Cryptocurrency – Or is it a CryptoCommodity?

Date: 16th June 2021

Summary

  • There is an excitement around Cryptocurrency (CCS) – a combination of high potential gains, high tech backbone, a novelty, and a rebelliousness, that has attracted investors and driven demand. While initial purchases were by professional traders, speculators, crooks and gamblers, the ecosystem and exchanges have been helping to simplify and popularize it.
  • The success of an asset class like CCS will be largely driven by regulations, and demand – supply. Regulations are now by and large benign. So far the demand has exceeded supply, but in June 2021 we are in a very positive investing cycle across stocks, commodities and CCS. A reversal will challenge CCS price trends.
  • If the two major issues around CCS of – 1) too many coins options and 2) high wastage of electricity for CCS mining and processing – are addressed, CCS has the potential to become a widely used and stable currency.
  • Until this happens, CCS has characteristics closer to global commodities, hence our term, CryptoCommodity.
  • Investing now into CCS is for professional traders, those with a high risk appetite, and who can see as much as a 50% fall in value, at least temporarily. Some experts suggest a maximum 5% of investible funds to be allocated to this asset class.
  • Past report on Cryptocurrency available A Note on Cryptocurrency

Introduction

  • The story of cryptocurrency (CCS) and blockchain technology began in the year 2008 when the globe was going through the financial crisis. We saw the fall of Lehman brothers, rising unemployment, and the bubble burst. Meanwhile, Satoshi Nakamoto founded bitcoin which was the first decentralised currency in the world valued at $0.0008, which is currently trading at $38,700. Also see Market caps of Coins in Fig 1a.
  • In the past 12 years of CCS market, many new coins were introduced that have almost disappeared. On the other hand, Dogecoin that was promoted by Elon Musk, helped it to rally very high just by his tweets.

Fig 1a- Market Capitalization in USD B / and Fig 1b – Volatility of Asset classes

  • CCS are digital currencies that utilize blockchain technology to provide improved security, anonymity, and decentralization. There is no central authority for CCS, and no third parties needed to facilitate transactions.
  • In Fig 1b, we compare Bitcoin with Gold and US equities in terms of volatility and drawdowns over 10 years. Bitcoin has the highest drawdowns, showing that it is more risky. 
  • Transactions are highly secure and independent. The most famous CCS, the blue chip cryptos, are Bitcoin and Ethereum. They have market capitalizations of ₹50.3 lakh crore and ₹22.6 lakh cr. resp.
  • Bitcoin, Ethereum and Dogecoin have rallied 2.7X, 9.4X and 133X resp. in a one year time frame. See Fig 2a.
  • CCS offers more confidential transactions with least transactions fees involved and provides more lucrative opportunities for easier international trade.
  • But CCS has some adverse effect on environment in terms of consumption of more power and electricity for mining which made Tesla to withdraw from Bitcoin as a payment option.
  • Even though CCS is decentralised, but they are still several powerful operators, who can manipulate the prices, and we can see huge dips and bounces in the market.

Fig 2a – BTC movement last 5 years and Fig 2b – In 1 year (Sources – Statista and Coinbase)

Recent News and Events

  • Recently RBI had issued notices to banks which gives relief to Indian crypto investors, allowing transactions in CCS but it needs to be regulated under KYC, Anti money laundering and combination of Financing of terrorism, Prevention of money laundering Act (2002).
  • The El Salvador Congress on June 9 approved a bill making the world’s largest CCS, Bitcoin, legal tender in the country. The Central American country is now the first ever to make Bitcoin legal tender.
  • Last month US CCS exchange Coinbase successfully listed on the Nasdaq stock exchange. This listing could stabilize CCS, change the perceptions of individuals and make the future bright for the industry. Coinbase also faces competition from Binance, the world’s largest crypto exchange, as well as decentralized exchanges like Uniswap, which handle more trading activity than Coinbase.
  • U.S Treasury calls for stricter CCS compliance with IRS as they pose tax evasion risk. Treatment of this in India is unclear. GoI has constituted a panel to develop crypto regulations for India.
  • China has taken a decision to ban financial institutions and payment companies from providing services for crypto transactions and has warned investors against speculation and volatility. This news led to bitcoin falling 50% from the years high to the lowest since February, See Fig 2a and 2b.
  • With the initial few CCS taking off, many new coins were being introduced in the form of ICOs (Initial Coin Offers). However this market became frothy and by Nov 2017, there were around 50 ICO offerings a month.
  • Indian blockchain start-up Polygon, is the first well structured, easy to use platform for Ethereum scaling which aims to provide faster and cheaper transactions on Ethereum. Mark Cuban a US based entrepreneur has invested an undisclosed amount in the Polygon Matic coin, which hit a new high market cap of $14 B.
  • Tesla allowed Bitcoin as payment option for purchasing vehicles, but later Elon Musk removed the option as there was significant increase in mining of the CCS after his announcement.
  • As technical outlook remains positive and strong, Bitcoin is expected to reach $4,00,000 level in 2021 as per Bloomberg. Many investors have added an exposure to CCS as a small part of their assets.

CRYPTO v/s GOLD

  • Gold is a traditional global store of value; Cryptos are new
  • Gold is physically heavy, difficult and costly to transport; CCS are instantly transferred
  • Country wise restrictions or taxes for import or export; CCS are digital and generally permitted
  • Gold is well established and regulated; CCS has low to medium clarity on rules and regulations
  • A rise in gold prices over the past 50 years; CCS/ Bitcoin has seen massive rally over last decade
  • Gold has been a protection against large risks like war and infection; also provides safety against inflation
  • CCS is itself volatile, so is not yet a safe store of wealth, but more is itself a high risk, potentially high gain asset
  • CCS can in future become a major threat to gold in global wealth and savings

CRYPTO v/s CURRENCIES like USD or INR

  • Cryptocurrency is weak as a currency due to high volatility.
  • Central banks stabilize their currencies and hedge against other asset classes to smoothen the spikes. Year on year movements reflect Trade balances and the strengths of their economies.
  • However CCS is increasing being accepted for purchasing on websites and as a medium of exchange. 
  • But it is right now being used as a speculative investment by itself.
  • CCS may evolve in time as a store of value and as an alternative to other stores of value.

CRYPTO v/s COMMODITIES like Crude Oil, Steel or Copper

  • The volatility of CCS can be compared to some global commodities.
  • Global commodities have supply restricted by mining and mfg. constraints and fluctuate in line with demand and supply.
  • Trading of global commodities happens rapidly on global exchanges but fulfilment and logistics to back the transactions of course require time.
  • Global commodities have an inherent utility and so trading of these is essentially the matching of producers with consumers, with a small fraction of speculative trading also happening.

Top Cryptocurrencies to invest in 2021

  • There are by now a large number of CCS, see Fig 3a below for a list.
Fig 3a – Cryptos
  • Of the options, we share a suggested ordered list of CCS for traders.
  1. Bitcoin
  2. Ethernum
  3. Cardano
  4. Ripple
  5. Polkadot
  6. Bitcoin Cash
  7. Tron
  8. VeChain

How to invest in cryptocurrency in India

  • There are lot of India available platforms like WazirX, CoinDCX Go and Coinswitch Kuber, etc. An investor can download the app, open an account by providing personal details, identity proof like Aadhar or PAN card. These apps are available in Play store and Appstore. Once the account is verified, the customer can link their bank account and add money to the wallet in the app using Mobikwik or bank transfer. See Fig 3b.
  • Once the balance reflects in the wallet, the customer can purchase coins available by just clicking to buy.
  • Purchased coin will be shown under My Investments. The platforms are user friendly and simple to navigate. See Fig 3c.
Fig 3b – Payment Transfer and Fig 3c – Buy the coin

Key Advantages & Disadvantages

Opinion and Outlook

  • There is an excitement around CCS – a combination of high potential gains, high tech backbone, a novelty, and a rebelliousness, that has attracted investors and driven demand. While initial purchases were by professional traders, speculators, crooks and gamblers, the ecosystem and exchanges have been helping to simplify and popularize it.
  • The success of an asset class like CCS will be largely driven by regulations, and demand – supply. Regulations are now by and large benign. So far the demand has exceeded supply, but in June 2021 we are in a very positive investing cycle across stocks, commodities and CCS. A reversal will challenge CCS prices.
  • If the two major issues around CCS of – 1) too many coins options and 2) high wastage of electricity for CCS mining and processing – are addressed, CCS has the potential to become a widely used and stable currency.
  • Until this happens, CCS has characteristics closer to global commodities, hence our term, CryptoCommodity.
  • Investing now into CCS is for professional traders, those with a high risk appetite, and who can see as much as 50% fall in value at least temporarily. Some experts suggest a maximum 5% of investible funds to be allocated to this asset class.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any Cryptocurrency or related app. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has no cryptocurrency assets as on date. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor or cryptocurrency specialist. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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