It was a midsummer nightmare for investors like Tyagi. Within a week starting 13 May, the value of his crypto holdings crashed by more than 60% from around Rs 55,000 to less than Rs 20,000 as panicky investors rushed to sell their coins. “Elon Musk acted irresponsibly without concern for the millions of investors who would be impacted by such decisions,” he says glumly.
Did you know?
- $1,635 billion is the estimated market capitalisation of all cryptocurrencies. Bitcoin’s market cap of $674 billion (Rs 50,57,561 crore) is more than three times India’s most valuable company Reliance Industries (market cap Rs 14,11,500 crore).
- Rs 1,000-1,500 crore is the combined daily turnover of crypto trading in India. This is less than 1% of the Rs 2,00,000 crore daily trading volumes of stock exchanges in India.
- 10-12 million is the estimated number of active investors and traders in cryptos in India. This is 16-20% of the 60 million active stock investors and traders in the country.
- 24×7 trading takes place in the cryptocurrency market. The market is open even on Sundays and holidays, unlike the stock and bond markets in India that open at 9 am and close at 3.30 pm and are closed on weekends.
- 40-50% was the decline in crypto prices after Elon Musk tweeted that Tesla won’t accept payments in Bitcoins and expressed concern over the environmental impact of crypto mining.
Tesla’s U-turn on cryptos was not the only trigger. Around the same time, the Chinese government had cracked down on institutions dealing with cryptocurrencies. These two developments triggered panic selling in cryptos. “Apart from panic selling, many investors chose to book profits at this stage, which led to a steeper fall in crypto prices,” points out Nischal Shetty, CEO and founder of WazirX, a crypto exchange set up in 2018.
Also read: Why this crypto market correction is healthy
Crypto prices have zoomed in the past 12 months, churning out mind-boggling returns for investors. Even after the recent decline, the price of a bitcoin is nearly 400% of what it was a year back. Some smaller coins like the Dogecoin is trading at 140 times its June 2020 level while Matic Network has risen by over 7000%.
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Data as on 8 Jun 2021 | Sources: Investing.com, Binance
Lured by high returns
These enormous returns have attracted investors to what crypto evangelists term as an emerging asset class. There are almost 12-15 crypto exchanges functioning in India and estimates of the daily trading turnover range from Rs 500 crore to Rs 1,500 crore. Big as it may sound, this is less than 1% of the Rs 2,00,000 crore daily turnover on stock exchanges in India.
Shetty admits that the daily turnover is low, but points out that the number of investors is far bigger. He estimates there are more than 10-12 million active investors trading in cryptocurrencies on the dozen-odd crypto exchanges in India, which is about 16-20% of the estimated 60 million active stock investors.
These figures suggest that the average crypto investor is not very deep pocketed. Even so, he is able to trade because cryptos can be bought and sold in fractions. One bitcoin is priced at close to Rs 27 lakh and ethereums are priced at Rs 2 lakh. But you can buy a fraction of these coins with Rs 50-100.
Such rules have made crypto trading easy and spawned a new breed of traders with traits that traditional investors would frown upon. These investors are young, easily influenced by social media and willing to take high risks. Their impatience to get rich has compressed investing horizons. “I want to invest for the long term,” says a seemingly sagacious 26-year-old Vikram Chaddha. Then he adds, “I’ll hold for 2-3 months.”
The trading hours of the crypto market add more craziness. The exchanges are open 24 hours a day, seven days a week. No holidays, no weekends. You can trade throughout the day and night. As one stock trader joked, “Now we can lose money on weekends as well.”
Meet Rajesh Rupala, a 31-year-old investor based in Bhavnagar in Gujarat who left a job at a bank to turn into a full time stock trader last October. Four months ago, he was introduced to cryptos and got hooked instantly. Rupala has almost Rs 12 lakh (25% of his total investment portfolio) invested in this highly risky but also rewarding option.
Facing multiple risks
Investors like Rupala are not bothered that cryptocurrencies face multiple risks. Firstly, there is the systemic risk. Cryptos are very volatile instruments and can move very quickly and without any warning.
“There is a second layer of risk from the regulatory ambiguity, cybersecurity threats, and the uncertainty about their acceptance in mainstream finance,” says Prableen Bajpai, Founder of FinFix Research and Analytics. Three years ago, the RBI had virtually banned cryptos when it asked banks and fintech companies to stop providing services to entities dealing in virtual currencies. But last year, the Supreme Court struck down the RBI’s ban, saying that cryptos were unregulated but not illegal.
This is hardly reassuring. If a stock investor has a grievance against a company or an intermediary, he can approach the Sebi and the complaint is redressed as per the codified rules. But in the absence of regulations for cryptos, the investor will probably need to go to the cybercrime cell or move a court. “This is why regulation is important. Right now self regulation is being done at the industry level but we want the government to define the rules and appoint a regulator,” says Shetty.
Crypto investors also face the risk from unscrupulous promoters and shady outfits. It’s a landscape littered with stories of scams and frauds. “Given the paucity of credible information and dependence on social media, there is very high risk of price manipulation,” says Gaurav Garg, head of research, CapitalVia Global Research.
Manipulation is also possible because many cryptos are not very widely held. “There is a concentration risk if a few investors hold very large quantities of a certain coin,” says Vineet Nanda, Co-founder, Globalise. As the May crash showed, if one tweet can bring down the price by 40-50%, there is a high risk of price manipulation.
Too big to shut down
Many investors find comfort in the numbers. The crypto industry has become gigantic in the past few years. The market capitalisation of Bitcoin alone exceeds Rs 50 lakh crore, making it bigger than the combined market cap of the six largest stocks in India, including Reliance Industries, TCS, HDFC Bank, Infosys Technologies, Hindustan Unilever and HDFC. Ethereum market cap is equal to the next six stocks. So, the two biggest cryptos are bigger than the 12 biggest stocks in India. “How can any government close down something that has attracted so much investment,” asks Arun Shivshankar, a 22-year-old medical student based in Vellore. Shivshanker dabbles in cryptos after he’s done with college.
Stakeholders in the crypto ecosystem too are confident that the government will not ban virtual currencies. In fact, the government is planning to create a sovereign digital currency of its own. “Nobody is thinking about banning them because it is virtually impossible. The other reason is that the tech is actually good. It is so beautiful that it will find a way to grow in future. And when that happens and a nation is not a part of it, it will just lose out,” says Vikram Subburaj, CEO & Co-Founder of Giottus Cryptocurrency Exchange.
Cryptocurrencies are risky, but if you are careful and understand the market, they can also be very rewarding.
Also read: Seven rules of cryptocurrency trading for new investors
