‘Crypto craze’ is taking over the world. The ongoing bull run coupled with ease of investment has helped cryptocurrency providers add more investors.
India is estimated to have over 1 crore cryptocurrency investors and this number is snowballing every day.
It's likely that some of your clients could also be owning cryptocurrencies or planning to do so.
As their financial mentor, it's important that you keep them informed about the various risks and hence save them from the pitfalls of investing in virtual currencies.
There are two types of risks faced by cryptocurrency investors — legal risks and financial risks.
Legal risks
Cryptocurrencies are unregulated but not illegal in India. RBI had barred banks from facilitating crypto transactions in 2018 but that order was quashed by the Supreme Court in 2020.
"Supreme Court striking down the RBI order has resulted in a situation of regulatory flux and hence there is an informal perception that cryptocurrencies are legal in India," said Salman Waris, a senior lawyer at TechLegis.
But the problem does not end with the quashing of the order. On several occasions, government has made it clear that it is not comfortable with the idea of private cryptocurrencies.
“The government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system,” Finance Minister Nirmala Sitharaman had informed the Parliament in February 2021.
A month later, news agency Reuters reported that India will soon bring a law to ban cryptocurrencies. The source-based report said the government plans to impose fine on people trading or even holding such digital assets.
The report said the law would provide six months’ time to people with existing holdings to sell the cryptocurrencies.
In a recent interview, Sitharaman appeared to have softened her stand a bit. She said that people will be given adequate window to experiment with blockchain, bitcoins and cryptocurrency.
"This indicates that the government’s present posturing is only to ensure a level playing field for RBI’s proposed digital currency. In the long run, Centre may allow use of some digital currencies in a regulated form," Waris said.
Financial risks
Investors should know that high return instruments carry high risks. This stands true for cryptocurrency investments as well.
Virtual currencies are subject to market risks. They are highly volatile and hence extremely risky.
Within the first few months of 2021, Bitcoin touched a low of $27,734 and a high of $64,895. This tells us how volatile these virtual currencies are.
The volatility is a result of the fact that governments, entrepreneurs and big investors across the world have started to take these currencies seriously. This has resulted in cryptocurrencies being in news every other day. They are either getting banned, taxed or receiving a big investor’s backing every few days or weeks.
Being unregulated is not a good thing
When speaking on the advantages of cryptocurrencies, enthusiasts often bring up the fact that these currencies are unregulated and decentralised, which means they are not completely in control of any government or individual.
This characteristic, however, has its own set of problems.
The biggest issue is that transactions, once done, cannot be reversed. And since these virtual currencies are not regulated, there is no grievance settlement mechanism.
Most cryptocurrency wallets do not even have a password recovery mechanism. This implies that if someone forgets the password, there is no way to recover it. The investment is lost forever.
Should one completely avoid investing in cryptocurrencies?
A well aware investor can choose to invest a small amount in these currencies after proper research and consideration.
Developments in the past few years indicate that the concept is here to stay. More and more high-worth investors and governments, either directly or indirectly, are lending their support to these virtual currencies.
Moreover, the Indian government, if and when they impose a ban, is likely to provide a window for investors to exit these investments.
Given this background, it would be unfair to ask investors with high risk appetite to completely ignore the highest return delivering asset class in recent years.
