Should you use Bitcoins to transact online?   Dec 27, 2013

December 27, 2013
In this issue
Weekly Facts
Close Change %Change
BSE Sensex* 21,193.58 113.9 0.54%
Re/US$ 62.16 (0.0) -0.06%
Gold Rs/10g 29,450.00 (400.0) -1.34%
Crude ($/barrel) 112.03 2.8 2.54%
FD Rates (1-Yr) 8.00% - 9.00%
Weekly change as on December 26, 2013
*BSE Sensex as on December 27, 2013

Recently Bitcoins have been catching trend in e-commerce around the world. Virgin Group chief Richard Branson and host of online shopping portals are accepting Bitcoins. Even the U.S. Federal Reserve Chairman, Mr Ben Bernanke has said that these (Bitcoins) may hold long-term promise.

So first let's understand what Bitcoins are...
Well, Bitcoin is a digital currency or a virtual currency or a cryptocurrency, which can be used for online transactions. They are decentralised unlike most currencies and are generated through open-source software and priced on the free market (as they are traded on the exchange or even swapped privately). All newly mined Bitcoins along with every transaction, are publicly recorded and verified through a network and this process is termed as the "blockchain". As you store your local currency in a physical wallet, Bitcoins are stored in an e-wallet. You can buy or trade for them through local vendors and use them to buy products and services online.

Should you indulge in Bitcoins?
Primarily it is important to note that Bitcoins are not backed by any central bank in the world. So while Mr Ben Bernanke has said that the virtual currency may hold long-term promise, he has supplemented the statement thereto by saying, "particularly if the innovations promote a faster, more secure and more efficient payment system".

In India, Dr. Raghuram Rajan, the Governor of Reserve Bank of India (RBI) is not impressed with virtual currencies (Bitcoins included) and in fact raised a red flag cautioning users, holders and traders of such currencies against the potential financial, operational, legal, customer protection and security-related risks they are exposing themselves to.

According to RBI, since virtual currencies are stored in e-wallets, they are prone to losses arising out of hacking, loss of password, compromise on access credentials, malware attack, etc.; and since they are not created by or traded through any authorised central registry or agency, the loss of e-wallet could result in a permanent loss of virtual currencies. In the recent past, the RBI has also sighted huge volatility in value of virtual currencies and therefore is of the view that users could be exposed to potential losses on account of such rampant volatility. The RBI has also mentioned that, while virtual currencies are traded on the exchange platforms set up in various jurisdictions, there's no clear legal status which thus exposes traders of such currencies to legal and financial risks. You see, citing media reports that pointed to usage of virtual currencies for illicit and illegal activities in several jurisdictions, RBI has warned such transactions could subject users to unintentional breach of anti-money laundering or combating the financing of terrorism laws.

PersonalFN is of the view that, given the findings by RBI on virtual currencies and it raising a red flag thereto, it would be best to avoid using Bitcoins to make e-payments or indulge in them even in the form of trading, although it may enable you transact at high speed and at a low cost. This is because virtual currencies are unauthorised by any central banks or monetary authority, there is no clear legal status for them, chance of misuse of e-wallet is high (through various ways) and even unintentional breach of anti-money laundering or combating the financing of terrorism laws, can subject one to prosecution.


Retiring with adequate savings is a dream of every one of us. Since retirement is a long term goal, one may invest in equity markets as per one's risk appetite. Despite there being a huge scope, seldom retirement money finds its way to equity markets. According to Securities and Exchange Board of India (SEBI), tax incentives should be offered to attract retirement money to equity markets. Moreover, SEBI feels there should be a dialogue with Employee Provident Fund Organisation (EPFO) to persuade them to start investing in equity markets. The finance ministry has already approved EPFO to invest upto15% of the corpus in equities.

SEBI supports the idea to have a provision under Direct Tax Code (DTC) allowing tax favourable tax treatment to retirement and pension funds. At present there is no such provision for a mutual fund or any other entity launching a retirement product.

PersonalFN is of the view that, offering tax incentives on investments made by retirement and pension funds in the equities would help increase the retail participation into markets. It is estimated that total size of the Indian pension market would be about Rs 2 lakh crore by 2015. Even if a smaller part of it is invested in equities; it would be beneficial for the development of Indian markets. PersonalFN also believes that since retirement money comes for the longer term, it may help stabilise the markets.


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Many Indians believe that gold is an asset class whose value never depreciates for long. Many of you who do not track international gold prices would be surprised to know that they have fallen nearly 35% from their all-time high made in September 2011. Indian investors didn't witness such a deep fall in gold prices. During this period, Indian rupee too depreciated almost equal in amount. Since gold is dollar denominated in the international market and India is one the major importers of gold, gold prices in India remained relatively unaffected.
Gold Prices in India
Data as on December 19, 2013
(Source: ACE MF, PersonalFN Research)

As you might be aware, gold and US dollar share negative correlation; i.e. they move in opposite direction. Therefore, to understand the direction of gold prices, we must know the direction in which U.S. dollar may move. Now that Federal Reserves (Fed) in the U.S. has announced that it will reduce its bond buying by USD 10 billion early next year. Reduction in monetary stimulus means higher value of dollar. Higher dollar will make dollar denominated gold cheaper. Thus going by the recent history it should mean gold prices would remain stable for Indian investors as even rupee may fall against dollar. But this time it may not be the case.

To read more about this news and the view of PersonalFN over it, please click here.


Much awaited Inflation Indexed Bonds (IIBs) linked to the movement of Consumer Price Index (CPI) have finally been launched. The ministry of finance notified the issue of Inflation Indexed National Saving Securities (IINSS) recently. This is in line with broader strategy of RBI to focus on retail inflation and discourage investors from investing in gold. At present, the retail inflation hovers at 11% which has been affecting the household budgets. Before you take a decision whether to invest or not to invest in IINSS, you might be keen on knowing more about this offering.

Salient features of the issue...

Tenure: 10 Years

Minimum investment amount: Rs 5,000 and in multiples of Rs 5,000 thereafter

Maximum investment amount: Rs 5,00,000 (per applicant)

Coupon rate: The interest on securities has two components. The fixed component is 1.5% p.a. Besides, investors are entitled to be compensated at the rate of inflation calculated by the movement of CPI. The CPI would be used with a lag of 3 months. The interest would be compounded half yearly and becomes due for payment at maturity along with principal.

Security: Since the IINSS are issued as a part of overall borrowing of the government in the current fiscal; they come with a sovereign guarantee to the principal.

Taxation: Interest is taxable on accrued basis. However, Tax Deduction at Source (TDS) wouldn't be applicable.

Exit Window: Premature withdrawals are allowed. In case of senior citizens, withdrawals are permitted after 1 year and after 3 years in case of other investors. However, redemptions are allowed only on the date of coupon payments and are subject to the penalty of 50% of the last coupon payment. For example, if the payment of last coupon was Rs 500; then Rs 250 will be deducted at the time of redemption.

To read more about this news and the view of PersonalFN over it, please click here.
  • After doing away with mandatory grading for Initial Public Offerings (IPOs) – a move which risks investors – the Securities and Exchange Board of India (SEBI), would now allow companies hitting the primary market in want of capital, to be more creative and innovative in their IPO advertisements, as long as they are not misleading and contains necessary disclosures of associated risks and other facts.

    PersonalFN is of the view that such a nod is another measure to boost primary markets, which have been rather sluggish in the last few years, since companies have been finding it unattractive to enter the capital market to raise funds through sale of shares. While the regulator has given the leeway to issuers provided that the information is not misleading and contains necessary disclosures of associated risks and other facts; the question how would it be umpired as to what is misleading or misrepresenting in nature. PersonalFN is of the view that advertising for all financial instruments should be kept essentially simple for prospective investors to understand and should not be hyped in anyway. Also investors should bear in mind that good investing is dull and boring, and should not be guided by excitement or tall claims. It is vital for you as investors to adopt prudence and take enough responsibility while investing, by reading the offer document well and understand if the investment instrument suits your need and risk profile.

Cryptocurrency: "A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency is that it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities such as money laundering and tax evasion. The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009. Bitcoin's success has spawned a number of competing cryptocurrencies such as Litecoin, Namecoin and PPCoin."
(Source: Investopedia)
Quote : "Determine value apart from price; progress apart from activity; wealth apart from size." - Charlie Munger

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