Investing in Cryptocurrency
This article helps explain the intricacies associated with investing in cryptocurrency.
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Open FREE* Demat Account25 Jan, 2022
6 min read
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If you are holding cryptocurrency or have been developing an interest in investing in cryptocurrency, you should keep abreast with local regulations and headlines around it. For instance, you have probably heard all the noise around the possibility of a government ban (and the possibility of no government ban) on cryptocurrency; and the token-dumping that took place in the aftermath of these headlines. If you haven’t had the time to wrap your head around it, but are interested in cryptocurrency as an investment avenue, this post will give you all the necessary insights, in a nutshell.
Cryptocurrency investors and enthusiasts in India have had a worrisome second half of 2021. In May this year, the RBI sent a directive to banks to be “wary” of crypto exchanges. And only earlier this month, there was news that the government was planning “general prohibition on all activities by any individual on mining, generating, holding, selling, (or) dealing” in digital currencies as a “medium of exchange, store of value and a unit of account”
Moreover, the bill proposes that flouting the rules (if the bill is passed and becomes law) would be a cognizable and non bailable offence - which means that you could get arrested and imprisoned for breaking the rules related to cryptocurrency.
Meanwhile, the RBI has proposed that cryptocurrency should not be banned, but should be treated as an asset. The central bank has recommended that the Securities and Exchange Bureau of India (SEBI), or the stock market regulator, should also regulate cryptocurrency.
Bottomline: They haven’t arrived at a conclusion yet and therefore, as of now, cryptocurrency is not banned.
You cannot use cryptocurrency as “legal tender” or in layman terms, like money, in India as of now. Only Indian currency is to be used to pay for items in India.
It is still legal to buy and sell cryptocurrency. The best way to go about it at this time might be via a crypto exchange, given the RBI circular to banks in May. The circular has resulted in a lot of banks not accepting payments towards crypto exchanges.
It is legal to mine cryptocurrency at this point of time, but miners might want to consider limiting their input costs until there is more clarity on whether the bill is going to become a law and whether cryptocurrency is going to be banned. If you have already invested, mine away.
Investors should definitely seek personalized pointers and options from their financial advisors on how to proceed in the current environment.
Investors who have achieved their target price might want to consider exiting. This is generally good advice to any investor in any dynamically priced asset. You enter with a target price in mind and once you achieve your target price, you exit -without letting greed take over the driving seat - and take home your targeted earnings. The idea is that you avoid losing out on the high in case the price drops suddenly, resulting in the investor having to settle for lower earnings than if he had exited as planned.
Investors who have witnessed a drop in the price since they invested might want to consider their risk appetite and decide whether they can wait for the price to rise to their target.
Investors should ideally avoid dumping tokens in a panic because the government will give them time to declare and redeem cryptocurrency assets, and if the bill does not become a law, they might be able to continue with their investment journey/ strategy as planned. Panic drives prices of stocks, commodities, currencies and cryptocurrency down. Investors are typically better off waiting for the panic to die down, and for prices to return to normalcy.
Moreover, the cryptocurrency rates are impacted not only by India but by the rest of the world and could potentially rebound soon; perhaps even before the ruling on the bill comes through. Investors might therefore have time to exit (or even enter and exit) with earnings. However, this depends on their understanding of the cryptocurrency market dynamics and how the pricing of their chosen currency works and how well they time their entry and exit, relative to their risk appetite.
It is still legal for you to invest in cryptocurrency if you desire to. It is also still legal for you to hold assets. Consider your risk appetite and seek financial advice before buying cryptocurrency or selling any cryptocurrency that you might already hold.
Disclaimer: Angel One Limited does not endorse investment and trade in crypto currencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.
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