When crypto prices fall, Ayushmann Khurrana, Disha Patani, Ranveer Singh are of little help

“Investors are moving far away from risky assets like cryptocurrencies as US policymakers tighten the monetary policy. That has pushed equity as well as crypto prices lower,” says Akshaya Bhargava, Founder and Executive Chairman, Bridgeweave, a UK-based fintech firm. He adds, that there are also crypto-specific issues that are contributing to the continued decline, such as Terra’s UST losing its $1 peg and the Luna debacle.

Also read: Advertising watchdog catches violations in crypto ads by influencers

Do your research

A big lesson for investors, who fell for glitzy crypto advertisements by popular Bollywood actors and celebrities last year, is to do your own research. In the last year or so, many investors bought cryptocurrencies for the first time, as crypto prices hit new highs almost every day.

Financial planners call this the ‘Fear-Of-Missing-Out’ or the FOMO syndrome. Based on glowing reviews by influencers on social media, several millennial investors invested small to large sums in cryptocurrencies. Raj Khosla, founder of MyMoneyMantra says it’s best to invest under 1 percent of your net worth in crypto coins, if you must.

Rishabh Parakh, a chartered accountant and founder of NRP Capitals, agrees. He says investors should avoid investing in cryptos if they do not understand how cryptocurrencies work.

Be careful of cryptocurrency lending and deposits

Investing in cryptocurrencies has taken on new colours, over the years. For instance, many crypto exchanges allow investors to pledge their existing stock of coins and borrow money. Or even offer them a chance to earn a passive income. Several crypto exchanges in India allow you to earn money by lending and depositing coins like Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Dai (DAI), etc. For instance, ZebPay allows you to lend for 7 to 90 days. However, both these offers can come back to haunt you in times like these when prices of cryptocurrencies crash. Here’s how it works.

Say, you have some coins which you are sure you are not going to sell for months or even years. In the interim, their values keep fluctuating and you earn a paper income. Instead, crypto exchanges allow you to deposit these coins with them and in return, offer you a chance to earn 10-20 percent monthly income. In the meantime, exchanges get to sell your coins and create extra liquidity, which is easier than mining coins; an otherwise complex process to create newer coins using expensive, mainframe computers the size of warehouses. These schemes usually run for a few years wherein you, the depositor, gets to earn a passive income (interest income). Once the tenure gets over, you get your coins back.

Here's the caveat though: The interest is paid in crypto coins, not legal currency. If the prices of your coins fall, you lose money. The mechanism works like a bank deposit on which you earn interest, but unlike a bank deposit that is guaranteed by the Deposit Insurance and Credit Guarantee Corporation of the Reserve Bank of India (subject to a certain sum), your crypto deposits aren’t. That’s the other risk. Parakh says that in the interim, if the exchange collapses or your wallet gets hacked, you could lose all your coins and there is no legal recourse.

Similarly, you can also borrow money by pledging your coins. Here as well, the value of your pledged coins can fall dramatically over a short span of time. Not only can your exchange (that lent you money) sell your coins in a hurry, but you would also need to make good the exchange’s loss, in addition to seeing the value of your asset diminish.

Salman Khan is not always right!

Manisha Kapoor, CEO and Secretary General, ASCI, tells us that since last year when many such advertisements proliferated, ASCI became more vigilant about celebrities endorsing cryptocurrencies. “It is precisely for that reason that ASCI guidelines were brought in. We noted the tall claims being made, massive returns being promised, all without disclosing the possible downsides of such investments. We know that crypto products do not have underlying tangible value, and they are highly volatile. Leading finance experts have expressed their concerns with how cryptos are valued. And therefore, there is a most definitive risk that consumers must be aware of before they invest,” says Kapoor.

She adds that since the guidelines came into effect in April 2022, ASCI has caught violations in four crypto ads and 25 ads related to influencers on crypto products. To be sure, ASCI does not pre-approve ads; in other words, these ads were already in circulation.

The Indian government has turned its attention to cryptocurrencies since late last year, and especially since Budget 2022, when the finance minister imposed a 30 percent tax on virtual digital assets and 1 percent Tax Deducted at Source (TDS). With ASCI’s detailed guidelines on celebrity endorsements and the SEBI and RBI sharpening their focus on cryptocurrencies (pending full legislation), hopefully advertisements like Ayushmann Khurrana’s CoinDCX’s ‘Future Yahi Hai’ (This is the future) or Ranveer Singh’s ad films for CoinSwitch Kuber’s ‘Kuch Toh Badlega’ campaign, would be a thing of the past.

Mrin Agarwal, Founder Director, Finsafe India Private Limited, says, “SEBI proposal to ban celebrity endorsement for cryptocurrencies is very much needed. Most advertisements featuring these influencers were misleading and got lay investors to believe their money would multiply quickly without any risk. Hopefully, with the new guidelines, there will be standardisation of information.”

Also read | Millennials and cryptocurrencies: A story of missed profits, hard lessons and losses

What should investors do?

The recent crash in crypto prices did not surprise the savvy and experienced investor. But those who invested in cryptocurrencies for the first time in the last two years got a raw taste of how quickly they could lose their money.

For those who still wish to continue on their crypto journeys, despite the risks and lack of regulation, two words of advice:“Avoid gambling in cryptos. Deploy only the amount that you can afford to lose,” says Parakh.

“Book profits frequently,” says Darshan Bathija, CEO of Vauld, a crypto exchange. Do asset allocation, but be disciplined.