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Want to reduce the risks of investing in Bitcoin, Dogecoin and Ethereum? Here are a few strategies from experts

Investing via SIPs, diversifying by buying a basket of cryptocurrencies and opting for index funds are some risk mitigation strategies

June 01, 2021 / 12:45 PM IST

For investors who understand the world of cryptocurrencies, we have covered a wide range of topics related to the topic thus far.  From how to invest in cryptocurrencies, including choosing the right exchange, completing the know-your-customer (KYC) process and maintaining a crypto wallet, we have covered it all.

For those without a grounding in cryptocurrencies, it may be challenging to follow these aspects. But if you do, then here are some strategies to de-risk your cryptocurrency holdings.

SIPs in cryptocurrencies

Cryptocurrencies are among the most volatile of all instruments. That is why savvy investors opt for a systematic investment plan (SIPs). Some exchanges such as Bitbns, Unocoin, Vauld, Zebpay, etc. allow you to start an SIP.

You can start with a minimum of Rs 100 and invest via daily, weekly and monthly SIPs. “With the Automatic Investment Plans i.e. AIPs (which works like SIPs) strategy, you can average out your buying price,” says Darshan Bathija, CEO of Vauld, a crypto exchange. An SIP in a cryptocurrency saves you from big losses if the value of your coin were to suddenly come crashing down.

But it’s not as straightforward as, say, a mutual fund SIP. “An SIP (in crypto) can work wonders. But in rising markets, investing via SIPs means that you will be sitting on lesser profit or may not be able to take advantage of the current market crash as your investments are spread out; otherwise, investing via SIP is always a good idea,” says Rishabh Parakh, a chartered accountant and founder of NRP Capitals.

Also read: Bitcoin can’t buy you a Tesla car, but must you still invest in the cryptocurrency?

A crypto basket or just a single coin?

Vauld offers a cryptocurrency basket to invest in. The exchange offers crypto baskets with four distinct strategies. You can start investing with a minimum of Rs 100. “Investing through crypto baskets is a sustainable investment strategy rather than facing the volatility of trading individual crypto assets,” says Bathija.

What if your cryptocurrency exchange doesn’t provide the feature?

“Then, you can make a crypto basket yourself by selecting more than one coin of your choice, decide on a proportion and invest in them regularly,” says Parakh.

If you are a beginner, first test waters with coins of larger market capitalisation such as Bitcoin, Ethereum and other blue-chip cryptos. “Later, invest in cryptocurrencies that have medium sized market cap and have been traded on crypto exchanges for at least three years,” says Nischal Shetty, Founder & CEO of WazirX. This will help to assess if withstood the tests of volatility and are still traded on the exchange.  “Finally, the smallest percentage should be invested in the high-risk category; i.e., new cryptocurrencies that are one month to one year old,” says Shetty.

Just remember this advice from Parakh: “You need to avoid the fear of missing out (FOMO) while investing in a select basket of cryptocurrencies.”

Investing in cryptos through index funds

Just as in the equity markets, global asset management firms have launched crypto index funds, too. For instance, in February 2021, Bitwise Asset Management firm had rolled out a decentralized finance (DeFi) Crypto Index Fund, hoping to capture deep-pocketed investors’ bets in the crypto markets. It is available on the Coindesk exchange.

There are others – Crypto10, Crypto20, etc. These index funds have exposure to the top 10 or 20 cryptocurrencies by market capitalisation. You can invest in these index funds through Invictus Capital.

Vikram Subburaj, CEO and Co-founder of Giottus, a cryptocurrency exchange says that considering the volatility in the crypto market, many investors look for professional help to maintain their crypto portfolio and index funds can be one of the solutions that cater to them.

These index funds are still unregulated. “Consumer protection for Indians is a major concern when these index funds go against their fiduciary responsibilities,” says Subburaj.

Also read: Should you invest in Bitcoin and Dogecoin, why is crypto so volatile and other questions answered

Frequent profit booking may help

Bathija says it pays to book profits at periodic intervals. For instance, if your allocation to cryptos has gone all the way up to, say seven percent, from say an initial two percent allocation, then take some profits off the table. Be disciplined about your asset allocation.

Avoid gambling in cryptos. Parakh says deploy only the amount that you can afford to lose.
Hiral Thanawala is a personal finance journalist with 8 years of reporting experience. Based in Mumbai, he covers financial planning, banking and fintech segments from personal finance team for Moneycontrol.
first published: Jun 1, 2021 09:19 am