The Supreme Court ruling is a significant positive for the future of cryptocurrencies in India
Cryptocurrencies have also been associated with high-value online frauds
Cryptocurrencies, especially bitcoin, gained ground in 2017-18 in India. But the buzz gradually died down after the Reserve Bank of India (RBI) in July 2018 banned banks from transacting with crypto exchanges and put a stop to crypto-rupee transactions. In a recent order, the Supreme Court quashed the RBI ban. In other words, you can once again start trading and investing in cryptocurrencies through your bank account. Ashwini Kumar Sharma asked experts whether it makes sense to invest in cryptocurrencies, considering the risk, volatility and the regulatory issues associated with them
They have no intrinsic value, are speculative in nature
The Supreme Court ruling is a significant positive for the future of cryptocurrencies in India. However, it should be noted that the court has said that banning trading of cryptocurrencies in the absence of a ban on the product (or commodity) itself is not legal. A lot will depend on how RBI reacts to this ruling—it can either take the direction of choosing to regulate them, or it could ban them and re-institute the circular. At this time, odds are that it will choose the former course of action (regulating it).
If that happens, then we could see the re-emergence of bitcoin-related trading entities that had shut shop earlier.
From an investment perspective, cryptocurrencies are a speculative instrument with no intrinsic value. They are seen as a hedge against the volatility of global monetary systems (and their fiat currencies), just as gold is seen as a hedge against market volatility. We don’t recommend investing in the commodity and investors, if they are keen to do so, should strictly use only what they consider as “play money" (money they don’t need) for the same.
Lifting of ban doesn’t make them a suitable investment
The Supreme Court order lifting the ban on cryptocurrencies has brought cheer to blockchain companies and investors in these instruments. In hindsight, the ban was misplaced because it never makes sense to obstruct technology.
However, lifting of the ban does not make cryptocurrencies suitable for inclusion in your portfolio. If you don’t know how blockchain works or how bitcoins are mined, you are better off investing in securities you understand.
With nothing to back it, bitcoin is a virtual asset riding waves of speculation. Prices crossed $19,000 in December 2017 but crashed over 80% to $3,600 within a year. They again rose 200% to go beyond $12,000 by July 2019, only to crash 30% to $7,500 levels in December 2019. They again shot up 50% to $11,000 in February 2020. Now they are down again. In comparison, the coronavirus-hit stocks look like a solid investments.
If you have made up your mind to invest in digital currencies, allocate only 1-2% of your total investment portfolio. Then, even if bitcoin crashes, it would not be too hurtful.
Invest limited amount if you are ready for volatility, risk
With the Supreme Court lifting curbs on crypto transactions, trading in these is likely to begin soon. During the period of a virtual ban on trading of cryptocurrencies in India, the global industry has had a troubling two-year period. Although 2019 turned out to be a year of recovery, many investors have moved on to other ventures.
The issue that needs to be addressed is whether investors in India should now be considering cryptocurrencies. While the simple yet profound wisdom of Warren Buffett—"If you don’t understand it, don’t invest in it"—provides the answer, some investors may still feel compelled.
It is important to remember that the crypto space can be highly volatile. Besides, the unregulated nature of cryptocurrencies makes investing in them a risky proposition.
If at all an investor decides to put money in them, it would be advisable to invest a limited amount after understanding the pros and cons and diversify holdings across different currencies to be protected against the possibility of one or more currencies suddenly failing.
Cryptos should never be included in the core portfolio
We don’t recommend including cryptos in a core investment portfolio given the current stage of regulation, transparency, insurability and liquidity.
We had quite a few of our younger clients following up with us on including it in their portfolios during the sharp run up of cryptos in the second half of 2017. We did not bring them into our recommendation list due to lack of clarity on various aspects such as legality, liquidity and their highly volatile nature. Those who bought during the phase are sitting with more than 40% losses and in many cases illiquidity.
It should definitely be avoided by senior citizens. Risk management and the potential of getting stuck with illiquid and highly volatile assets gets missed out during the hyper growth stage of speculative options such as cryptos.
Cryptocurrencies have also been associated with high-value online frauds. For the few clients who have bought them on their own as part of their speculative investing portfolio, our suggestion has been to keep it at less than 3% of the portfolio. They should consider it as money they can afford to lose.