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Dear Niveshaks, . It’s the election year, and we The real question is whether hope of a new beginning. Prime PCA net is doing more harm Minister Narendra Modi took than good? Delving further into oath in May 2014 and made the system, one cannot avoid several promises to develop a another important policy new India. Now is the time to see implemented to improve the whether the people see these health of the banking sector, the changes as positive or they feel Insolvency and Bankruptcy code it was the (IBC). This edition’s article of the same old political month, written by Vrusha Patel and Raghav propaganda. The Gupta (NMIMS, hustle-bustle has Mumbai), talks already begun in about the impact the financial and of IBC ruling on the business world, Indian markets and it also waits to and future experience the new outlook. While flavour in the New IBC is a good Year. move, the law is This month’s cover challenged on story discusses the un nouveau départ two major health of the Indian banking sector. grounds, one that it violates The prompt corrective action article of the constitution, and (PCA) framework is a step taken second that it is not fare to the by the RBI to assess and promoters of the defaulted monitor the banks which are company.The recent episode of weak and troubled. The rising QuadrigaCX, Canada’s largest levels of NPAs is a serious crypto currency exchange, has matter and the action taken by sparked fears among the RBI should be appreciated; but investors in this space. This as is the case with several month’s fingyan questions the policies, the implementation of fundamentals of this new product, PCA framework is not efficient whether it is the beginning or the 2
end? It is interesting to study the history of financial scandals over the years. The FinFails section tells us that such scandals are not just a recent phenomenon but seem to be a part and parcel of our society. Kipper and Wipper is one such scandal. It dates back to the 17th century when every German state started minting its own coin and started debasing its currency. This happened purely because of the greed and at the end all states were left with worthless currencies. Does finance pertain only to numbers? No, not really. Behavioural finance is an area which does not include any hard number analysis. It purely links human behaviour and the decisions taken outside the financial world to the very subject of finance. The classroom section intends to enlighten the readers on this less talked topic. With the end of the first month of 2019, we hope that this year brings a lot of positives for the investing community. Stay Invested, Team Niveshak
THE TEAM Aayushi Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Sheshav Dosi Sriya Gupta Aman Jain Harsh Jain Rajat Magotra Rohit Garg Shreyansh Parakh Suchitra Mandal Trisha Waghela Vinti Singla Yukti Rajpal All images, design and artwork are copyright of IIM Shillong Finance Club
Š Finance Club Indian Institute of Management, Shillong
Disclaimer: The views presented are the opinion/work of the individual author and3 the Finance Club of IIM Shillong bears no responsibility whatsoever.
Contents NIVESHAK: JANUARY 2019
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06 08 10 . . . 14 18 20 . . . 23 24 . . The Month That Was
Niveshak Investment Fund
Article of the Month: Impact of IBC Ruling on Indian Market
Cover Story: How Likely are Banks to escape the PCA net?
FinFail: Kipper and Wipper
FinGyaan: Crypto Currency, Is this the beginning of the end
Classroom: Behavioral Finance
Book Review: Rich Dad Poor Dad
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NIVESHAK | JANUARY 2019
TMTW
THE MONTH THAT WAS RBI removes Bank of India, Bank of Maharashtra & OBC from PCA Regime
issue REIT, InvIt will be reduced. The leverage limit will also be increased to 70% from the current 49%. At the time of initial/follow-on issue, the minimum application and allotment lot shall be of 100 units and the value of one such lot shall be within the range of Rs 15,00020,000. RBI reluctant to change FPI portfolio limits The government introduced restrictions to cap an FPI’s investment in a single corporate bond to 50 percent of the bond issue during April 2018. This restricted FPI’s exposure in any individual corporate group to not more than 20 percent of their overall corporate bond portfolio. They were allowed to invest in debt papers with less than three-year maturities, provided the total investment in debt papers maturing within a year did not exceed 20 percent of the portfolio. The RBI has asked investors to look at the voluntary retention route (VRR) — a new channel currently in the works to enable FPIs to invest in debt markets in India — to bypass existing restrictions.
RBI has removed prompt corrective action (PCA) on these three banks so that they can carry on their normal operations and continue lending. The central bank took these decisions after reviewing their quarterly performance for the October to December quarter. The RBI imposes the PCA framework in place to maintain the sound financial health of banks. It facilitates banks, which are in breach of risk thresholds in areas such as capital, asset quality (net NPA), and profitability, to take timely corrective steps to restore financial health. SEBI plans new regulation for REIT, InvIT SEBI has notified REIT regulations 2014 so that it becomes more attractive to investors. The minimum allotment and trading lot for publicly
Sebi allows mutual funds to write call options under certain conditions Call options refer to an agreement that gives a buyer the right to purchase an asset at a specified price within a particular time period. Currently, mutual fund schemes are permitted to undertake transactions in equity derivatives but cannot write options or purchase instruments with embedded written options. In a circular, Sebi allowed mutual fund schemes (except [6]
NIVESHAK | JANUARY 2019
TMTW
Index Funds and ETFs) to write call options only under a covered call strategy for constituent stocks of Nifty 50 and Sensex indices. The total notional value (taking into account strike price as well as premium value) of call options written by a scheme shall not exceed 15% of the total market value of equity shares held in that scheme. Further, the total number of shares underlying the call options written should not exceed 30% of the unencumbered shares of a particular company held in the scheme. “In no case, a scheme shall write a call option without holding the underlying equity shares. A call option can be written only on shares which are not hedged using other derivative contracts," the circular said.
funds, but on a legal technicality relating to settling the obligations of insolvent IL&FS Group companies. SBI is poised to control 15% of Jet Airways India’s largest lender State Bank of India (SBI) is set to take an equity stake of at least 15 percent in Jet Airways India Ltd. as lenders to the carrier plan to convert part of their loans into equity. Under a new rescue deal in the works, the nation’s biggest full-service airline’s founder Chairman Naresh Goyal’s stake will fall below 20% from the current 51%, the people said, asking not to be identified as the information is not public. Etihad Airways PJSC, the current equity partner with a 24% stake, is expected to infuse additional funds to take its total holding to more than 40%.
Debt funds downgrade: No reason to panic yet ICRA put six debt fund schemes—two from HDFC Mutual Fund, one from Aditya Birla Sun Life Mutual Fund and three from UTI Mutual Fund—on a rating watch with negative implications. These funds held bonds of certain special purpose vehicles (SPVs)— Hazaribagh Ranchi Expressway Ltd (HREL), Jorabat Shillong Expressway Ltd (JSEL) and Jharkhand Road Projects Implementation Co. (JRPICL) that have links with IL&FS Group. What triggered the rating action was a communication from the SPVs seeking to stop any future repayments to their bondholders, which included these mutual fund schemes, not because the projects were not able to generate the
Vodafone-Idea prepares ₹25,000crore war chest India’s largest telecom operator by subscriber base, approved a rights issue of ₹25,000 crore for existing shareholders in line with the recommendations of a capital raising committee. The board has considered and approved the offer and issue of fully paid-up and/or partly-paid up equity shares of the company and/or other securities convertible into equity shares of the company, including, but not limited to, compulsorily convertible debentures, for an amount aggregating up to ₹25,000 crore, by way of a rights issue to existing eligible equity shareholders of the company [7]
NIF PERFORMACE EVALUATION As on January 31, 2019
January Month's Performance of NIF
As on 31th July 2017
102 100 98 96
94 92
Scaled Sensex
29-Jan-19
27-Jan-19
25-Jan-19
23-Jan-19
21-Jan-19
19-Jan-19
17-Jan-19
15-Jan-19
13-Jan-19
11-Jan-19
09-Jan-19
07-Jan-19
05-Jan-19
03-Jan-19
01-Jan-19
90
Scaled Portfolio
Value Scaled to 100
Total Investment Value: 10, 00,000 Current Portfolio Value: 19,60,092 Change in Portfolio Value: 96.09% Change in Sensex: 76.00%
Risk Measures: Standard Deviation NIF: 35.49 Standard Deviation Sensex: 19.65 Sharpe Ratio: 2.59 (Sensex: 3.71) Cash Remaining: 37,788
Comments on the Equity market and NIF’s Performance: The Indian equity markets during the month of January continued to see a whiplash movement with a downward bias and shallow depth. The sectors which have been conventional like FMCG did deliver a good number but cyclical did disappoint the markets. The political fever also hit high day after day wherein economics took a backseat in decision making process for the government thereby keeping the market fairly under the pressure. The uncertainty over the Yes Bank’s CEO issue was finally over after a really long time. This might not only give the company a greater stability but also will be welcomed by the markets participants. Indigo which had been reporting a market profit for a long time, reported a 75% decline in its bottom-line. The market is still overcrowded with a lot of uncertainties given the global geo-political scenario, EU slowdown, BREXIT indecisiveness and all these factors might scare away the bulls. Markets seem to move unlikely higher until the policies from bot Union Budget and MPC will be announced which will drive the bourses appropriately.
NIVESHAK INVESTMENT FUND INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE
NIF Sectoral Weights
Monthly Performance Portfolio Weight
1.19% 8.74% 11.58 % 8.89% 13.61 % 5.70%
6.72% 2.05% 12.43 %
24.18 % Auto Infrastructure Chemical Media Financial Services FMCG Pharma Telecommunication Misc
TOP GAINERS FOR THE MONTH • Speciality Rest (21.72%) • Titan (7.31%) • Lupin (4.52%) TOP LOSERS FOR THE MONTH • Thirumalai Chem (-30.80%) • India Bulls Hg(-21.20%) • PPAP Automative(-21.17%)
ARTICLE OF THE MONTH
NIVESHAK | JANUARY 2019
Impact of IBC Ruling on Indian Markets and Future Outlook - Vrusha Patel & Raghav Gupta NMIMS, Mumbai
Source: marketexpress.com
law for meeting the bankruptcy and insolvency standards which led to the creation of Insolvency and Bankruptcy Code, 2016. They are a collection of rules and laws to solve insolvency issues in a time bound manner. The basic premise was to consolidate and amend the laws related to a bunch of stakeholders like corporate persons, partnership firms and individuals. Now, there is a strict time bound period, i.e. it provides a moratorium for insolvency resolution of 180 days which can be extended up to 270 days under special circumstances.
Justice delayed is justice denied. This is true not just for criminal or civil laws but even for financial market laws. Newspapers are flooded with such circumstances in which there has been non-payment for years which ultimately resulted in insolvency. Such situations have become a daily nuance since the turn of the century. Before the IBC came into the picture, there was a recovery of a modest 25.7 cents per dollar lent which was the lowest among the developing economies. A law was the need of the hour which could restore the faith of creditors in the Indian economy and protect their interests by the timely payment of money.
Why was the IBC law challenged? The Apex court had many petitions related to IBC which focused on majority two challenges. The first challenge was that it violates Article 14
These factors made way for a single
Figure: Grounds for dismissal of Petitions
Source: Bloomberg
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ARTICLE OF THE MONTH
NIVESHAK | JANUARY 2019
companies which were a trap of this law were driving the case from the defence side. The apex court has refused a plea to allow the operational creditors parity with the financial creditors. The impact of the verdict can be assessed from the following parameters:
of the constitution. There were strong sentiments that the IBC doesn’t make a clear differentiation between financial and operational creditors. Even though the operational creditors are allowed to initiate the proceedings in case of defaults, they weren’t allowed to participate in the resolution process. The second major concern was that IBC was debarring the fundamental rights of the promoters of the organization. It was pulling the rights of the promoter from bidding for their own companies.
NPA Recovery India is facing the biggest ever challenge in the history of its financial markets- the growing NPAs. Because of the IBC law, there was a recovery of 4 lakh crore of the NPAs which is 44.44% of the total recovery. So, within 24 months there is a strong recovery of the NPAs which is a rare achievement for Indian economic law. With time being, the government predicts recovery of more than 70% of the total NPAs.
In case of the Binani cement’s ruling concerning Ultratech, NCLAT has set a precedent for future cases related to IBC. It has reiterated the sanctity of the code. NCLAT has reaffirmed that the goal of the insolvency process is to provide maximum value from the resolution of stressed assets and at the same time ensure protecting the interests of the operational creditors. It also emphasized that once an insolvency application is filed, it can’t be merely withdrawn because the promoter is ready to pay. This will mainly have a bearing in the case of Essar Steel.
Clarity in Hierarchy of Payments With operational creditors not on the same page with financial creditors, it will result in the promotion of restructuring by the committee of creditors. Now, it has become a clear waterfall with the first right coming to the bank which is the committee of creditors and then everyone else including operational creditors (account payables). It will result in a clear hierarchy of the payments to be followed.
The Verdict The Supreme Court of India has upheld the insolvency law in ‘entirety.’ Now, founders and promoters cannot bid under the bankruptcy process. The Supreme Court rejected the petitions which challenged the IBC and upheld the constitutional validity of the law. Independent Power Producers Association and 12 major
Bad Loans Recovery The ruling will help recover Rs 1.8 lakh crore in the current financial year. This will aid in the recovery of [11]
ARTICLE OF THE MONTH
NIVESHAK | JANUARY 2019
the bad loans by the banking sector. After the IBC law, the Public Sector Bank recorded a staggering recovery of 10.77% of previously given loans.
stressed assets. It has resulted in the maximization of the value of assets. It will also promote the independence of locked-up assets.
Removal of Duplication of laws There were 12 different laws before the IBC came into the picture. If the IBC would have been dissolved, then it would bring that situation again in which there would be multiple laws, multiple reporting and a lack of clear understanding regarding the liquidation process to be followed. This would have resulted in significant entropy and inefficiencies in the system. What makes this law better than any previous laws is the identification of multinational insolvencies through agreements.
What if the law was not withheld? There is a strong sense of faith in the investors & creditors due to the Supreme Court upholding the law. It clearly lays down the institutional infrastructure, i.e. the insolvency regulator, insolvency resolution professionals, informational utilities, adjudicatory authorities. The proIndian favouring economists always talk about its fastest growing economy, but crucial facts are being ignored. We stand at 136th position globally when it comes to resolving the insolvency.
Speedy Trials It takes 4.3 years to address the bankruptcy in India while in Finland it takes nine months, and in Japan, it just takes half a year. The law promotes the rapidity which is a must in the Indian context.
If the law were withdrawn, then the situation would become even worse, and there would be a further reduction in the recovery rate of the loans. 70,000 court cases were pending before the IBC. If the law would not be reinstated, then such a situation would become prevalent again which will affect the legal jurisdiction of the country.
Credit Culture Upliftment There will be more availability of credit in business. It will also result in greater investments which are the need of the hour in India. The size of India’s corporate bond market is just a meagre 16%. With the law, it will only increase & promote the credit culture in the country & thus will harmonize the interests of all stakeholders. Asset Value Maximization 21.66% of loans in the country are under
Source: marketexpress.com
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ARTICLE OF THE MONTH
NIVESHAK | JANUARY 2019 Analysis of One Year Report Card After one year of establishment of law, a survey was conducted to gauge the trust of creditors and investors in the IBC law. 69% of loans preferred resolution through IBC as a mechanism to recover loans while 16% and 15% resorted to the sale of ARCs and restructuring of debts respectively. This speaks for the success of confidence in IBC law. Similar Models The judgments & petitions may raise a doubt regarding the sustainability of the IBC. However, a comparison among countries with similar law must be closely watched to take inspiration. Taking developing countries as a model
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for validity like Thailand with 0.13%, Argentina with 0.12%, Colombia with 0.16% bankruptcy shows that even India can achieve these targets which look far-fetched. However, these are only possible if we allow the law to take some time and gain momentum as in these countries. Conclusion “A stitch in time saves nine.� The SC upholding the IBC law has given a significant life to this law once again as the law has true potential to reform the economic process. Petitions and challenges should be seen as initial hurdles of the game, but considering the future scope, it can truly redefine the Indian economic scenario.
COVER STORY HOW LIKELY ARE BANKS TO ESCAPE THE PCA NET?
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COVER STORY
NIVESHAK | JANUARY 2019 To restore the financial health of banks and preserve their capital levels, RBI drags commercial banks with deteriorating performance under its PCA framework. PCA or Prompt Corrective Action is a mechanism by which RBI ensures that weak or troubled banks don’t break down. The PCA framework can extend only to commercial banks and cannot incorporate under it cooperative banks and non-banking financial companies (NBFCs). A bank falls under the PCA net if it does not maintain desirable capital level which is judged through parameters such as capital ratio, asset quality and profitability. Here 3 important indicators are CRAR (Capital to Risk weighted Assets Ratio), Net NPA (Non-Performing Assets) ratio and Return on Assets (RoA).
The CRAR is the capital needed for a bank in terms of the assets (loans) disbursed by the banks. Higher the assets, higher should be the capital by
the bank. An important feature of CRAR is that it measures capital adequacy in terms of the riskiness of the assets or loans given. As an example, if a bank gives loans to the government by investing in government securities like bonds, it need not keep any capital. The reason behind this is that government securities come with zero risk level and hence their risk weight is 0. Net NPAs are those from which the provision for NPA is deducted and hence shows the actual burden on banks (Net NPAs = Sum of Default loans- Provision for Default). To calculate Net NPA ratio, net NPAs are divided by the loans (advances) of the bank. RoA (ratio of net income to total assets during a period) is a common measure used by banks to assess their profitability. RoA figure gives an estimation of the effective conversion of invested money into net income.
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COVER STORY
NIVESHAK | JANUARY 2019 The table on the previous page explains the 3 risk threshold levels for the above mentioned trigger areas. Currently there are 8 banks under the PCA net, including Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Central Bank of India, Indian Overseas Bank and Dena Bank. Bank of Maharashtra, Bank of India and Oriental Bank of Commerce were removed from the PCA framework on January 31, 2019. Not only this, Allahabad Bank, Central Bank of India and Dena Bank may be next in line to get out of PCA net as the government may inject more money into these banks. An amount of 12500 crore is expected to be given by the government to troubled banks in this quarter. Apart from the government lent capital, banks may use fresh equity to reduce the net NPA ratio below the trigger level. Insolvency Resolution mechanism has also raised hopes for better loan recovery of troubled banks. Though 34 banks are expected to be freed of the PCA net by March this year, their gross NPAs remain as high as 1617%.
If we see the situation with Allahabad Bank, as stated by their CEO S S Mallikarjuna Rao, their current net NPA ratio stands at 7.7% which they expect to bring down below 6% by March; however they have to come a long way to meet the RoA criteria. The question here is that why RBI has given them a leeway in terms of RoA? Does RBI want banks to be freed of the
PCA net? If we consider the impact of PCA on operational performance of banks, there has been improvement in April-June 2018 quarter with steep reduction in net losses, higher recoveries and considerable improvement in provision coverage ratio. As per the data from Capitaline, before BoM, BoI and OBC were removed from PCA net, 11 banks that were under the PCA Framework showed growth as high as 114% YoY basis in their Net Interest incomes (shown in the figure below).
Image Courtesy: Capitaline
However, due to the restrictions banks cannot expand their number of branches, staff recruitment and increase size of their loan book. Also banks are required to maintain higher
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COVER STORY
NIVESHAK | JANUARY 2019
provisions for bad loans and are allowed to lend to only those companies that maintain their borrowing above investment grade. Not only this, the year on year growth In advances for banks under PCA framework has declined from over 10% in 2014 to below zero by 2016 and has remained in the contraction zone since then. So the question that remains is- would it be better if more PSBs come under the ambit of PCA or if the existing ones are freed from the PCA net. That is whether PCA net is doing more harm than the good it may bring to banks? On closely observing the scenario we feel that PCA is not doing any harm to
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the banks as it is a check on the banks activity and if the RBI gives freedom to the bank then banks may lend recklessly leading to further higher NPA’s. Also since IBC has become more active so banks will recover their loans comparatively faster. A move from government on this front would be to merge banks to reduce their operational costs, thus increasing their margins.
FINFAILS
NIVESHAK | JANUARY 2019
Kipper and Wipper What happens when you dig a hole for others ? A German mint hard at work producing debased coinage designed to be palmed off on the nearest neighborin g state, c.1620 Source:https://www.smithsonianmag.com
While it is popularly thought that the current financial situation is worse than ever due to the ever-happening scandals, conflicts of Interest and stories of corporate mis governance and while it is true that scandals are more apparent now, however history is mired with serious incidents of Financial Distress that were more recurring in nature and this was even before Corporate Governance was the Buzz word. One such Event was the Kipper und wiper which dates way back to the 17th Century. Kipper und Wipper which translates to Tipper and See-saw Time is the perfect example of what happens when you try to dig a hole for others. Occurring at a time when Metals were still the way of Currency, it happened at the start of the thirty Years’ War dating from 1618 till 1648, which was [18]
also the cause for wiping out 20 percent of the German population. Wars are Expensive, there is no two way about it but at whose cost? Well apparently, in this case everyone as the various German states tried to beat each other down in this game of debasing the currency. Every German state minted their own coins and the value of these coins from derived from the metal underneath. So the Tipper comes from the Tipping scales used to identify the coins which were not yet debased. Of course, it would be foolish to debase your own currency, the catch was that each and every neighbouring state was trying to produce low value imitations of its neighbour and exchanging it for it’s high value counterpart resulting in
FINFAILS
NIVESHAK | JANUARY 2019
A 1622 debased silver 24kreuzer coin of Bavaria reflects the “monetary terrorism” of the Kipper und Wipper period in Germany.
Source:coinworld.com
increase in the value of Precious Metal that they hold. Debasing was done through trimming the edges of the good currency and using this leftover metal to produce new coins. Another way was through melting the currency and mixing it with other low value metals such as led, copper and tin. However this was the end of it with just a win for one state, the state which had it’s currency devalued would then get it’s bad and low valued currency with valuable minted currency and then this cycle of vicious continued. But then who really won ? If everyone was trying to debase each other’s currencies then which state finally
managed to earn the revenue it wanted. Apparently , by now all the German states were full of Kippergeld-Worthless Coins. However, all things come to a close as did this when the public got wind of the manipulation the lords and prices of these states were doing due to which only the poorer section of the society was suffering. Finally, the soldiers refused to fight until and unless they were paid in good currency. One thing that can be concluded from this is that scandals and manipulations are not a product of our generation but rather seeks to declare where there is money there is greed.
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FINGYAN
NIVESHAK | JANUARY 2019
Crypto Currency – Is This The Beginning Of The End?
reach a level which is higher than what can be justified, they will need to pull back. The market has been ruthless in case of cryptocurrencies. Their prices ascended rapidly, but their descent was even quicker. Within a span of few months, BTC plummeted to $5,967 and lost over 69% peak value. The value has been shaky since then. It soars daily and plunges in the same breath.
- Vishal Jain KJ SIMSR, Mumbai
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” - Satoshi Nakamoto
Reasons for Downfall The volatility is primarily related to the Internet- Google and Facebook banned the advertising of cryptocurrencies. It means you shall no longer see ads for crypto, ICOs, or Bitcoin in your search results. In January 2018, Facebook banned any advertisement related to cryptocurrency, and the news spread quickly which made a negative impact on the confidence level of investors. Even though the ban has just been lifted off (with some conditions like preapproval of content from authorities of Facebook and no promoting binary options or initial coin offerings), the retail investors haven’t gained the faith in cryptocurrency till now.
With this aim, cryptocurrency was introduced into the market. Behind it was a robust blockchain technology, whose potential was realized over a period of time. A number of companies started releasing their cryptocurrencies & implementing it in their business. As news started rolling out, “cryptocurrency” became the new buzzword which led to an exponential growth in market capitalization and the prices of various cryptocurrencies skyrocketed in 2017 with Bitcoin touching $19,783 at the year-end. After a fantastic 2017, we are now witnessing the after-effects of an unprecedented rise in prices of Bitcoin and its other allies- 2018 is just the retracement of that. Not only crypto-market but also broader markets seem to be bearing the brunt, where tech stocks, for example, are following a similar pattern. As with all markets, if the prices
Secondarily, the way China handled cryptocurrencies when their prices skyrocketed in 2017. China banned all websites that offered cryptocurrency trading services in the country at the start of 2018. Even the search engines were cleaned of any mention of cryptocurrencies. Being one of the biggest markets for the [20]
FINGYAN
NIVESHAK | JANUARY 2019
Cryptocurrency is built on a robust and innovative idea which is “blockchain technology,” the implementations of which are yet to be explored. The principles behind blockchain have already been used in manufacturing and financial industry, so once applied to other systems like real estate, supply chain management or anything that requires a unique identifier, a high amount of security and protection for both user and vendor, the market for crypto will become more prominent which will attract more investors.
cryptocurrency, this was one major setback. The third reason that might have played a significant role could be the negativity cited in the environment after statements from very prominent investors saying, “cryptocurrency is a pure gamble and will only destroy wealth.” This played into the minds of retail investors, and they also started taking out their money from the market which led to a crash. As per the recent market trends, the first ten cryptocurrencies are turning red (i.e., have seen significant losses) - Bitcoin, Ethereum, Ripple and all other major cryptocurrencies are suffering. Most of them are at 90%+ low from their maximum rates.
Allow online payments to be sent directly from one party to another without going through a financial institution, the aim with which cryptocurrencies were introduced. If cryptocurrency can achieve this aim, it will become the mode of payment, and eventually, the demand will have to increase as well. It will also decentralize the banking system along this process which will be a massive achievement in itself. This is also the reason why many governments have tried to ban it as it will undermine the power of fiat currency - US dollar, Indian rupee and the like.
Is this the beginning of the end of cryptocurrency? Bitcoin and other cryptocurrencies like Ethereum, Ripple, Litecoin prices in 2019 have been marked by volatility which has made price prediction in short-term a bit of a challenge, even for an experienced analyst. The only way crypto-market is going to regain its composure is if institutional investors enter the market. This will create a continuous cash flow as well as give retail investors some assurance of the market. The faith of retail investors is essential for cryptocurrency’s comeback. The high volatility in today’s market is because cryptocurrency is still at its initial level. This brings us to the second point that states why cryptocurrency will bounce back.
As early as 2013, Bitcoin was "banned" by the Thailand government. Then in 2017, it came as big news when China banned Bitcoin, and the latest news carries a ban by the RBI (Reserve Bank of India). The problem is this news is not appropriate because it is simply [21]
FINGYAN
NIVESHAK | JANUARY 2019
not possible to ban Bitcoin or any cryptocurrency for that matter. They do not fit into traditional regulatory or banking framework. The reason is that these cryptocurrencies that run on blockchain technology are decentralized, meaning they do not run on any server or URL or IP address. These virtual currencies run on multiple nodes which are spread across the globe and can be run by anyone with internet access. This is similar to a torrent for example. If I hold Bitcoin in my wallet and transfer it to another wallet, the government cannot block it because the entry of the transfer is recorded in a distributed ledger.
Many governments have tried and failed, and in 2018, it is accepted that there will be regulations rather than bans. Another major element which is not getting highlighted as of now is the fixed supply 21 million BTCs which will play a significant role in price determination in the future. As economies of scarcity will come into the picture and somewhere down the line demand for Bitcoin will increase, the limited supply will play its hand, and the rate will automatically go up. Experts would prefer to make predictions over a longer period. While the current reality of cryptocurrency may suggest some glooms, it’s worth remembering that the heights achieved last year came amidst similar conditions along the way. Also at this stage, Bitcoin and other cryptocurrencies prices will be significantly affected by speculations. Even small statements by governments or any organization will affect the prices, but the factors stated above will be the key to determining the future of cryptocurrencies.
However, statements like these have led to a deteriorating image of cryptocurrencies which have led to a loss of trust of retail investors. For a fact, countries like Venezuela have started to come up with official, statesanctioned cryptocurrencies, such as Venezuela’s “Petro.” Certainly in the near future, people will realize the underlying idea of cryptocurrency and the positives it can bring for the advancement in technology.
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NIVESHAK | JANUARY 2019
CLASSROOM
BEHAVIOURAL FINANCE “Wall Street has a few prudent principles; the trouble is that they are always forgotten when they are most needed.” – Benjamin Graham We all have cognitive biases left over where we see that people many times from the earlier times since our use past performance as the leading evolution when some of the indicator for investment in securities. behaviours were beneficial and which During the bull run, markets are at full now are not. We can easily link these of momentum investing which ends behaviours with many happenings in up turning in the strategy of buying our life, and so we can connect them high and sell higher. So, we can see with our financial decision too. By that in this case, momentum investors understanding these cognitive biases, try to find the person who can pay the we can make better financial price higher than them and fool them decisions, avoid blunders and reduce and ends in a sort of gambling and risk. exposing them to torpedo stocks. Behavioural finance links all decisions Although many theories of finance outside the world of finance. It’s an have been developed around emerging subject being studied. It investors rationality like CAPM studies the influence of psychology (Capital Assets Pricing Model) or on the investors & the subsequent EMH (Efficient Market Hypothesis) effect on the markets. Its primary but with new studies, we can see that focus is on the fact that investors are the fundamental assumption of not always rational, are influenced by investors rationality has certain their own biases and lack self-control. anomalies in it. We often hear that we should buy low Although we can’t change our biases, and sell high, but it’s very challenging we can attempt to mitigate its effects. for most of us to buy low in a There are many techniques which nosediving market due to can be employed for the same to psychological factors. Let’s improve our probability of successful understand this by a practical case investing. [23]
BOOK REVIEW
NIVESHAK | JANUARY 2019
and psychological teachings related to the matter of money, given in the book.
Rich Dad Poor Dad
The book is very interesting when it tries to distinguish between the rich and the poor through their mindsets related to money matters and the education related to it that they pass on to their children, which result in their entire generations being plagued by a similar fate. The title of the book ‘Rich Dad, Poor Dad’ refers to the two male influences that Robert Kiyosaki had as a child. His own father, the figurative poor dad is a hardworking man who worked at a steady job for a living, while the rich dad is the father of a friend who ran a multitude of businesses. Most of the book is about Robert’s learning from his rich dad on how to make money and learning from the money mistakes of the poor dad on ‘what not to do’.
Rich Dad Poor Dad is a personal finance perspective book by Robert T. Kiyosaki. The book is a complete rethinking of how money works when it sees asset as something that generates cash flows and liabilities as something that uses cash flows. In that sense, one’s house is a liability and not an asset.
The book teaches six essential lessons for money making, that are: The rich don’t work for money, Why teach about financial literacy, Minding one’s own business, The history of taxes and the power of corporations, The rich invent money and work to learn-don’t work for money. Through the teachings from these six money lessons, the book at a very fundamental level tries to drive the point that one should work hard to save money and convert that money into assets which will generate further cash flows. All and all, the book is a recommended read.
The book is a perspective on overcoming psychological obstacles like fear, cynicism, laziness and arrogance to become financially prepared to actually take action and accomplish the task of making money. In that sense, the book promotes the idea, that anyone and everyone can become rich by following the investment education [24]
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