The wild crypto journey and should you join it?

So far, most news headlines have reported a major rally in cryptocurrencies led by Bitcoin and Ethereum. While Bitcoin is king, its younger brother, Ethereum, is not far behind. Even as retail investors try to make sense of all this, high-net-worth individuals (HNIs) have already deposited between 1-3% of their money here.

When asked about his view, Krishna Jha, a Bengaluru-based private investor, said: “The next uptrend has begun and prices will go higher than they were before.” But Jha says he is not ready to bet on cryptocurrencies. “My cryptocurrency holdings are zero.” What he owns is through exchange-traded funds (ETFs) based outside the United States.

Imagine a treasure chest filled with a limited number of gold coins. Its rarity and value make it highly sought after. Bitcoin works on a similar principle. Unlike currencies printed by governments, there is a limit to the total number of bitcoins that can ever exist: about 21 million. This scarcity fuels its value, especially when demand starts to rise.

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What adds to the value of scarcity is that every four years, the number of new bitcoins that can be mined will decrease by half. The next halving is scheduled to happen in April this year. Think of it as a treasure chest to which access becomes very limited. Therefore, this long-awaited event in April will cause the price of Bitcoin to rise due to increased demand chasing a smaller set of assets.

Then there's the fact that buying bitcoins has traditionally involved navigating complex cryptocurrency exchanges and secure storage wallets. This was scary for new investors. However, with the government allowing Indian investors to buy spot Bitcoin ETFs in India, the game has changed.

These ETFs work similarly to mutual funds. To put that in perspective, if you need biscuits, you can't build a biscuit factory. Alternatively, you can purchase the package(s) that suit your needs. In contrast, the average Bitcoin miner has the infrastructure needed to build a factory. With spot ETFs, you have the option to buy a box of cookies along with other assets, just as you would in a mutual fund where you buy a basket of stocks. This is easier to handle and opens doors for investors to buy bitcoins indirectly. It has opened doors to more people, which explains the interest from individual investors.

As for Ethereum, the offer is a little different. It aspires to be “the world's computer.” The thing it hopes to do is compete to become a global banking system. This means it is a potential competitor to Finacle created by Infosys. As we speak, Finacle is a core banking product that banks use to provide digital services. It is a central system used by banks to manage accounts, process transactions, and provide various services safely and efficiently.

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In contrast, Ethereum is a massive global network of computers (nodes) that can run software applications in a decentralized manner. The main advantage of Ethereum is its ability to run smart contracts. Think of it as self-executing contracts where the terms of the agreement are written directly into the code. They automatically execute and enforce the terms of the contract when the conditions are met, without the need for an intermediary. This can be used for a wide range of applications, from financial agreements to voting systems.

ETH is the native cryptocurrency of the Ethereum network. ETH has been called the fuel or gas that fuels the Ethereum ecosystem. Ethereum's critics were not convinced by its ability to scale. However, the upcoming “Dencun” upgrade on Ethereum in mid-March aims to improve its efficiency and scalability. This could attract more developers and users to the platform, which could lead to increased demand for ETH.

Tellingly, Tanuj Bhagwani, a public policy expert and fintech analyst in Bengaluru, said, “The bull market is definitely back.” However, Bhagwani also calls for caution. “Cryptocurrencies are mostly a corrupt bet that a lot of young people will take. Now that institutions are in, the party will be wild for a few weeks. Bhagwani’s comments are worth thinking about carefully: Is it okay for people to take these bets? And for that matter, can they handle a party Unruly? Maybe not yet.