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From cash-strapped millennials and Gen Z looking at cryptocurrencies as a means to grow wealth, high net worth individuals (HNIs) have now started considering this new asset class as a way to diversify their portfolios.

This is in part because none of the other asset classes can boast of the kind of returns delivered by blue-chip crypto assets such as bitcoin and ether. The world’s biggest cryptocurrency, bitcoin, has gained more than 50% since the start of the year. The one-year gain stands at around 400%.

The gains in such assets have resulted in a much higher client base at Indian crypto exchanges compared with stockbrokers. Zerodha today has over seven million users against 11 million at CoinSwitch Kuber and 8.3 million at WazirX.

While the surge in client base at Indian crypto exchanges has been driven by retail investors, there has also been a rise in interest among HNI investors towards investing in cryptocurrencies over the past 12 months.

“The HNI or the affluent class joined the crypto bandwagon a bit late as they came to realize that this is a very relevant asset class. Not having crypto means you are ignoring the Googles or the Apples of 10 years down the line. Some investors are also thinking of crypto as an alternative to gold," said Asheesh Chanda, founder and chief executive, Kristal.AI, a global wealth management firm with assets under management (AUM) of $360 million and HNI clients in 22 countries, including India.

As per Chanda, affluent investors prefer putting in through the fund route, as they don’t want to take the regulatory risk of directly owning the cryptos. “Plus, it is more convenient as HNI investors don’t have to convert their fiat currency to crypto or open wallets accounts with crypto exchanges," said Chanda.

Since there are no US-listed exchange-traded funds (ETFs) in the market, investors are putting in money in ETFs listed in other countries.

For example, Ether Tracker One and Bitcoin Tracker One, the two top-performing ETFs on the Kristal platform, are listed in Sweden.

The global wealth management firm also has an in-house fund, Kristal Founder’s fund, which has $30 million in assets of which 6% is in crypto. As per Kristal.AI, one in three of its clients is open to investing in crypto.

While fund managers have started to seriously look at getting a crypto exposure in their portfolio, even exchanges plan to offer investing services via the fund route.

Mudrex, a global algorithm-based crypto investment platform, is in the process of launching Coin Sets, which will allow investors to simultaneously invest across a curated basket of cryptos.

For HNI clients, it is planning to come up with a crypto-focused fund.

“HNIs are looking primarily to diversify their portfolios across asset classes. They have investments in gold, fixed income instruments, equities, alternate investment funds, etc. They are steadily including crypto into their portfolios to capture the alpha-generating potential of cryptos," said Edul Patel, chief executive officer and co-founder, Mudrex.

In India, so far, HNIs, family offices and the affluent class have been slow in adopting cryptocurrencies, as regulatory ambiguity and low familiarity have impacted participation.

According to Vaibhav Porwal, co-founder, dezerv., a wealth–tech firm, most of the investors are participating in a small way.

“These investors are looking to test the waters before committing serious money. A slight divergence is visible with clients where the next generation took charge of the portfolio. They are more receptive to the idea of investing in crypto," said Porwal, who is awaiting clarity from regulators before taking a final call on offering investments via funds for crypto investments.

On HNIs investing in coins directly or taking the fund route, Porwal believes it is a mixed bag. “Investors with domestic capital invest in cryptocurrencies directly, and investors using the LRS limit choose a mix of direct and fund-based investing," he added.

Under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI), an Indian individual can send up to $250,000 per year overseas for travel, education and medical care as well as for the purchase of shares.

In India, crypto-focused fund services haven’t picked up pace till now primarily because there is a grey area in terms of taxation on cryptocurrency funds.

However, as per Mudrex’s Patel, this trend appears to be drastically changing.

“Companies in India are setting up crypto-based funds whose legal jurisdictions lie outside of India," he added.

As per Patel, the minimum ticket size for HNIs across the industry is $100,000, while the crypto allocation remains within 4-7% of investors’ entire portfolio.

Moreover, as per the latest report by accounting and consulting firm, PricewaterhouseCoopers (PwC), the total AUM of crypto hedge funds globally increased to nearly $3.8 billion in 2020 from $2 billion in 2019.

However, the pace of adoption in India is slow. “We are not advising our clients to get into crypto right now as it is too big a risk in terms of regulations in India. As of now, it’s not known in what form the government bill will come. Also, there is ambiguity over the taxation of crypto," said Amit Kumar Gupta, a New Delhi-based portfolio manager at Adroit Financial Services Pvt. Ltd, a Sebi-registered portfolio management firm.

Experts say that retail investors shouldn’t follow the investment strategy of HNIs as they have a higher risk appetite.

Moreover, retail investors should preferably stay away from crypto as it is a highly risky asset class, while those looking to dabble in it must contain crypto investment to 2-5% of one’s portfolio.

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