Crypto Investments: Cryptocurrency investments are risky, but can be rewarding: Risks of knowing how to make the most of the opportunity
Until about two months ago, Noida-based Gaurav Tyagi thought Elon Musk was a visionary who would lead the world into a technology-based and financially secure future. But not anymore. After Musk announced that his company would stop accepting bitcoins for Tesla car purchases and expressed concern about the environmental impact of bitcoin mining, the crypto market collapsed in mid-May.
It was a midsummer nightmare for investors like Tyagi. Within a week of May 13, the value of its crypto holdings plummeted more than 60% from around 55,000 rupees to less than 20,000 rupees as panicked investors quickly sold their coins. “Elon Musk acted irresponsibly without caring about the millions of investors who would be affected by such decisions,” he says sullenly.
Did you know already?
- $ 1,635 billion is the estimated market capitalization of all cryptocurrencies. Bitcoin’s market capitalization of $ 674 billion (50.57.561 billion rupees) is more than three times the size of India’s most valuable company, Reliance Industries (market capitalization 11.14.500 billion rupees).
- Rs 1,000-1,500 crore is the combined daily turnover of crypto trading in India. This is less than 1% of the daily trading volume of Rs 2,00,000 crore on stock exchanges in India.
- 10-12 million is the estimated number of active investors and traders of cryptos in India. That is 16-20% of the 60 million active stock investors and traders in the country.
- The 24×7 trading takes place on the cryptocurrency market. The market is also open on Sundays and Holidays, unlike the stock and bond markets in India, which open at 9 a.m. and close at 3:30 p.m. and close on weekends.
- 40-50% was the drop in crypto prices after Elon Musk tweeted that Tesla doesn’t accept payments in bitcoins and expressed concern about the environmental impact of crypto mining.
Tesla’s U-turn on cryptos wasn’t the only trigger. Around the same time, the Chinese government took action against institutions dealing with cryptocurrencies. These two developments sparked panic selling in cryptos. “Aside from panic selling, many investors decided at this point to book profits, which led to a stronger decline in crypto prices,” emphasizes Nischal Shetty, CEO and founder of WazirX, a crypto exchange founded in 2018.
Why this crypto market correction is healthy
Crypto prices have risen over the past 12 months and have given investors incredible returns. Even after the recent decline, the price of a Bitcoin is close to 400% of what it was a year ago. Some smaller coins like the Dogecoin are trading 140 times their June 2020 level, while Matic Network is up over 7000%.
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Data from June 8th, 2021 | Sources: Investing.com, Binance
Lured by high returns
These enormous returns have drawn investors to what crypto evangelists are calling an emerging asset class. There are nearly 12-15 crypto exchanges in India and daily trading volume estimates range from Rs 500 crore to Rs 1,500 crore. As big as it sounds, this is less than 1% of the daily turnover of Rs 2,00,000 crore on the Indian stock exchanges.
Shetty admits that daily sales are small, but points out that the number of investors is far larger. He estimates that there are more than 10-12 million active investors trading cryptocurrencies on the dozen crypto exchanges in India, accounting for about 16-20% of the estimated 60 million active stock investors.
These numbers suggest that the average crypto investor doesn’t have very deep pockets. Still, he can trade as cryptos can be bought and sold in fractions. A Bitcoin costs close to Rs 27 lakh and Ethereums cost Rs 2 lakh. But you can buy a fraction of these coins at Rs 50-100.
Such rules have made crypto trading easy and spawned a new generation of traders with traits that traditional investors would disapprove of. These investors are young, easily influenced by social media and ready to take high risks. Your impatience to get rich has shortened your investment horizon. “I want to invest for the long term,” says a seemingly astute 26-year-old Vikram Chaddha. Then he adds, “I can last 2-3 months.”
The trading hours of the crypto market add more craziness. The exchanges are open 24 hours a day, seven days a week. No holidays, no weekends. You can act day and night. As one stock trader joked: “Now we can lose money on the weekend too.”
Meet Rajesh Rupala, a 31-year-old investor based in Bhavnagar, Gujarat who left a bank job last October to transform himself into a full-time stock trader. He was introduced to cryptos four months ago and was instantly hooked. Rupala has invested almost Rs 12 lakh (25% of its total investment portfolio) in this high risk but also rewarding option.
Facing multiple risks
Investors like Rupala don’t mind that cryptocurrencies are exposed to multiple risks. On the one hand, there is the systemic risk. Cryptos are very volatile instruments and can move very quickly and without warning.
“A second level of risk arises from regulatory ambiguity, cybersecurity threats, and uncertainty about their acceptance in mainstream finance,” said Pableen Bajpai, founder of FinFix Research and Analytics. Three years ago, RBI practically banned cryptos when it asked banks and fintech companies to stop offering services to companies that trade virtual currencies. But last year the Supreme Court lifted the RBI’s ban, saying that cryptos are unregulated but not illegal.
That hardly calms you down. If a stock investor has a complaint against a company or an intermediary, he can contact the Sebi and the complaint will be dealt with in accordance with the codified rules. But since there are no regulations for cryptos, the investor will likely have to go to the cybercrime cell or move a court. “That’s why regulation is important. There is self-regulation going on at the industry level right now, but we want the government to set the rules and appoint a regulator, ”Shetty says.
Crypto investors are also at risk from unscrupulous promoters and shady outfits. It’s a landscape full of tales of betrayal and deceit. “Given the lack of credible information and reliance on social media, there is a very high risk of price manipulation,” said Gaurav Garg, research director at CapitalVia Global Research.
Tampering is also possible, as many cryptos are not very common. “There is a concentration risk when a few investors hold very large amounts of a particular coin,” says Vineet Nanda, co-founder of Globalize. As the May crash demonstrated, there is a high risk of price manipulation if a tweet can lower the price by 40-50%.
Too big to switch off
Many investors find solace in the numbers. The crypto industry has gotten gigantic in recent years. Bitcoin’s market cap alone exceeds Rs 50 lakh crore, which is higher than the combined market cap of the six largest stocks in India, including Reliance Industries, TCS, HDFC Bank, Infosys Technologies, Hindustan Unilever and HDFC. Ethereum’s market capitalization is equal to the next six stocks. So the two largest cryptos are bigger than the 12 largest stocks in India. “How can a government shut down something that has attracted so much investment,” asks Arun Shivshankar, a 22-year-old medical student from Vellore. Shivshaker tries out cryptos after graduating from college.
The actors of the crypto ecosystem are also confident that the government will not ban virtual currencies. In fact, the government plans to create its own sovereign digital currency. “Nobody thinks of banning them because it is practically impossible. The other reason is that the technique is actually good. It’s so beautiful that in the future it will find a way to grow. And if that happens and a nation doesn’t belong, it will simply lose, ”says Vikram Subburaj, CEO & Co-Founder of Giottus Cryptocurrency Exchange.
Cryptocurrencies are risky, but if you are careful and understand the market, they can also be very rewarding.
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