Bitcoin: Beyond Payments and Capital Appreciation—Is There More to It?

Introduction

With all the chatter about Bitcoin halving, Bitcoin crossing $100k, MicroStrategy and governments stockpiling Bitcoin, and even Donald Trump launching his own meme coin, one thing has become clear: cryptocurrency and blockchain technology are here to stay.

But how do we navigate this rapidly evolving, uncharted, and largely unregulated space? We could choose to stay away until governments step in with regulations and risk missing out on the chance to turn a small investment into exponential gains. Or, we could embrace the available technology, stay proactive, increase our risk appetite, remain skeptical, and do proper due diligence before investing. After all, we don’t want to be the next generation’s equivalent of, "Kaash uss time dadaji ne plot khareed liya hota."

But hold on—this isn’t a post about convincing you to invest in Bitcoin or crypto. This is about something different. Something beyond just trading profits or decentralized payment systems. This is about protecting yourself from the effects of rising inflation. And no, I’m not talking about Bitcoin’s limited supply.

This is about hedging against the depreciation of the INR against the USD. As the rupee weakens, imports become costlier, and while exports may benefit, the rising costs of goods in the Indian market could hit us hard.

Bitcoin, in this case, could act as a shield.

Curious to know how? Keep reading!

Types of Exchanges

To grasp the current cryptocurrency investment landscape, it’s essential to understand how the system operates. Broadly, there are three types of exchanges:

a) Universal Exchanges : These platforms allow you to purchase cryptocurrencies directly using payment methods like cards, UPI, or NEFT. They facilitate real-time conversion of INR to USD (or whatever currency is native to them), enabling you to buy the desired cryptocurrency seamlessly.

b) Mediator Exchanges : These exchanges act as intermediaries by purchasing cryptocurrencies from foreign exchanges (primarily in USD, US being the largest active market) and holding them in their custody. They allow users to trade these cryptocurrencies using local currencies like INR. To maintain liquidity and optimize financial benefits, they buy or sell cryptocurrencies on foreign exchanges based on investor behavior and demand.

c) Platform Exchanges : These exchanges primarily function as trading platforms for investors. They provide a space for users to buy and sell cryptocurrencies without directly involving themselves in the trading process or holding custody of assets.

Forex Hedging Mechanism

From the explanation above, it’s clear that regardless of the type of exchange we use, there’s a strong likelihood that cryptocurrency transactions involve the USD-INR conversion rate, either directly or indirectly. This makes cryptocurrency comparable to assets like gold, silver, artifacts, or paintings—holding inherent value and convertible into any fiat currency.

This raises two key questions:

a) Why use cryptocurrency for hedging?

b) How does it work?

Let’s break it down:

a) Why use cryptocurrency for hedging?

The answer lies in three key points:

1. Many countries restrict individuals from holding foreign currencies.

2. While Forex futures contracts exist, they have a limited lifespan, requiring frequent creation and execution of positions.

3. Money is typically defined by six properties: durability, portability, divisibility, uniformity, scarcity, and acceptability. Most cryptocurrencies satisfy most of these criteria, and some fulfill all of them.

   
   

b) How does it work?

Let’s illustrate this with an example:

Consider two individuals—A from the US and B from India—who purchased Bitcoin in 2016 at ~$950 and sold it in 2024 at ~$100,000.

For A (US):

• Purchase price: $950

• Sale price: $100,000

• Profit: $100,000 - $950 = $99,050 (~10,426% profit)

  
  

For B (India):

• Exchange rates: USD-INR was 68 in 2016 and 85 in 2024.

• Purchase price: $950 x 68 = INR 64,600

• Sale price: $100,000 x 85 = INR 85,00,000

• Profit: INR 85,00,000 - INR 64,600 = INR 84,35,400 (~13,058% profit)

  
  

This means B benefited from an additional ~25% gain purely due to Forex movements, highlighting how cryptocurrency can act as a powerful hedging tool against currency depreciation.

Outro

As we’ve explored, cryptocurrency isn’t just about speculative trading or decentralized payment systems—it holds the potential to act as a hedge against economic challenges like inflation and currency depreciation. By understanding the mechanisms of exchanges and leveraging opportunities like Forex hedging, individuals can position themselves to protect their wealth in a rapidly changing global financial landscape.

However, it’s important to approach cryptocurrency with caution, awareness, and thorough research. The market is volatile, unregulated in many regions, and requires a strong grasp of the risks involved. Whether you’re a seasoned investor or a curious beginner, the key lies in staying informed and making calculated decisions.

In the end, Bitcoin and cryptocurrencies may not be a guaranteed path to riches, but they do represent a powerful tool for financial diversification and resilience in an uncertain economic climate.

Thank you for reading!!! If you have any thoughts, feedback, or insights, feel free to share them in the comments. Stay curious, stay informed, and happy investing!

PS: This post was paraphrased and refined using ChatGPT for improved readability and clarity.

Disclaimer: The views and opinions expressed in this content are solely my own and are based on my understanding and perspective at the time of writing. They may not fully align with actual circumstances or scenarios, which are subject to change over time. This content is intended for informational and educational purposes only and should not be construed as financial, investment, or professional advice. Always conduct your own thorough research and consult with a qualified professional before making any decisions or taking action based on the information provided here.