Bitcoins, which have long faced questions around their legality, are gradually gaining acceptance across the world. The Philippines and Japan legalised it earlier this year, and Australia recently confirmed it will treat the cryptocurrency “just like money.” In India, however, lack of regulatory clarity has been a dampener, keeping investors and market participants away. But Sandeep Goenka, co-founder and COO of Ahmedabad-based bitcoin exchange Zebpay, believes things are set to witness an overhaul. In an interview with VCCircle, he says the narrative will soon change from legality of bitcoins and virtual currencies to how we can use them to protect the country’s financial infrastructure. He also talks about Zebpay’s growth plans, and busts many a myth around the virtual currency. Excerpts:
How does a bitcoin exchange work? Can you explain the pricing dynamics?
There are four-five stakeholders in the ecosystem, viz. miners, exchanges, wallet providers and blockchain applications. The exchange is the first infrastructure that needs to be built, just like you need the stock market to invest in equity. A virtual currency exchange provides value to the currency, and these digital tokens are ‘revenue’ for other players in the ecosystem.
As for pricing, bitcoins have historically seen massive appreciation. Since global supply will be limited to 21 million units till 2040, demand is high and prices keep on rising.
There is a perception that bitcoin prices should be the same universally. But prices on any exchange are simply a function of demand and supply. International prices are reference rates, and our price is Rs 20,000 higher. But, then, our sale price is also higher than the international price. My users are aware of this and they are willing to buy.
Prices in South Korea are highest in the world. When bitcoin touched its all-time high of $2,700, in South Korea it was trading at $4,000. On an average, prices vary by $300-400 across countries.
What’s the revenue model of bitcoin exchanges?
There is a spread between the buy and sell rates. We buy at low costs and sell at high prices. Exchanges are the first in the ecosystem to go profitable. Zebpay, for example, started making money in six months.
What kind of traction are you seeing in India?
We started about two years ago, and we are the largest bitcoin exchange in India. We have around 70% market share. We have grown from three partners to 50 people now, and have 25-30 people for customer support. In fact, the Zebpay app recently crossed 7.5 lakh downloads. We are adding 1.5 lakh users every month compared to the 1,000-2,000 we were adding initially.
In FY2016-17, we clocked gross merchandise volume (GMV) of Rs 1,200 crore. As the market touches new highs, we expect to do Rs 5,000 crore in GMV in the next fiscal. Our revenue is 1-2% of the total GMV.
Where do Indian bitcoin startups stand in comparison to their US counterparts?
We are at least 2-3 years behind. Currently, the entire industry across the three exchanges (Zebpay, Unocoin, and Coinsecure) is doing Rs 50 crore a day, which is peanuts compared to numbers in the US. In fact, the US-based Coinbase is about to become the first bitcoin company in the world to be valued at $1 billion. Worldwide, exchanges are clocking over Rs 20,000 crore a day. China is posting transactions worth Rs 5,000 crore a day. Our volumes are comparable to small economies like the Philippines.
The reason we lag behind is regulatory confusion over bitcoins and perception issues. As soon as there is clarity, we will see a huge explosion in interest and usage.
How will regulation help bitcoin companies?
Bitcoins and virtual currencies are legal under existing laws. But there is a myth that they are illegal. The thing is, they are not regulated. And all parts of the ecosystem care about legality. Although the government has no regulations in this area, all exchanges ensure that people who buy bitcoins share their PAN cards and trade in bitcoin through banking channels. We don’t sell bitcoins in cash.
If bitcoin gets regulated, many other legitimate companies will enter the space. The entire ecosystem will develop much faster. Raising funds will be easier.
Regulation will also result in better user protection.
What’s the government’s stance on the issue?
The government has legitimate concerns. However, three years down the line, I think the narrative will change from the legality of bitcoin and virtual currencies to how we can use them to protect the country’s financial infrastructure. It’s just a matter of time.
In the recent ransomware attacks, where money was paid to the hackers in the form of bitcoins, there were questions around its use. Truth is, these attacks have been happening for the past 20 years. Nobody ever knew how much money IT biggies paid. In bitcoins, the ledger is public, so all transactions are open.
However, now startups that can track payments to bitcoin addresses are emerging. That will helps track down the culprits.
How capital-intensive is the business?
Starting a bitcoin exchange is more tech-intensive than capital-intensive.
A lot of investment goes into tech because it’s an absolutely new subject that uses consensus algorithm and cryptography. To get experienced engineers in this domain is tough. Finding talent is the biggest challenge.
What are your growth plans?
Zebpay is looking to expand internationally. By the end of this fiscal, we will enter Singapore, and then expand to other countries in Southeast Asia over the next two years. Today, we are among the top 30 exchanges in the world, and our goal is to break into the top 10 in the next two years.
Currently, we are headquartered in Ahmedabad. However, we are shifting the gravity of our business to Mumbai. By the end of the year, we will have a substantial presence in Mumbai.
We are adding another alternative currency, Ethereum, on our platform by August. Over past few months, it has shown tremendous growth.
What should users keep in mind while investing in bitcoins? Can you share some tips?
First, there are two types of people who invest in bitcoins. One, those who understand the technology and, two, those with herd mentality. People with herd mentality make the worst buy and sell decisions, buying at highs and selling at lows. People who understand the technology realise that highs and lows are part of the process, and that bad news is always temporary.
Second, use exchanges only to load money and buy bitcoins. And then take out bitcoins and keep it in your hardware locker. There are several independent wallet providers as well. So, even if an exchange shuts down, your bitcoins will be safe.
Third, bitcoins, like other investments, attract short-term and long-term capital gains tax. If you buy today and sell tomorrow, you will need to pay short-term capital gains tax at 30%. If you sell after a year, you’ll need to pay long-term capital gains tax of 20%. If you are a regular trader and invest in bitcoins for regular income, then you will have to pay income tax on it. Ideally, one should invest in bitcoins like one would in a systematic investment plan and hold it for a long time period. Sell it only when you need money.
Last, beware of scams. Any miner who guarantees a fixed return is trying to scam you. A lot of users fall into such traps. Mining can be a Ponzi scheme—they sometimes say buy 10 bitcoins and we will give you one extra. That’s a scam. People launching new coins (ICO) is also illegitimate. It’s simple to decide, actually. If the ICO software is open source and public, it’s a legitimate coin. But if a company launches a coin and does not hold 25%, which the industry standard is, then they have doubtful credentials.
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