Should clarity on taxing cryptocurrencies push you into trading in them?

A flat tax of 30 percent has been proposed on gains made on all digital assets including cryptocurrencies such as Bitcoin in the Budget. It seems as though the government has finally accepted the reality that digital assets (and cryptocurrencies) are here to stay. Though a high rate of taxation (similar to that of speculative income such as from lotteries) is being frowned upon, the taxation does change the perception of this space for the better.

So all said and done, should you now invest in cryptocurrencies?

Most people dabble in cryptos with just a few thousand Rupees to test waters. But very few are serious about it.

So, is the new taxation a clear indication by the government that one can begin investing in cryptos with the same seriousness that we give to established assets like equity, debt, gold and real estate?

I think it is still early to say that.

Though taxation is a good thing from a regulatory angle, it is still early days.

World over, the idea of making some allocation to cryptocurrencies in portfolios is gaining traction. Maybe this is because of FOMO or people viewing Bitcoin’s massive rise in the past few years from the lens of missing out on a life changing opportunity.

But whatever is being said, one cannot just ignore the volatility in this space. Falling 20 percent or more overnight. Getting halved in a matter of weeks. Regularly falling more than 80 percent from the highs. The phrase ‘gut wrenching’ may not be a wrong one to use here.

Given the extreme volatility and most people’s inability to digest such high levels of, the fact is that one has a high chance of losing it big (if not all) in this space. But to be fair, there is also this small chance of winning it big that comes due to cryptos’ asymmetric risk-return payoff potential.

Assuming the Indian government’s move to tax crypto profits is an indication that there are no legal issues in crypto investing, should one invest in cryptos?

Should you invest in cryptos?

If you are looking to play with a few thousands, then go ahead and do it. Nothing wrong with trying things out. If nothing else, you will accelerate your learning. We learn more and quickly when we put money on line.

But if you are considering it more seriously, then remember that this space is not for everyone. It is highly risky and extremely volatile.

If you are a conservative investor, then ignore cryptocurrencies.

On the other hand, if you are a fairly aggressive investor (and you should be sure about it), only then consider it. And even before you get into the cryptos, first make sure you are getting the basics right. Keep aside some money as an emergency fund. Focus on your goals and how to reach them by investing properly and investing the right amounts in established assets like equity and debt first. What I am saying is that stick with traditional assets like equity, debt, etc. for 95-99 percent of portfolio.

Once these are in place and you have some extra money, only then venture into financially adventurous spaces like cryptocurrencies. And even when you get in, under no circumstances try to bet big in cryptos on the first day.

How much should you invest, if at all?

Cryptocurrencies are very volatile and speculative. My understanding is extremely limited in this space. So whatever I say here should not (in any case) be considered as investment advice. More so because cryptocurrencies, even though about to be taxed, are still not regulated.

Some sections of investor community believe that having a 1 percent allocation to cryptocurrency can be considered.

Mathematically speaking, a 1 percent allocation to cryptocurrencies has the potential to boost risk-adjusted returns without taking on too much exposure. But given the highly risky nature, one should be willing to lose this 1 percent entirely as well.

If things go well and prices in a few years move up as they have in past, then even 1 percent allocation will give you something to cheer about. On the other hand, if you end up being completely wrong, then it won’t hurt you or the portfolio very much due to a very small allocation.

So those are my thoughts on this topic.

Please note that even though a Registered Investment Advisor, my understanding of cryptocurrencies is very limited. I do not advice on cryptocurrencies as of now. Do not forget that crypto-assets are extremely risky. So do your own research, assess how much volatility is acceptable and only then decide whether to invest or not.