Should you invest in bitcoins and cryptocurrencies?

Here are some points you should know before investing in bitcoins and cryptocurrencies

Updated: May 21, 2021 07:43:53 PM UTC
Gold Coins Bitcoin in a soap bubble. The concept of instability of the cryptocurrency, electronic money, the burning of the cryptocurrency. Image: Shutterstock

In the last few days, many retail investors of cryptocurrencies felt trapped. The prices of bitcoin, dogecoin, and other cryptocurrencies shot to the moon and crash-landed in no time. The crypto market wiped out more than $600 billion in a matter of few days and almost all the cryptocurrencies' values dropped by more than 30-35 percent in a single day.

Once again, we witness emotions such as fear, greed and uncertainty hovering over one crore Indian investors that together hold approximately Rs 10,000 crore worth of cryptocurrencies as of February 2021. There are so many questions that need to be answered, and this is my attempt to share some of the important ones to help understand what’s happening in this crypto space.

Is Bitcoin too good to ignore or a bubble waiting to burst? Some 25-30 years ago, people used to assume our share market was a place for gambling. Who knows, the crypto market could be the next 'Internet' and it is already becoming too big to ignore. One should not ridicule it without understanding this first. Always remember that first come the innovations, followed by the regulations. You can start to learn and understand what the crypto market is all about, and wait for the government to come up with regulations before you plan to invest in it.

Should we call it a currency?
It is better to call it an asset, like a commodity. Because to call it a currency, it requires to be stable and possess value which is not the case at the moment. However, some corporations across the globe have started accepting bitcoins as a mode of payment.

So, is it an asset?
Well, until it is recognised by the regulatory authorities, we can treat it as a commodity like gold, silver or stock. Its value comes from its scarcity, like gold. Only 21 million bitcoins could ever be in circulation, making it a scarce commodity.

As you know, your stock or gold is not a legal tender, meaning you cannot trade your gold or stocks in a store against your purchases. Your crypto asset is unlike other asset classes which are already verified, established, and trusted by people. What gold used to be for the older generation, cryptocurrency is for the new generation that believes in decentralisation.

Why is the crypto market so volatile and speculative?
There could be many reasons. Let me share the two most important factors. First, this market never rests. It works 24/7 unlike any other stock market globally that works for a specific time period during weekdays. The second factor is that a global community is involved in trading or investing in it, unlike stock markets which are more country-specific. Imagine, what would happen if BSE and NSE were allowed to open 24/7 and people across the world were interested in investing. Won’t you find similar volatility there as well? Stock markets are less volatile as compared to the crypto market which, as suggested earlier, would stabilise once it finds more takers and favoured regulations.

What you should know before you plan to invest in bitcoins/crypto market

  • Regulations: It would be a good idea to invest only after its regulations are clear. Finance Minister Nirmala Sitharaman has already said that the government will take a calibrated view on crypto soon.
  • Fundamentals: This phenomenon is not a new thing because cryptocurrencies, similar to other asset classes, are also based on fundamentals. Though those factors differ from the fundamentals used for other asset classes.
  • Asset allocation: Never forget the rules of asset allocation—you never invest all your money in one asset class. The basics of investing remain the same—know your risk profile and then invest in asset classes best suited to achieve your financial goals.
  • Don’t understand? Don’t invest: You should never invest your hard-earned money in any financial instrument be it the stock market, mutual funds, gold or crypto without first understanding that space.
  • Avoid FOMO: You must not invest out of the fear-of-missing-out (FOMO) syndrome.

Rishabh Parakh is a personal finance expert, a Chartered Accountant by Profession and founder of NRP Capitals (formerly known as Money Plant Consultancy)

The thoughts and opinions shared here are of the author.

Check out our end of season subscription discounts with a Moneycontrol pro subscription absolutely free. Use code EOSO2021. Click here for details.

Post Your Comment
Required, will not be published
All comments are moderated