Cryptocurrency is a new investment avenue that has attracted many investors. But like any other investment, it is important that people understand what they are getting into. They should evaluate their own risk tolerance and assess if they are well-suited to the wild price rides that cryptocurrencies go through.
Earlier this week, Rishabh Parakh, a chartered accountant and founder of NRP Capitals (formerly known as Money Plant Consultancy) was a guest on our weekly personal finance podcast, Simply Save. Like many advisors, Parakh too has been getting a lot of questions from his clients on how to invest in cryptocurrencies, how much to invest in them and several such questions.
Here’s what investors must know before they decide to invest in cryptocurrencies.
Is cryptocurrency an investment or just a currency?
A currency is usually stable and regulated. Most importantly, it should allow you to buy goods and services. Cryptocurrencies do not have a store of value and are volatile. And at the moment, at least in India, you cannot buy any item, say a laptop, or a TV with a crypto. For now, therefore, cryptocurrency is not a currency. Till the time that it becomes an acceptable currency, it’s something like what gold used to be for the older generations. It’s more of an asset. You cannot buy items from the market by trading your equity shares, right? But you can buy shares or gold with money, just like crypto. So, at the moment, it resembles more like an asset than an actual currency.
Which category of investors is typically interested in cryptocurrencies?
Ever since Dogecoin went to the moon and returned, we have been getting a lot of queries. Earlier, mostly youngsters in their 20s were curious. But now, everybody wants to know more about cryptocurrencies – people from across age and income groups.
Should we invest in Bitcoin? How much should we invest, if at all, given the price volatility? Is it a bubble?
Some people suggest allocating, say, Rs 10,000 in a crypto such as Dogecoin, simply because people have heard some crazy success stories. But unless you have a good reason or logic to invest in a cryptocurrency and you understand the technology behind the existence of that currency, it is akin to gambling in a Las Vegas casino. That is not investing.
Why are cryptocurrencies so volatile? One tweet from Elon Musk is enough to scare all cryptocurrencies.
Stock markets mainly rise and fall because they are controlled by factors specific to their own countries. Besides, they are open for 6-7 hours a day. Only during these hours can investors buy and sell shares. That buying and selling takes the markets up or down, among a few other things.
But a crypto market never sleeps. It is open 24/7 and 365 days a year. Besides, it’s a global market. You can buy a Bitcoin in India and someone sitting in the US would also be buying or selling the same Bitcoin. Imagine the volume of this activity.
Also, in the last year or so, as the prices of cryptocurrencies have gone up, many first-time investors have entered. It’s called Fear-Of-Missing-Out or FOMO syndrome.
Give us 3-4 important points that people should consider before they invest in cryptocurrencies.
Understand cryptocurrencies first. Unless you have money to throw away, do not invest more than 2-3 percent of your overall corpus in cryptocurrencies. Else, wait for the market to stabilise and the government to come out with its proposed regulation to understand where the cryptocurrencies market in India is headed.
Read the white paper or prospectus of the currency in which you wish to invest in. Who are the founders behind the cryptocurrency? Look at the supply and scarcity of the coin. These factors will determine how volatile it could be. Look at the logic behind why that currency was invented.