Bank deposits are one of the oldest and most trusted financial instruments of all times. Before assets like stocks, mutual funds, etc. came into existence, everyone parked their savings in Deposits to earn interest as income. But today, there are various options for investors to choose from to grow their wealth.
Bitcoin is one such new asset class that is becoming very popular recently. It was introduced in 2009 by a cryptographer named Satoshi Nakamoto as an alternative to the current financial system. It is the first and the most valued cryptocurrency which has given multiple folds returns to its pioneers.
Background: Bank Deposits and Bitcoins
Bank deposits are investment instruments offered by banks and financial institutions.
Just like we pay interest on loans, the banks pay a certain amount of interest on the money deposited with them. The Reserve Bank of India predetermines the interest rate and tenure of the investments. There are two widespread Bank deposits.
- Fixed Deposits: It is just like keeping your money in a savings account. The difference is that the amount will be fixed, and you cannot withdraw until maturity. It also offers higher interest than savings accounts.
- Recurring Deposits: It is the same as the Fixed Deposit scheme, except you have the option of depositing a fixed sum of money periodically.
Bitcoins are a type of digital currency.
In other words:
It is available only digitally and not physically. Bitcoins are based on cryptography and are supported by blockchain technology. It is decentralised, i.e. no individual or entity can have power over this type of currency.
Bank Deposits vs Bitcoins
|Risk Involved||Low Risk||High Risk|
|Return on Investment||Low Returns, i.e., the interest rates after-tax, does not even beat inflation.||Enormous Returns, i.e., more than 100% in the last year|
|Regulatory Body||Reserve Bank of India||Decentralized|
|Security||It depends on the bank in which the deposit is held.||Secured by Blockchain Technology|
|Type of Asset||Traditional Asset||Alternative asset|
|Maintenance||Low maintenance. Once deposited in the bank, no need to monitor.||High Maintenence. Once it is purchased, you need to track the markets regularly.|
|Type of Investors||Conservative and risk-averse investors||Risk friendly and growth investors|
|Knowledge Required||Basic knowledge to operate a bank account.||Knowledge of the technology and how the market works.|
Comparison of ROI
Bank deposits are a traditional investment vehicle and move in line with the economy of our country. These deposits come with a predetermined lock-in period and offer a fixed interest rate. Most banks pay an interest of ~6%-10%.
The capital is insured by a subsidiary of the reserve bank of India for up to 5 lakhs. Meaning, there is a guarantee that your money will be returned to you even if the bank goes bankrupt.
The interest rate offered varies depending on the bank in which the deposits are made. However, the base rates are determined by the RBI. Every time the government cuts interest rates, the interest offered on the deposits is also cut down. Recently, the interest rates have been tumbling due to the economic crisis.
Income from bank deposits is subject to tax. It means the interest income will be added to your taxable income. On average, after deducting taxes, the returns from deposits generally fail to beat inflation also.
On the other hand, Bitcoins are an alternative asset. Since its inception, bitcoins’ price has risen to heavenly heights of nearly 9,00,000% in just ten years. Check how much they are worth here BTC to INR.
The bitcoin market is highly volatile, and the prices fluctuate many times a day. It is considered a high-risk asset. However, the potential returns are exponential when compared to other instruments. It is priced is based on demand and supply factors.
On the supply side:
Bitcoins have been designed so that we can mine only 21 million of them in total. i.e. a total of only 21 million bitcoins are available. We can even mine more gold if we have the funds, but there are no chances to create more Bitcoins. This makes them a highly scarce currency.
The demand for bitcoins has been skyrocketing in recent years as more and more people realize that humanity is dealing with such a scarce asset. Even institutional investors are adding bitcoins to their portfolios as a hedge against inflation. If you feel you are missing out, you can buy bitcoin here.
With more awareness of cryptocurrency, the demand for it may only keep increasing with more time.
Which Is Better And Why?
Bank deposits are a safe place to keep your savings, but the returns generated can be significantly low. If you happen to fall under a higher tax bracket, it may not be a feasible investment for you.
Bitcoins are a risky investment and require you to possess some knowledge of the markets and their underlying technology. However, if you are risk-friendly and are looking to grow your wealth enormously, Bitcoins may be the perfect fit for you.
In my opinion, it is best to have a mix of both and a few other investments such as stocks, bonds etc. Because diversifying your investment allows you to stay protected from economic downfalls.
I have merely laid out the facts for you. It is in your hands to decide which instrument suits you best.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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