Cryptocurrency – Should you buy or give it a miss?
If you are an active trader in any financial instrument in India or doing your own stock market analysis, you have certainly come across cryptocurrencies. While someone in your network made hefty gains in crypto, some lost fortunes too. The question remains what should you be doing when it comes to cryptocurrencies?
Before we dig deeper, let us look at an analogy, someone contemplating serious investment in any instrument like stock market or cryptocurrency, tries to learn the ropes. The stock market beginners will explore content on stock market analysis and try to learn how to invest in stock market. Similarly, the cryptocurrency beginners try to explore data on internet or other social media channels and try to ride the bus. But is this way to get into cryptos or do you need to look this entire picture from a bird’s eye view? Let’s explore. Right from basics to where it is all headed?
So, what are cryptocurrencies? Cryptocurrency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies do not have a central issuing or regulating authority and instead uses a decentralized system to record transactions and issue new units. So instead of any physical money being carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries in an online database describing specific transactions. There are thousands of cryptocurrencies in the world today. Some of the best known include Bitcoin, Ethereum, Dogecoin, Litecoin and Ripple.
In the last few years, no investment asset has garnered more noise than Cryptocurrencies and while many of us are, still wondering whether we should invest in Cryptocurrencies or not, the fact is that Cryptocurrency today is the fourth popular investing asset among Indians after real estate, stock market and mutual funds. If we look at pure numbers, India today has the highest number of crypto owners in the world at 10.07 crore with close to 65% of those cryptocurrency investors jumping into this asset class in the last year. US comes in a distant second at 2.74 crore, followed by Russia (1.74 crore) and Nigeria (1.30 crore).
In terms of the number of crypto owners as a percentage of the total population, India stands at the fifth spot at 7.30%. The bar graph below depicts the how are top five countries placed in terms of crypto owners as percentage of total population in the country.
Ukraine ranks first with 12.73% people of the total population owning crypto followed by Russia (11.91%), Kenya (8.52%) and the US (8.31%).
So, have you missed the bus here? Or should you be continuing, if you are an active stock trader & doing your stock market analysis or for that matter, an active investor in any other financial instrument.
Well looking at the above numbers it might seem so, but not long back, the fear of Indian Government banning the Cryptocurrencies was looming over the entire crypto investor community in India. While the recent budget statement of Finance Minister Nirmala Sitharaman may have allayed some of these fears, we still do not have clarity over the future of Cryptocurrencies in India. In her budget statement, the finance minister said the transfer of digital assets and these includes cryptocurrencies – will attract a 30 percent tax. Additionally, all transfers of such assets will attract 1 percent tax deducted at source (TDS). Even gifting such assets will attract the 30 percent tax. Government has also disallowed the loss from crypto-trading from being adjusted with any other income or being carried forward to the next year.
While some may term these statements as an indication of Government recognizing Cryptocurrencies, others may look at it as a form of discouragement from investing into this asset class.
Even if we look at the Crypto regulations in some of the most powerful economies in the World, the signals that we get can best be termed as “Confusing”. Despite a large number of cryptocurrency investors and blockchain firms, United States hasn’t yet developed a clear regulatory framework for the asset class. The US Securities and Exchange Commission (SEC) — the most powerful regulator — typically views cryptocurrencies as securities, while the Commodity Futures Trading Commission Calls Bitcoin a commodity, and the US Treasury calls it a currency.
The United Kingdom’s approach to cryptocurrency regulations has been measured. Although UK considers crypto assets as property, it has no specific cryptocurrency laws and cryptocurrencies are not considered as legal tender.
While United Kingdom still has a measured approach, Cryptocurrency is legal throughout most of the European Union, although exchange governance depends on individual member states. Meanwhile, taxation also varies by country within the EU, ranging from 0% to 50%.
If we come closer to our neighborhood, China’s dealings with cryptocurrencies, is an interesting story to follow. While the country was initially welcoming to all crypto-related activities, of late its stance towards cryptocurrencies is the most hostile among all powerful economies. Last Year People’s Bank of China (PBOC) banned crypto exchanges from operating in the country, stating that they facilitate public financing without approval. Moreover, China has also banned the mining of cryptocurrencies, leading to about a 40% fall in global mining operations.
In addition to all the regulatory confusion, another thing that keeps the Traditional Investors at bay from investing in Cryptocurrency is the Volatility of its market value. All cryptocurrencies experience huge fluctuations in their valuation. If we have a look at the last year’s price fluctuation of Bitcoin, the world’s largest and oldest cryptocurrency, it touched a low of $31,000 (around ₹ 23 lakh), losing more than 50 per cent from its all-time high of $64,000 (roughly ₹ 48 lakh) in mid-April. The market has recovered since, but the volatility persists.
The Price of any commodity is driven by the supply and demand equation. Bitcoin’s market value is primarily affected by how many coins are in circulation and how much people are willing to pay. The total number of Bitcoins that can be mined is pre-determined in the protocol at 21 million. So, when more people join the industry, there is bound to be scarcity for Bitcoin and its price may skyrocket. Another factor, which effects the Crypto price, is the action of Large Holding, wealthier investors called Whales. If these Whales start selling their Cryptocurrency holdings suddenly, prices would plummet as other investors would panic as well.
Since there is nothing intrinsically valuable backing up the currency, the market value of cryptocurrency is largely based on speculation and it takes even a single tweet from Elon Musk to make the Cryptocurrencies swing like crazy. Cryptocurrencies within a short term can create a Pauper out of a Prince and even the vice-versa is true
Now with all this information in the back of our heads, the obvious question is what should be our approach? So, if you are an existing investor in Cryptocurrencies, you can either test the waters and hold on to your investments in expectation of a Bright Future or you can look at booking profits or losses before March 31,2022 as the new provision to tax cryptocurrency gains at 30 percent will only come into force from April 1, 2022. Therefore, it will not affect those who sell their crypto holdings this financial year. But if you are still pondering over whether to invest in Crypto or not, you may want to wait for things to become clear before you move your hard-earned money in Cryptocurrencies, especially when there are better asset classes available to invest in. The recent slump in the stock market ( Read more about it here) has created excellent opportunities to invest in the fundamentally strong stocks / companies you had earmarked for a long time. However, if you do not know how to do stock market analysis, and if you are not very sure of what to buy-at what point -whether to hold or sell, the experts at Adwizon can hold your hand in making these informed decisions. You can also download their android app where you can connect to professional technical research analysts in market hours to get your queries answered.