- Date : 12/08/2021
- Read: 4 mins
From how to invest and what approach you should take, here’s a guide that can help you navigate your cryptocurrency investments.
The emergence of new-age digital millionaires has made cryptocurrency the buzzword in investment circles. Cryptocurrencies are a decentralised form of currency based on blockchain technology. The expensive cost of ‘mining’ and limited supply has made them highly valuable.
While Bitcoin (BTC) has become near-synonymous with cryptocurrency, there are over 4000 different coins, with Ethereum (ETH), Litecoin (LTC), Polkadot (DOT), Binance Coin (BNB), Bitcoin Cash (BCH), Stellar (XLM), and Tether (USTD) being the other popular currencies based on market capitalisation.
How to invest in cryptocurrency
To buy, sell, or trade the asset, you will need to register on a cryptocurrency exchange operating in India. Considering crypto-investments are unregulated (as of now), you need to select a platform after due consideration. Look for the following features:
- Reliability – A platform that has been around for a while.
- Service range – An exchange that supports a wide range of coins.
- Liquidity – Demonstrates a large number of customers actively trade on the exchange.
- Security – Various checks and balances to ensure your funds and investment remains safe.
- WazirX, Zebpay, CoinDCX, Vauld, and UnoCoin are some well-known crypto-exchanges you could consider.
To register, you will be required to complete the KYC process and link your bank account to the wallet offered by the exchange. You can use your bank’s netbanking platform, debit card, or a third-party payment gateway to transfer funds to your crypto wallet and convert Indian rupees into the desired cryptocurrency.
The exchange will levy a trading or investment charge on every buy and sell transaction. The charges vary from one exchange to another, and can range from 0.05% to 0.25%.
What should be the investment approach?
Understanding the finer aspects of cryptocurrencies can be challenging even for the most seasoned of investors. Additionally, the asset is prone to a lot of volatility. Given the high valuation of most popular coins, you could consider the following investment strategies to minimise risk.
- Systematic Investment Plan (SIP): While most exchanges have a minimum transaction threshold, some exchanges such as Zebpay, Vauld, and UnoCoin allow SIPs starting as low as Rs 100. This is a good option for women who are looking to test the waters without taking on too much risk. You could also opt for the Automatic Investment Plan (AIP) that these exchanges offer for daily, weekly, and monthly SIPs, thereby allowing you to accumulate coins in a budget-friendly manner while averaging out your purchase price.
- Basket of currencies: Minimise portfolio risk by investing in a bunch of different coins. You can decide the currency based on market capitalisation, volatility, and the exposure you wish to take. You could start off by making small investments in ‘blue-chip cryptos’ such as Bitcoin, Ethereum, and Tether first. If your risk tolerance permits it, you can take a further exposure to other ‘mid-cap’ currencies such as Polkadot, Litecoin, or Chainlink that have been around for at least 3-5 years. Some exchanges make it easier by offering a few standardised investment strategies through the SIP route.
- Index funds: Just as with equities, some global Asset Management Companies have launched crypto index funds that invest in the top 10 or 20 coins based on market capitalisation. These professionally managed funds relieve one from the headache of active management and are best equipped to pivot strategies based on market conditions. However, the high investment threshold for many of these funds would be a deterrent for women who do not want to make a big bet on crypto.
On account of concerns regarding investor protection, lack of centralisation, and accountability, the RBI has not yet granted complete legitimacy to crypto trading. So, it is advisable that you limit exposure to alternative investments in your portfolio to 5% or less. If the market value exceeds your asset allocation, it would be wise to book profits periodically.