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Bubbly bitcoin shows it’s nothing but lottery

'One terror strike funded by bitcoin, and central banks will go cracking'

Bitcoin’s crazy rise and the big fall within in a day’s time best reflects what can happen to financial fortunes when one tries to dabble in the unregulated world for sheer greed.

The crypto-currency slumped some 20 per cent overnight just hours after it rallied past the $10,000 and then $11,000 marks within the same day, hitting at peak of $11,434 at one point. As greedy investors flocked to the crypto-currency, seeking to make a fast buck, bitcoin exchanges faced outages, which triggered a selloff among jittery investors.

By the end of the day, the unit, often referred to as consensus currency, was down 20 per cent at $9,911 in New York. It had fallen to as low as $9,009 at one point.

Bitcoin watchers attributed the problem to massive spikes in traffic, which led to unspecified problems.

Bitcoin is not regulated, and is traded on specialist platforms. Launched in 2009 as a bit of encrypted software written by someone using the Japanese-sounding name Satoshi Nakamoto, bitcoin is controlled and regulated by its community of users.

A crypto-currency runs electronically and is generated by an individual or a group of people, called the miner. Bitcoin does not have any physical appearance and only can be traded online through bitcoin exchanges. Some analysts and investors see the virtual currency as our future currency.

Awareness about the crypto-currency is very limited.

In India too, the crypto-currency is said to have sizeable investors and it has grown by leaps and bounds. Rs 1,00,000 invested in the cryptocurrency in November 2010 would have become Rs 625 crore today. The crypto-currency was first introduced in India in December, 2012. The four wellknown and existing bitcoin exchanges in India are Bitxoxo, Unocoin, Coinsecure and Zebpay.

At present, there are about 17 million bitcoins. Market experts believe that if bitcoins become more and more adopted, then the price likely will rise substantially as the supply is finite. Limited supply helps to entrench the highly speculative nature of the currency. It’s a brilliant feature by the designers.

But analysts have been repeatedly warning about a possible bubble in the crypto-currency, but the digital currency has defied doomsday prophesies. Central banks and couple of global financial services companies believe that virtual currencies can be used for illegal purposes and are highly speculative in nature

News agency Bloomberg on Thursday quoted Federal Reserve Chair nominee Jerome Powell as saying that bitcoin isn’t big enough to matter right now, but alluded to the possibility that it could impede the central bank’s transmission mechanism “in the long, long run.”

On the risk to investors, UBS Group Chief Investment Officer Mark Haefele says “all it would take would be one terrorist incident in the US funded by bitcoin for the US regulator to much more seriously step in and take action.”

Global financial major BNP Paribas says there seem to be many symptoms of a bubble as far as the price of crypto currencies is concerned. The key feature is that many participants appear to be buying crypto currencies because their price is going up. One of the features that aid the bubble is that there is a hard limit for bitcoin issuance of 21 million, which is expected to be reached in 2040.

If you believe luck can bring you money, go for it. If you think wealth creation is serious business, don’t even look at it. That’s a crazy lottery, now you win, now you lose, said a veteran financial planner based in Mumbai.

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