The digital world of cryptocurrency has created a buzz among the young investors in india.Its ever increasing price that it had shown last year, has created investment mania in the mind of younger Generation.Bitcoin, a cryptocurrency, had seen increase of 53.12% in its value amid the coronavirus pandemic when other investment assets have not shown such a good return.This has created a FOMO(Fear of Missing out) among the investors who have little or no knowledge about cryptocurrencies.
What is Cryptocurrency?
A Cryptocurrency is digital currency which is a complex computerized code that cannot be duplicated.It is built on blockchain technology in which a block of data is created and shared across all the computers connected in the network.Once this block is verified,a formal record gets entered into the decentralised database.In this technology transaction that is done cannot be reversed. Among the cryptocurrencies,bitcoin and ethereum have the largest market cap and are the most popular crypto currencies.
Why has the price of cryptocurrency gone up?
The crypto currencies price depends on demand and supply of it.The speculative potential of what Bitcoin can become once it finds global government acceptance and become legal tender is a key driver for the price rise. In April 2018, the RBI virtually banned cryptocurrencies and prohibited all regulated entities, such as banks, from allowing anyone to trade in them. So, you could no longer transfer funds from your bank account online to a cryptocurrency exchange for buying Bitcoin or any other cryptocurrency.But in March 2020, the Supreme Court said that such curbs are illegal. The Supreme Court’s ruling makes many believe that eventually cryptocurrency would become legal tender.
Higher demand and lower supply lead to higher prices. The current stage of Bitcoin is one where there is limited supply and a very high demand. That is why Bitcoin’s price shot up 414 percent between March 2020 and the current year.
Should one Invest in bitcoin or stocks?
Bitcoin or any other Crypto currencies are speculative which are completely based on supply and demand.Unlike other currencies it is much smaller in currency market with regard to its overall size so it is more subject to big swings.In india , there is also no proper legal framework that regulate the cryptocurrencies and crypto exchanges.These all factors combined lead to volatility in cryptocurrencies.Bitcoin has been volatile since it was created as there was no natural way to value it.
On the Other Hand,Stocks have some guidance which one can use to get an understanding that where price might go.We can use the P/E Ratio(price earning ratio) to know the company financial health and its growth.Stocks are Governed by securities exchanges boards which have legal framework and are accountable to its investors.
Also stocks are more established and historically supported,stocks seem to be very low volatile as compared to bitcoin or other cryptocurrencies.
Bitcoin is good for investment if one is looking for extra diversity in its portfolio.Bitcoin or other cryptocurrencies investment are helpful if we want to have some assets that are not dependent on country currency.One must check its own risk appetite and goals that whether you are comfortable with losing that amount in your portfolio because bitcoin investing is very volatile.
Stocks investment are suitable for the major portion of investment in our portfolio.Stocks investment are more stable and are less volatile compared to cryptocurrencies.Also stock investing for a long period of time is more rewarding and very less volatile. We should decide how much amount of portfolio we should invest in different asset classes,whether it is stocks and cryptocurrencies, so that we can maximize our return and reduce our investment risks.