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Cryptocurrencies: Digital Gold or a Ponzi Scheme? Should you make it a part of your portfolio?

By Finserv MARKETS - Jun 15,2021
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Factors Affecting Cryptocurrencies

Temptation and Caution

If you had bought Bitcoin worth Rs. 10 Lakhs at the start of March in 2020, it would have been worth approximately Rs. 1.1 Crores in March of 2021, a span of just one year. This shows you how the demand for cryptocurrency is increasing multifold. Yet, there is more than what meets the eye here. Before this euphoric bull run began, Bitcoin was more or less holding in the same range for almost 3 years. After this recent bull run, we have already seen a descent of approximately 50%, with Bitcoin falling from the $65,000 levels to the $32,000 levels recently. So, if you had bought Rs. 10 Lakhs worth of Bitcoin this March, it would be worth approximately Rs. 5 Lakhs in June of 2021.  This shows you how unpredictable the cryptocurrency market can be. Yet, does this high risk “asset” make a case for being part of your portfolio?

Taking a deeper look

The Negatives: The cryptocurrency market is a high-risk space where if you are ill informed and on the wrong side of a trend, you can lose huge percentages of your investments. As this “Asset Class” is still relatively new, as compared to traditional markets like equities or commodities, most people, including many investors, are uncertain of how it will all eventually play out. Investment magnate Warren Buffet has stated that he will never own Bitcoin as he believes they don’t have any underlying value. He compares this phase to the “Tulip Mania” and expects it all to come tumbling down sooner or later.

The Positives: Although there exists high risk, with it comes the possibility of high reward too. If you have accumulated cryptocurrencies and hold it through a bull run, you are likely to see returns that the stock market may take years to deliver. In an answer to Warren Buffet’s take on Bitcoin, founder of Social Capital, Chamath Palihapitiya, says that Bitcoin is likely to continue increasing in value. This is because cryptocurrency market serves as an alternate option to traditional equity investments. In the event of equity markets going bust or a financial crisis unfolding, the cryptocurrency market could serve as a safe haven.

Key Takeaways

  • Invest what you can afford to lose: It is not advisable to invest a large part of one’s portfolio in cryptocurrencies, especially if one is new to the market. This means that one must first aside money for an emergency fund, long term investment goals, purchasing insurance, important expenses, etc. Any surplus amount that remains (ideally less than 5% of your portfolio) can be considered for investment in the crypto space. This way, even if you lose all the money invested in cryptocurrencies, it won’t affect your financial well-being.
  • Digital Gold: A lot investors view cryptocurrencies as a form of “digital gold”. Just as gold serves as a hedge against stock markets falling, this could be an addition in the same way. Typically, seasoned investors place around 5% of their portfolio is such hedges, and cryptocurrencies could be made a part of that section after adequate research.
  • Stay away from the hype: It is easy to fall prey to bullish sentiment when a market is doing well. Yet, one must realize that there are many “altcoins” that are hyped by social media users, but don’t have strong “use cases”. Many of these influencers run “pump and dump” schemes where once the coin hits a certain high, it is sold off by “whales” or people with high ownership of the coin. The smaller investors buy in due to the hype, only to see the price tumble. Also note, it is extremely easy to make a cryptocurrency and release it into the market. For example, recently a crypto enthusiast created a coin called “Pump Coin” as a joke to warn investors. The market cap of his coin hit 5 Billion US Dollars, despite his own warning to buyers not to invest in his project as it had no use case. This shows how herd mentality plays a big role in this market.
  • Do your own research: The cryptocurrency space is still in its nascent stages. While there are many coins fueled by hype which are unlikely to last long, there are also several projects with a lot of potential for real world use. It is advisable to read the coin’s “whitepaper”, understand the aim of the project, its progress so far, the founders’ backgrounds, the number of coins in circulation, and the project’s overall potential. Study how the price has behaved, whether it is extremely volatile, etc. and then make your move accordingly.

A Balanced Portfolio Remains Key

It is easy to get impulsive and invest higher amounts in a new space like cryptocurrencies. One must avoid this and keep in mind that your main long-term investments can continue in other trusted financial instruments such as Mutual Funds, Fixed Deposits, Gold, National Pension Scheme, Unit Linked Insurance Plan (ULIP) etc.

While Equity Mutual Funds can accelerate your portfolio growth over the long run, Debt Mutual Funds can offer a steadier form of income at a moderate rate of return. Gold can serve as a hedge and ensure that one’s portfolio has a cushion in case of a market downturn. Fixed Deposits serve as one of the safest ways to store your money while earning an interest so as to offset inflation. ULIPs are also a unique option that serves as an insurance instrument while offering the benefits of investments. NPS, a government-backed market-linked scheme, is also another option that can provide long-term payouts for a secured financial future post retirement.

It is prudent to diversify your funds across these instruments based on your risk appetite, time horizon and financial goals. This will ensure that your portfolio is well balanced and has a long-term growth trajectory along with appropriate security. Get access to these financial instruments on the Finserv MARKETS website and App.

The Final Word

As goes with any investment, it is important to educate yourself and see whether the crypto is a space that is suited for you before investing any amount in the same. Avoid falling for coin “tips” or promises of exponential returns in a short span of time. If you are to invest in this space, it is advisable to have a long-term mentality and keeping yourself up to date about happenings in this relatively new market. Remember to only invest what you can afford to lose in a space like crypto, as it is a relatively new and volatile space.

FAQs

  • Is it legal to buy cryptocurrency in India?

It is legal to invest and trade in cryptocurrency in India. The RBI put out a statement to clarify this recently as certain big banks were threatening to shut accounts of customers that were investing in crypto.

  • Why talk about Bitcoin when there are other cryptos?

The reason that Bitcoin was chosen in the first example is because Bitcoin was the first to bring blockchain technology to the market and has the largest market cap in the cryptocurrency market. The sentiment of the market tends to follow the sentiment around Bitcoin. Yet, there are various other “Altcoins” that one can buy such as Etherium, Cardano, Polygon and many more.

  • Where to buy crypto in India?

Some of the reputed platforms are mentioned below:

    1. BitBns
    2. CoinDCX
    3. Wazir X
    4. CoinSwitch Kuber

There is a simple KYC process to register and then one can start purchases after linking your bank accounts/ UPI IDs.

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