Why Virtual Currencies are not for the Aam Aadmi and certainly not a good investment

Kumar Shankar Roy

Virtual currencies, a form of unregulated digital money that is not issued or guaranteed by any financial authority, worth over USD 13 billion (Rs 80,400 crore and counting) are floating around.

Chances are high that you would have listened about it, heard or read about it. Considering it as just another investment option? I WILL TELL YOU WHY YOU SHOULD NOT.

Brass tasks

Money making is a boring process and often time-consuming.

But virtual currency advocates will quickly ferret out stats like the eye-popping 32,81,500 pc gains (yes you read that right) in their brand ambassador Bitcoin, or tell you stories of how people are paying for pizzas, condoms and even room rent at motels etc. by paying via these virtual currencies. 

Sounds tempting, right?

They will, when provoked, also tell you how the mainstream governments and central banks are printing money day in and day out yet the 'elite' balk at the thought of letting people control their own money! It’s about having an open mind...blah blah. Please don't fall for this sermon.

When pushed to a corner, they would even say virtual currencies represent the ultimate form of freedom. You get to choose which currency you want and use it for any purpose without going through any of the conventional blood-sucking monsters lurking behind the guise of bankers. How convenient is a lie...

The ugly truth: All this could not be farther from the truth.

While I admit virtual currencies have come in many forms, beginning as currencies within online computer gaming environments and social networks, and developing into means of payment accepted 'offline' or in 'real life' -- such formal but 'informal' methods of payments have long existed. Hawala is one of them. It's a fact.

While it is now increasingly possible to use virtual currencies as a means to pay for goods and services with retailers, restaurants and entertainment venues, they expose you to fantastic risks that you won't even understand unless all of it goes in a blink. 

For instance, in December a prominent virtual currency wallet service was attacked by cyber criminals or hackers, leaving hapless investors poorer by USD 1.2 million.

Truth hard and cold

I am sure you must be chuckling and saying such things happen in banks as well. What's the big deal? Well...But, first the illusion of freedom that virtual currencies needs to be popped.

Things like Bitcoin represent the ultimate hierarchic system that channels money into the hands of a small elite.

Who are these elite? 

To understand who these elite are, lets understand a few things first. 


While virtual currencies can be bought for cash, the supply of this 'free' money comes from using complicated and heavy computer processes that lead to emergence of a coin or any such unit. 

Don't be sad when I tell you that fidgeting on that mac book pro or Dell inspirion won't let you manufacture even 0.01 of a full bitcoin.

If you don't understand what terms like a distributed timestamp, a valid hash or computing power (which means you are like me), you can't produce any. You have to buy them. 


There is no other way. That's all about freedom.

Money is serious business

In the real world, a central bank has a monopoly right to issue of coins and banknotes (fiat currency) for its own area of circulation (a country or group of countries such as Eurozone). 


They do this by regulating the production of currency by banks (credit) through a monetary policy. 

It’s an organised system of money supply and creation.

An organised system has checks and balances that would not let anybody be robbed off or fooled unless they threw caution to the wind.

Last week, a TV anchor got 'robbed' on prime time when he showed a virtual currency backed gift card to viewers.

On Friday, December 20, Matt Miller surprised his two fellow anchors – Adam Johnson and Trish Regan – with bitcoin gift certificates during his “12 Days of Bitcoin” segment. 


Johnson then flashed his certificate on the screen for roughly 10 seconds - more than enough time for a user to scan the digital code with his phone and take the gift for himself. Miller isn't amused. Neither should you.

If you are thinking woah this guy is totally against digital currencies, I am not. What I am against are these virtual currencies hawked as the best thing after Facebook or Google!

Facebook and Google met an unmet need. What do virtual currencies such as bitcoin offer that a dollar, a rupee or an euro doesn't?

When you keep a deposit in a conventional bank, you get deposit insurance.

In India, each depositor in a bank is insured up to a maximum of 1,00,000 (Rupees One Lakh) for both principal and interest amount held by him/her in the same right and same capacity as on the date of liquidation/cancellation of bank's licence etc.

There is no such thing in virtual currencies. At the most, and very rare, they would try to give you a portion back but that's a painstaking procedure.

The traditional hard money, which can be stored online in regulated banks with ease and can be used for just about everything, is an integral part of a system that has developed over thousands of years with trial and error method.

I would like you to believe that saving money you earned and withdrawing that money are easy today. You know it. Give me a nod.

Those ordinary yet gullible people who are going after virtual currencies are mostly collecting it as a novel form of investment -- the next 'in' thing if you may call it.

With the promise of virtual currencies being limited in supply, the manufacturers are taking your real money and giving something in return.

They highlight - you pay no high charges to banks etc like in the real world.

A day not too far

Imagine a day when this bitcoin bubble, which is exactly what it is now, would burst. There would be nobody to protect your money.

As the value of these so-called coins deplete and fall like a stone, you would try to sell them further driving down the price as scores of others create a supply storm.

What happens when a note is torn?


In India, the Reserve Bank has proper facilities for exchange of soiled and mutilated currency notes. Excessively soiled, brittle, burnt notes are also taken.

As an investment option, a bitcoin or a dogecoin or a megacoin isn't really good either. None of them a good and there's a full 67 of them.

Historical returns are hardly ever repeated in future. When you buy a share of, for instance Reliance Industries, you have liquidity. You can sell it with three clicks every time without batting an eyelid.

That kind of liquidity, platform or players are not available in the market right now for virtual currencies.

Plus the value of a virtual currency isn't based on fundamentals. When you buy a share you are making a bet on continued growth of the company which translates into earnings.

However, when you buy a virtual currency, you are buying it because you hope others would buy it tomorrow and you would time the market well.

That's how simple yet dangerous the valuation theory is for a virtual currency.

The price volatility of virtual currencies is way to extreme. Are you comfortable with a 10 per cent drop today of the money in your virtual currency value?

Spare a thought for those who bought a bitcoin for USD 1200 odd some weeks ago at its peak and have seen the rate fall to USD 800 now.

I am not trying to scare you.

We are living in strange times.

The politicians are not doing what you selected them for.

Your boss probably doesn't admire or let alone recognize that you exist.

Your friends are numbered, while enemies are many. It's okay to lose hope sometimes.

And suddenly at that opportune moment something like a virtual currency comes and we feel alive. As if our ticket has finally arrived.

Bad news first -- it hasn't.

Good news -- you are reading this and asking yourself when something appears easy and quick it probably isn't?

The Verdict

The infrastructure for virtual currencies simply isn't there now.

An ATM here or a restaurant run by a virtual currency enthusiast there isn't the system that one requires to protect one's own money, often hard-earned.

The risks outweigh the rewards by a heavy margin.

Look at safety first and then returns.

Nobody made more money by investing it in untested exotic sounding schemes that haven't stood the test of time.

Till the next time.

Feel free to criticize. Am okay with it. Write whatever you want about this post in the comment section (below)

IMAGES courtesy :

1. http://watchdog.wpengine.netdna-cdn.com/wp-content/blogs.dir/1/files/2013/12/bitcoins.png
2. http://www.ccsu.edu/uploaded/departments/AdministrativeDepartments/Administrative_Affairs/images/Safety_Matters.gif
3. http://www.fakingnews.firstpost.com/wp-content/uploads/2013/12/AamAadmiSentiment.jpg
4. http://www.propwise.sg/wp-content/uploads/invest.jpg
5. http://cdn.rt.com/files/news/21/a1/30/00/screen_shot_2013-12-24_at_23.29.22.si.jpg
6.http://spectrum.ieee.org/img/06Bitcoin-1338412974774.jpg