Bitcoin and other cryptocurrencies: To invest or not to invest

Amar has invested in stocks and digital gold, but now he is considering investing in Bitcoin. “I have heard so much about Bitcoin lately, but I do not know anyone in my friend or professional circle who has invested in the cryptocurrency. However, I would like to invest,” he said with apprehension.

The Indian youth and veterans in investments have been a little, if not much, curious about the rise in cryptocurrencies. And, after reaching an all-time high, with Bitcoin prices witnessing a drop recently, several like Amar, who were showing keen interest in the virtual currency, are now taking a step back. While volatility is one major concern of this virtual currency, the other major concern for the Indian investors is the lack of regulation in this space.

“It is a self-regulated space,” said Sanjay Khan, Partner, Khaitan & Co. The uncertainty in regulation can be a real turn off among investors who wish to diversify their portfolio. “Maybe having some regulatory framework will lead to a surge in demand for cryptocurrencies in India.” According to a report, there were around 50 lakh traders and users of cryptocurrency in India in 2018.

Ban to unban journey

In 2018, Reserve Bank of India (RBI) barred banks and other financial institutions from facilitating “any service in relation to virtual currencies.” In March 2020, the Supreme Court quashed the RBI curb. Jaideep Reddy, Technology Lawyer at Nishith Desai Associates, who represented the IAMAI in its writ petition against the crypto banking restriction by the central bank, said, “It is legal to trade cryptocurrency in the country. However, generally applicable laws like foreign exchange and tax laws also apply so people should comply with them where applicable.” It is more like trading a stock, buying gold or other commodities. It is used as an investment option and not as a currency to buy or sell goods.

Demand surges

Despite the ban, India witnessed a steady rise in demand for trade in cryptocurrencies. However, retail investors who burnt their fingers due to this ban are sceptical of taking this investment route again. “I did not invest in Bitcoin, but my friend did. We both had planned on investing together (in 2018) however, I backed out. Soon after the ban was imposed on banks, he knew he had made a risky investment and the revival of money will be tough. But he felt India cannot ignore such an asset class and ban had to go,” narrated Sita K. In 2018, the lowest value of one Bitcoin (BTC) was around Rs 2.60 lakh and had peaked around Rs 10 lakh since. Recently, one BTC touched an all-time high of around Rs 29.84 lakh.

Many in the industry expected the surge in cryptocurrency in 2021 as investors were looking at diversifying their investment options. The surge in adoption of crypto payments across sectors such as retail, banking, IT, and gaming, among others, will further amplify the demand for cryptocurrencies. “In 2021, we can expect a significant surge in investment banks embracing this ecosystem, payment service providers putting their trust and even large-scale investors investing in cryptocurrency. On the other hand, cryptocurrency is going to become the digital gold for millennial investors as more of them move towards alternative investment class and cryptocurrency, especially Bitcoin,” said Monark Modi, Founder and CEO, Bitex.

The value of Bitcoin is higher compared to other cryptocurrencies like Ethereum, Ethereum 2.0, Ripple, Litecoin, Bitcoin cash, XRP and others. The rise in value of Bitcoin has also helped the rise in value of other cryptocurrencies. “The increased seriousness instilled by Bitcoin among investors to seek a decentralised alternative asset has surged the demand for cryptocurrencies, such as Ethereum and Ripple amongst others.” Monark Modi said, “Collectively, we (Bitex) have global trading volumes of nearly USD 1.2 Million, of which Bitcoin constitutes 60 per cent of the volume.”

Better safe than sorry

Trading for cryptocurrency within the country’s borders is easier for Indian investors; cross-border transactions for them may not be that easy. One investor said, “The grey area in cross-border transactions in India has led to the purchases of cryptocurrencies at higher value whereas the sales value is not as per the other countries.”

Cryptocurrencies traders have themselves embedded various red flag indicators and parameters, such as transaction types, transaction patterns, source of funds, and anonymity, on our platform that can detect any fraud transactions. In an event of any withdrawal or transfer of any cryptocurrency that does not adhere to the Anti-Money Laundering (AML) policies, it faces scrutiny by the regulatory authorities. “We also let the customers know immediately once the transaction is red-flagged and any additional details required to complete the transaction are requested from them. In cases when a transaction is red-flagged, the funds are withheld by our wallet until the concerned customer provides for valid information for secure transfer of their cryptocurrency,” stated Modi.

Tips before investing in cryptocurrencies

  • Evaluate the risk while dealing in a volatile new asset class.

  • Observe the price trends.

  • Know Anti-Money Laundering (AML) policies.

  • Understanding technical indicators before investing in cryptocurrency.

  • It is not a legal tender but one can trade it legally in trading platforms.

  • Cross-border transactions have to be done very carefully.

  • The lack of an appropriate classification of this asset class.

  • Invest in understanding tax liability.

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