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7 Precautions for New Cryptocurrency Investors in India

Recent Cryptocurrency price rise is bringing many new crypto investors to the market. Below are the 7 Precautions for New Cryptocurrency Investors in India and they would be better off by carefully going over each of those aspects.

Use Reliable Exchanges in India


I have written extensively about the regulatory uncertainty surrounding Cryptocurrency. Last year, the Supreme Court quashed a 2018 rule banning crypto trading by banking entities, resulting in a trading surge. The crypto space continues to be unregulated in India and new Exchanges crop up on a daily basis. Though the Supreme Court has struck down the RBI ban on cryptos and even the government has hinted at taking up a calibrated approach towards industry regulation, investors need to be careful when choosing the intermediary. Investing via an overseas exchanges will require greater compliance for Income Tax and other regulations. Popular India Exchanges are WazirX and CoinDCX.

Don't Invest your entire portfolio

 

No matter how big a fan you are of Elon Musk & Michael Saylor, Don't Invest your entire portfolio. The phenomenal returns given by some cryptos in the past one year is certainly mouth watering. Rs 10,000 invested in Dogecoin six months ago is now worth lakhs of rupees. But don't get carried away by these numbers and take large bets. Invest only what you are willing to lose. Even if you have a high risk appetite, start small. Don't allot more than 2-3% of your overall portfolio in cryptos. After you get familiar with the arena, learn about various coins and understand their value and prospects, before allocating more.

Be ready for Extreme Volatility


Investing in cryptocurrencies is the best way to learn about them but in this high-risk high-reward game, you must have the appetite for extreme volatility. Bitcoin smashed through $50,000 in February and as the May 2021 crash showed, an overnight fall of 70-80% can also be expected. Keep in mind that even a bluechip like bitcoin is down 48% from its April high of Rs 50 lakh.

Double check on all information before investing


Another issue with the unregulated nature of Cryptocurrency is that the crypto arena lacks legitimate information on many fronts. Investors are dependent largely on unverified information circulating on social media and sadly, social media these days has plenty of fake news. Self-styled crypto analysts create whatsapp & Telegram groups packed with their accomplices who vouch for their accuracy. These analysts trap gullible investors, first by charging a fee for the tips and then using them for their pump-and-dump operations. You must verify information before you invest. Check the market cap and trading volumes of the coin. A low market cap and insignificant daily volumes are clear red flags.

Start with established bluechip coins

Like the stock markets, the crypto market also has bluechips coins, mid-caps and penny coins. Don't hoard obscure altcoins just because they are at cheap price. Bigger coins may be costlier but are more stable and reliable. As of date,  9th July 2021, there are 10808 Cryptocurrencies and 381 Crypto Exchanges. Core market share is dominated by Bitcoin 45.1% and Ethereum 17.7% In fact you need not worry about costliness at all since you buy these coins in fractions. Bitcoin is the bluechip of the crypto space and drives the overall market sentiment. Focus on the bluechip coins like Bitcoin and Ethereum, with some of your money in open source emerging counters like Dogecoin (their biggest cheerleader is Elon Musk).

Prices are impacted big ways by global developments

The crypto market has a global footprint, which is why global developments can impact prices, so one needs to keep up with the happenings in key markets like the US, Singapore and Europe, regardless of where you are based. Crypto trading is 24x7, unlike in case of stock markets that have opening and closing bells, so one can act immediately. Recent actions by Chinese Government banning Crypto Mining and Trading caused huge swings in the market.

Don't Forget Income Tax implications

I have written extensively on this topic in this blog. There will be tax payable on the income from crypto trading. Even though cryptocurrencies are not specifically mentioned in the Income Tax Act, not yet at least, income in any form from any source is taxable unless specifically exempted under the act, point out experts. Cryptos are not considered currency by the RBI, so they must be treated as capital assets, meaning short-term gains will be added to income and taxed at normal rates while long-term gains will be taxed at 20% after indexation. Basis the volumes and frequency of trading, the corresponding income can be treated as business income too.

CA Mitesh and Associates is Mumbai's leading Chartered Accountants Firm. Contact us for any guidance or consultation on Capital Gains Tax or Crypto Consulting India

So here it is the 7 Precautions for New Cryptocurrency Investors in India

  1. Use Reliable Exchanges in India

  2. Don't Invest your entire portfolio

  3. Be ready for Extreme Volatility

  4. Double check on all information before investing

  5. Start with established bluechip coins

  6. Prices are impacted big ways by global developments

  7. Don't Forget Income Tax implications

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