Cryptocurrencies: Even if legal, invest only what you can afford to lose

Is cryptocurrency legal in India? And if it is, then how much should you invest in it? These are two questions that many Indians are trying to answer.

Bitcoin and other cryptocurrencies have given super-normal returns in the last one year or so (even if you take into account the recent 30-40 percent fall). So, it’s natural for people to find ways for participating in this upmove.
Is cryptocurrency legal in India?

This is not an easy question to answer, to be honest. The Indian government still isn’t very sure about how to deal with this new phenomenon. But here are few facts. In 2018, RBI came out strongly and kind of banned these in India. Then in 2020, the Supreme Court of India reversed RBI’s ban of 2018.

This was followed by the Indian banks curtailing transactions with crypto-exchanges as, in their view, they are governed by the RBI (2018) and not directly by the Supreme Court (2020). But a few days back, RBI said that the banks cannot quote its 2018 ban to its customers as it was overruled by the Supreme Court!

And if this flip-flop of different government bodies wasn’t enough, the RBI governor said a few days back that the central bank still has “major concerns around cryptocurrencies, which [they] have conveyed to the government. And, about investors, it is for each investor to do his/her due diligence and take a very careful and prudent call.”

As things stand now, Bitcoin and other cryptocurrencies are not illegal in India but are unregulated. And that ‘unregulated’ part is what is bothering the government. But as the crypto space is all about ‘no central authority regulating it’, the government may still not be very sure about how to tame this wild animal. Blockchain technology itself is quite promising and the government doesn’t want to miss out on that. But how to not undermine its own position from a regulatory perspective and still allow investors to join the space is what it is deliberating. The government is also planning to bring in the “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021,” which is expected to clear the government’s stance once and for all.

Also read: Here’s how the cryptocurrency works

Can this bill ban crypto-trading in India? Yes it’s possible. But then what will happen to the investors who hold cryptocurrencies? As per a report ‘Cryptocurrencies: Fad or Forever’ by HDFC Bank, Indian investors have currently deployed about $1.36 Billion in cryptocurrencies. In case of a ban, I am sure government will not kill this investment overnight. It might allow some time for existing investors/traders to exit their holdings.

On the other hand, what if Bitcoin and cryptocurrencies remain legal in India? Should you then invest?

If allowed, how much should you invest in Cryptocurrencies?

Before you make up your mind about this, first a fact.

Once every few years, cryptocurrencies have fallen more than 80 percent from their highs. And 30-50 percent falls are fairly regular.

So if you are a:

Conservative Saver who deals mostly in fixed deposits, PF, insurance policies, then you should forget about investing in cryptocurrencies. Volatility is not for you. You first get yourself comfortable with equity.

Moderately Aggressive Investor, then you might still consider it. But given its extremely volatile nature, it’s better to put in a few thousands or whatever you can spare (or afford to lose completely) and get a feel of this first. Study a bit more about the concept, which I can tell you isn’t very simple to grasp. Nevertheless, make the effort if you want to invest more.

Also listen: Simply Save podcast | The many similarities between cryptocurrencies and equity investing

But on the note of how much to invest in Cryptocurrencies, many big investors have said in past, that having a 1 percent portfolio allocation to Bitcoin or a basket of cryptocurrencies might be a good idea.

So, if you have a Rs 50 lakh portfolio, then you can invest up to Rs 50,000 (1 percent of Rs 50 lakh) in cryptos. The rationale is that if cryptos you pick do well and do a 10X or (fingers crossed) 50X, then you make a lot of money. But if it goes bad, then you only end up losing 1 percent, which is something that you can recover during a good year on the rest of your 99 percent portfolio of traditional assets: equity and debt. Losing 1 percent of your portfolio will not be a catastrophic loss.

Other optimistic people advocate investing more, say, 5-20 percent. But I think that for most people, it’s easier to say that they can digest volatility but another matter altogether to see prices correcting 30-40 percent in a matter of hours or see 80 percent falls on a large part of their portfolios.

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

If you believe Bitcoin and cryptos are here to stay (legal), then you can first invest some spare thousands to explore more. Putting money on line accelerates learning. And from there on, the next checkpoint can be 1 percent of your portfolio. Beyond that, it’s up to you and your risk appetite.

But if you have any doubts about this, then don’t venture out adventurously and be a cowboy! Keep the majority (95-99 percent percent) of your portfolio in proven assets such as equity, debt, gold and real estate. And if you have an advisor, then discuss your need to increase exposure to this new animal accordingly.