Bitcoin Wave This Time Sees Mature Investor Participation Digital-asset exchanges are pointing to the trend that this time investors are not entering the space in the heat of the market sentiment

Ashish Nitin Patil made his first bet on bitcoin in late 2017 amidst the brouhaha around cryptocurrencies. He jumped in to make a quick buck, like most investors back in the day. But, as he learned more about the value proposition of the digital tokens, Patil stuck around.

"Initially the intention was a short-term investment, but now I firmly believe that some good projects (hedge funds, ETFs) can deliver good gains of about 5-10X over a long period of 1-3 years," says the 28-year-old tech professional.

After its first run-up three years ago, bitcoin, the most popular cryptocurrency, is making headlines again on gaining nearly 242 per cent year to date, to trade at all time high levels of about USD 24,000. In the last four months alone, bitcoin's price has surged by nearly 104 per cent.

Of course, investors are yet again flocking to cash in on its price rally.

Cryptocurrency exchange CoinDCX has reported a 3X QoQ growth in trading volume and 4X QoQ growth in daily active users. In October alone, it has registered a 25 per cent MoM growth in the number of users and 21 per cent MoM growth in average trade volume. Zebpay, one of the early exchanges in India, has recorded a 270 per cent QoQ surge in trading volume and 218 per cent increase in number of users trading in 2020.

However, investors this time are in for the long-haul.

Take the case of Mumbai-based Shruti Vakhariya who made her first cryptocurrency investment in October this year. "I'd been meaning to buy bitcoin for a long time but only took the plunge after thoroughly reading up on the digital tokens and their applications," she says. "My current holding has gained over 35 per cent but I'm in no hurry to cash out. I see a lot of value in cryptocurrencies and want to remain invested for a few years to see where this is going."

Digital-asset exchanges also confirm the trend that this time investors are not entering the space in the heat of the market sentiment.

Vikram Rangala, chief marketing officer, ZebPay says users are behaving like long-term investors by holding on to their investments instead of quick buying and selling, as was the case during the 2017 rally.

"In the two-week period of November 5-17 that kicked off the current bitcoin rally, despite a 46 per cent increase in BTC-INR (bitcoin-Indian Rupee) volume and a 48 per cent increase in the number of unique customers trading BTC, our withdrawals stabilized," Rangala pointed.

This behavior is in contrast to the 2017 run when most investors ploughed in a small amount and cashed out during the upsurge as they didn't particularly wish to wait for a long time to receive the pay-offs, say industry stakeholders.

"Our daily transaction volume right now is less compared to the 2017 rally but that's because investors are not jumping in due to the fear of missing out," says Sathvik Vishwanath, co-founder and CEO, Unocoin.

The trend seems to be playing out globally. A report by blockchain and cryptocurrency analysis company Chainanalysis said there are fewer sellers in the market as compared to three years ago.

So, what has changed in the last three years?

Increasing Awareness and Adoption

Monark Modi, founder and CEO, Bitex, a UAE-based digital currency exchange and a professional trading platform, says with increased awareness around cryptocurrencies, speculative trading has gone down.

In fact, the 2017 rush opened the floodgates for small as well as institutional investors to seriously look at the space. Patil is a case in point. What started as a punt for him now accounts for 20 per cent of his total investment portfolio.

Moreover, with improved tech and innovations over the years, emergence of crypto related index funds and hedge funds have made cryptocurrencies a legit alternative asset class to include in one's investment portfolio.

"The biggest change between 2017 and today is the rise of exchange traded BTC futures and options. The cryptocurrency derivative markets are substantial now. There are many ways to hedge against sudden price moves (of bitcoin)," explains William Quigley, MD and co-founder, Magnetic Capital, a US-based investment and incubation firm, and founder of WAX, a blockchain built for video games. "This has the effect of reducing price volatility that is strictly due to speculation."

"We've seen a substantial shift in people warming up to bitcoin and other cryptocurrencies as a new asset class and not just a gamble," says Rangala.

Take the case of Viraj Sheth. He entered the cryptocurrency space in August this year to diversify his portfolio. "With the lockdown, I was reading up a lot about diversifying my portfolio and I considered investing a small percentage of it in crypto currencies," says the 20-something entrepreneur.

Growing use cases of digital tokens has also supported their adoption.

Pune-based Suraj Maheshwari sends money to his daughter studying in Zurich in the form of cryptocurrencies. "It's fast, transparent and helps save steep bank charges," says the 51-year-old marketing professional.

Price Rally Fuelled by Institutional Participation and Fundamentals

Institutional investors globally entering the crypto game in a big way is one of the major forces driving bitcoin price this year, say industry stakeholders.

American ace investors Bill Miller, who is known for beating the S&P 500 Index from 1991 to 2005, consecutively, and Stanley Druckenmiller, founder of Duquesne Capital Management, recently publicly endorsed bitcoin, announcing their own position in the digital token.

Asset managers and hedge fund managers, such as Paul Tudor Jones are scooping up bitcoin to include it as assets under management as a hedge against inflation.

American financial services corporation Fidelity is giving ETF exposure to bitcoin and ethereum to its institutional customers.

The list goes on.

Further, tech companies like Paypal and Square launching cryptocurrency-related services on their platforms are not only contributing to the price surge but also creating use cases for the digital tokens.

"The financial industry has been quite forthcoming in addressing this changing investment behavior (investors perceiving bitcoin as an asset class), be it global fintech like Paypal that has started accepting cryptocurrency on its platforms or an investment bank like JP Morgan Chase which has adopted blockchain based interbank payment systems through Stablecoins," says Modi.

Not just bitcoin price, institutional participation has also played a part in influencing investor decisions.

For Maheshwari, institutional adoption has added legitimacy to cryptocurrencies. "I bought bitcoin during the 2017 hype but encashed soon after RBI (Reserve Bank of India) banned banks from dealing in cryptocurrency-related transactions. The drastic move made me question their legality," he recalls.

"However, reading about tech leaders like Jack Dorsey (co-founder Twitter and Square) and David Marcus (former President PayPal) betting big on bitcoin has restored my faith in them again. Currently, about 10 per cent of my investment portfolio is allocated to bitcoin and ethereum."

Apart from pent-up demand, experts say fundamentals are also determining the price.

Quigley points out that in May this year third halving of bitcoin took place. In a halving event, the rate at which bitcoin enters circulation is cut in half, which results in a supply shock. "Historically, we see the price of BTC rise about six months after the halving event. That trend seems to have continued in 2020 as well," he says.

On being asked whether bitcoin price will see a similar crash as the previous cycle when it fell by about 80 per cent from its peak, all the experts Entrepreneur India spoke to agreed in unison that it won't.

"The previous cycle was largely driven by a set of fly-by-night retail investors who jumped on the bandwagon to cash in on the price surge. This led to a short-term euphoria, which resulted in a lot of cryptocurrencies being deemed significantly overvalued than their actual value," says Sumit Gupta, Co-founder and CEO, CoinDCX.

The prices are increasing one step at a time this time and a huge crash looks unlikely, says Vishwanath.

"There will be a correction but the question is how far the crypto assets will go before the correction kicks in. Due to this, the fear of missing out is not there. The industry is quite relaxed and retail participation is not comparable to 2017 yet."

Lack of Regulations a Dampener

Despite increased awareness, lack of regulations in the country continues to be a major concern for investors.

The Indian government and regulators have been skeptical about digital currencies since the beginning. So much so, that in 2018 RBI barred all banks and financial institutions from dealing in transactions related to cryptocurrencies. Though the Supreme Court struck down the order in March this year, a separate draft bill that proposes banning the use of cryptocurrency and 10-year prison sentence for anyone found dealing in them is still pending with the government.

Sandeep Sharma is a true cryptocurrency believer but he liquidated his holdings in late 2018 due to uncertain regulations. "Back then, rumors were floating that trading in cryptocurrencies will be banned by the government," says the Gurgaon resident.

The industry echoes investor's sentiments.

"Lack of clarity on taxes is making a lot of retail investors hold back from investing even though they are willing to," says Vishwanath.

Also, in the absence of a dedicated regulator, investors don't have an authority to approach for their grievances. For instance, Sharma says one of the major reasons for him to exit the space was his friend losing INR 5 lakh worth of bitcoin in online theft. "Lack of a regulatory body, like we have SEBI for equities and mutual funds that can protect public interest was a major discouragement for me."

The 46-year-old is eagerly waiting for regulations to kick in to invest in cryptocurrencies again.