nearly half a
billion dollars of bitcoin–more than any other provider in the world”.
 The Android “Bitcoin Wallet” app has been installed “1–5 million
times”, Coinbase’s Android app has been installed “500k — 1 million times”,
 and Mycelium’s Android app & Blockchain.info’s Android app have each been
installed “100k — 500k times”.
 Many bitcoin are stuck in addresses with lost private keys — another extremely
area of analysis full of murkiness & unknowns. A great article written over 2 years
ago by John W. Ratcliff proposed as high as 30% of then existing bitcoin were
“zombies”, & the still unknown Satoshi Nakamoto is believed to hold about 1
million bitcoin alone, with no way to tell if the private keys are still controlled.

The following graph shows the increasing number of Wallet users over the years from
the one in which Bitcoin was introduced.
The above graph depicts the age group of the highly active investors of bitcoins. The
adults in the late 30’s and late 40’s constitutes the substantial part of the investor base
of Bitcoins as a whole according to the survey held.
The above graph is showing the nature of the trend line that how the Coin Wallet
Users raised to unanticipated heights merely within years.

Findings & Observations :

CASE STUDY
When Vivek Pethe read that the price of a bitcoin had surged five times between
January and September 2017, he couldn’t resist jumping on the cryptocurrency
bandwagon. Pethe started small. In June 2017, he invested Rs 11,000 in bitcoins and
another Rs 15,000 in ATC Coin, an Indian cryptocurrency. Although his Rs 15,000
investment in ATC Coin quickly grew to Rs 1.82 lakh, Pethe started having doubts for
the BTC when he tried to withdraw Rs 5,000 from his holdings. He was unable to
execute the sell order smoothly. The computer screen just flashed ‘operational error’
messages. When that was resolved, and he was finally able to sell them, the money
wasn’t credited to his bank account right away. “I finally received the money three
months later, that too after many follow ups with the firm. I am not sure if I’ll be able
to recover my remaining investment in this scheme,” he says.
While this incident prompted Pethe to sell his bitcoin stash immediately and vow to
steer clear of such investments in the future, cryptocurrency exchanges claim that
around 2,500 new users in India are entering the market every day. Gopal Jiwarajka,
President, PHD Chamber of Commerce and Industry says, “Bitcoin is fraught with
risks and not backed by any tangible asset. But the number of investors is still
growing, which is a concern.”
“Investors haven’t seen such high returns from other investments within such a short
span of time. So many of them are tempted to try it out, hoping to make quick
investment returns,” says Hitesh Malviya, Blockchain consultant and bitcoin expert,
founder of itsblockchain.com.

A few pointers for buying and holding Bitcoins:

-Never invest more than you are willing/able to lose.
– Bitcoin is a very risky investment and you should keep in that in mind at all times.
After buying Bitcoins make sure to move them into your own personal wallet and
never leave them at the exchange. My personal recommendation is to use a hardware
wallet to store your Bitcoins.
-Make sure to buy Bitcoins only from exchanges that have proven their reputation.
Buy Bitcoins through Dollar cost averaging.
– This means that you don’t buy all of your Bitcoins in one trade but instead buy a
fixed amount every month, week or even day throughout the year. This way you
average the price over the course of a whole year.
Conclusion & Recommendations
The silence of the RBI on the regulatory status of bitcoins may prove to be damaging.
An industry has grown around bitcoins in India- traders, exchanges and merchants
who accept payments in bitcoins. Bitcoins have already gained wide acceptance
around the world- hence banning them would not be an option in India. Instead, this
industry would need to be regulated. The sooner this is done, the better. I don't
recommend putting large sums of money into it as the bubble will inevitably burst in a
matter of weeks but nobody knows when exactly. But I do think it's a good idea to get
familiar with the system and perhaps buy just a small amount for the experience or to
support the growth of the Bitcoin eco-system.
It’s not just a matter of should you invest, but also a matter of how to invest. Like I
said in the beginning, start by educating yourself. Learn about the currency, what
affects it, what are its advantages and disadvantages, etc.

References & Bibliography :

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