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Investing in cryptos? Points you should consider

  • Marisha Bhatt
  • Jan 27 2022
  • 6 minutes
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Introduction

There are many dynamic investment options available for investors today. Stocks and mutual funds have been around for decades but the latest addition to the high-risk high-return investment category is cryptocurrencies. They have taken the world by storm in the past couple of years and have everyone talking about them. But for the average investor, cryptocurrencies are still an alien concept.

Given below are a few details of cryptocurrencies and the factors to consider while investing in them. 

What are cryptocurrencies?

Cryptocurrency is the new form of investment where the asset is in a digital form. Investors can purchase or sell the cryptocurrency from a digital platform and can use it for their online purchases, where they are accepted.

Investors can purchase coins or tokens of the cryptocurrency of their choice and it is stored in a digital wallet which can be accessed using a private key. If the owner does not have the private key, then they cannot access the currency for any purpose. The USP of cryptocurrency is that each coin of this currency is a unique digital code that cannot be copied or altered. This makes it easier to identify and track on the trading platform. However, it is important to understand that it is an extremely volatile mode of investment and is not recognized as legal tender nor is regulated by the Central Bank or market regulators like SEBI, etc in many countries. 

How to buy cryptocurrency?

Cryptocurrency can be bought and sold on an exchange similar to the stock market. Like stock markets have brokers, crypto markets have facilitators. The exchanges charge nominal fees or commissions for every transaction on their portal. Although cryptocurrency is not a recognized legal tender in India, there are multiple crypto portals in India like WazirX, CoinDCX, Coinswitch Kuber, and Unocoin. These portals require the users to sign up with valid KYC details and download the app to trade on cryptocurrency. 

These portals also help the users monitor the value of the cryptocurrency and trade in it. Users can also buy cryptocurrency in smaller fractions. This means that if the user is not capable of buying the entire coin or token, they can buy it in fractions which is not the case with shares or mutual funds. 

What are the key factors to note while investing in cryptocurrencies?

Investment in cryptocurrencies is gaining momentum in recent years and is only going to increase. 

  1. Take small bets

Cryptocurrencies are capable of giving phenomenal returns but they are also quite volatile. Hence, it is important to have caution while investing in cryptos. Most experts believe that it is prudent to invest in small amounts and invest only surplus funds. Also, investment in cryptos should be restricted to up to 2% to 5% of the entire portfolio.

  1. Be ready for high volatility

Volatility is a huge part of investment in cryptocurrency. Hence, it is ideal for only investors with a high-risk appetite. The markets were riding high till April and the most premium crypto ‘Bitcoin’ had reached an all-time high of Rs. 50,00.000. However, the markets crashed quite soon and the same coin was traded at a 48% down value than its high. Thus, investors should be ready for this volatility while investing in cryptocurrencies. 

  1. Ensure investment in crypto through a trusted platform

Cryptocurrencies in India are decentralized which means there is no formal Act or regulation in place to govern the buying and selling of the crypto. The Supreme Court has not restricted the trading in cryptocurrency and the Parliament is also in process of launching the bill that can govern digital currency. In the meantime, trading in cryptocurrencies should be done through designated platforms. This will ensure that their investment is not stuck in any regulatory complication or the funds are not lost.

  1. Focus on bluechips initially 

Cryptocurrencies like stocks also have bluechip currencies, i.e., digital currency that is relatively more stable even though it is costlier. Bitcoin is considered to be a bluechip in the crypto market. It drives the crypto market and the prices of cryptocurrency in general. Bitcoin is quite costly as compared to other emerging cryptocurrencies like Dogecoin and Matic. However, the former with a large market capitalization cannot be manipulated easily. 

  1. Be aware of the tax rules

There are no clear taxation laws laid out for cryptocurrency. However, the Income Tax Act states that any income generated from any source is taxable in the hands of the assessee unless it is specifically exempted. Therefore, it is safe to assume that any income or profits from cryptocurrencies like shares, mutual funds, and other similar securities will be treated as capital gains and taxed accordingly. Therefore, unless it is specified, short-term gains will be taxed at applicable slab rates and long-term gains will be taxed at the rate of 20% after indexation. Hence, investors need to consider the tax implications while investing in cryptocurrencies.

  1. Take the latest developments into consideration

One of the most crucial aspects of investing in cryptocurrencies is being aware of the latest developments as they can impact the prices dramatically. Cryptocurrencies like stock markets are also impacted by global news and therefore, it is important for investors to keep an eye on any crucial development that can sway the crypto prices. This will give them a chance to maximize their profits and at the same time limit their losses by acting immediately on any news. 

Conclusion

Cryptocurrencies, although new, are here to stay for the near future. It is a booming market with a global reach and has the potential to give 

1. What are some of the popular cryptocurrencies available in the market?

Some of the popular cryptocurrencies today are Bitcoin, Dogecoin, Litecoin, Polkadot, Mooncoin, Shiba Inu, etc.

2. Why is the private key relevant?

Private key is the key that is available with every valid owner of cryptocurrency. Without the private key, the owners will not be able to access their cryptocurrency for any purpose like trading it or using it for any online purchases.

3. What are the advantages of cryptocurrencies?

Some of the key advantages of cryptocurrencies are mentioned below.

a. Cryptocurrencies are online transactions that cut out the middleman and provide better tracking and accountability of transactions.

b. The transactions on the recognized portals are secure and the various encryptions placed, protect the assets and the identity of the users. 

c. Cryptocurrency has a global reach and therefore is an excellent tool to plunge into international trade.

d. The transaction fees for cryptocurr4encies are nominal in comparison to the potential returns.

e. Cryptocurrencies also provide a greater sense of ownership as unless delegated, the private key and the public encryption key belong to the owner alone. 

4. Who regulates cryptocurrencies?

Cryptocurrencies are a decentralized form of digital asset that is not regulated by any Central Government or an Act or special body like SEBI.

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