1. Don’t take very big bets
The phenomenal returns given by some cryptos in the past one year are mouth watering. Rs 10,000 invested in Dogecoin six months ago is now worth Rs 5.75 lakh. But don’t get carried away by these numbers. “Invest only what you are willing to lose,” says Vineet Nanda, Co-Founder of Globalise. Even if you have a high risk appetite, start trading with small amounts. “Don’t put more than 2% of your overall portfolio in cryptos,” advises Vikram Subburaj, CEO, Giottus Cryptocurrency Exchange. After you get familiar with the arena, read up about various coins and understand their value and prospects, before you allocate more.
2. Be ready for extreme volatility
Investing in cryptocurrencies is the best way to learn about them. But it is a high-risk high-reward game and you must be able to digest very high volatility. As the May crash showed, an overnight fall of 70-80% is also a possibility. Keep in mind that even a bluechip like bitcoin is down 48% from its April high of Rs 50 lakh. “Enter this market only if you can stomach extreme variations and the implications of an investment going wrong,” says Prableen Bajpai, Founder, FinFix Research and Analytics.
3. Use trustworthy platform
The crypto space is not regulated in India and new outfits are mushrooming every day. Though the Supreme Court has struck down the RBI ban on cryptos and the government has hinted that it will follow a calibrated approach towards regulating the industry, investors need to be careful when choosing the intermediary. “Invest through an established and trustworthy platform so that your money does not get stuck if there is a regulatory setback or the promoter company goes under,” says Vineet Nanda, Co-founder, Globalise. Keep in mind that investing through an overseas platform may require greater compliance on the tax front.
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4. Don’t act on tips without verifying
The crypto space suffers from a severe lack of credible information. Investors are dependent largely on unverified information on social media. Self-styled crypto analysts create whatsapp groups packed with their accomplices who vouch for their accuracy. These analysts trap gullible investors, first by charging a fee for the tips and then using them for their pump-and-dump operations. “As a rule, you should verify the information before you invest,” says Raj Khosla, Managing Director, MyMoneyMantra.com. “Check the market cap and trading volumes of the coin. A low market cap and insignificant daily volumes are obvious red flags,” he says.
5. Focus on bluechips
Like the stock markets, the crypto market also has bluechips, mid-caps and penny coins. Don’t get tempted into buying obscure coins just because you can get a lot of them at a low price. Bigger coins may be costlier but are more stable. In any case, you can buy in fractions so don’t worry about the price. Bitcoin is the bluechip of the crypto space and drives the overall market sentiment. “Focus on the bluechip coins like Bitcoin and Ethereum, with some of your money in emerging counters like Dogecoin and Matic,” says Gaurav Garg, Head of Research, Capital Via. Widely held coins with large market capitalisation are less likely to be manipulated than coins that are closely held by a few people, points out Nanda of Globalise.
6. Keep abreast with global developments
Even though you may be buying and selling in India, the crypto market is spread across the world. Any global development can impact prices, so one needs to be abreast with what is happening in key markets like the US, Singapore and Europe. “The crypto tax in the US was one of the reasons for crypto prices falling in May,” points out Manish P. Hingar, Founder, Fintoo. An alert investor will not get caught on the wrong foot. It helps that crypto trading is 24×7, so one can act immediately unlike stock markets where one has to wait for trading to open the next day.
Also read:
The cryptocurrency craze: Should you invest?
7. Don’t ignore the tax Be ready for extreme volatility
Last but not the least, don’t ignore the tax payable on the income from crypto trading. “Even though cryptocurrencies are not specifically mentioned in the Income Tax Act, income in any form from any source is taxable unless specifically exempted under the act,” says Archit Gupta, CEO of tax filing portal Cleartax. Cryptos are not considered currency by the RBI, so they must be treated as capital assets. “There is no judicial precedent but it can be assumed that cryptos will be treated as capital assets,” says Homi Mistry, partner at Deloitte India. This means short-term gains will be added to income and taxed at normal rates while long-term gains will be taxed at 20% after indexation. “A lot depends on the volumes and frequency of trading, which may lead to the income being treated as business income,” says Mistry.
