Despite the growing popularity of cryptocurrencies in India, a large number of investors hesitate to put their money in the virtual coin trading space. Find out if it is safe to invest in cryptocurrencies in India.
The popularity of cryptocurrencies has been growing rapidly in India since last year as more investors try their luck in the lucrative virtual coin trading space. Indian cryptocurrency exchanges confirm that they are adding people to their platform at a faster rate in 2021.
In view of the rapid customer base growth, cryptocurrency exchanges are optimistic that the emerging asset class will keep attracting more investors in India. However, the amount of cryptocurrency investments in India is only a fraction of traditional investment-class assets like equities.
The trend indicates that while younger Indian investors are placing their bets on crypto assets instead of traditional options, a larger number of individuals still remain hesitant, even though they are keen on exploring the cryptocurrency space.
IS IT SAFE TO INVEST IN CRYPTOCURRENCY?
The answer to the question is tricky as it is still an emerging asset class and has not yet gained widespread acceptance like equities, commodities and mutual funds.
Whether investing in cryptocurrencies is safe remains a hotly debated topic in the financial space, with many backing the decentralised digital currency and an equal number of people opposing it.
However, from a pure investment point of view, the risks associated with Bitcoin, Ethereum (Ether) or any other cryptocurrency are no different from other traditional assets, except the fact that the virtual coin market faces higher volatility.
Analysts have clearly stated that all cryptocurrencies are risky assets and wild price swings are common in the virtual coin trading space. This is likely to reduce as the asset gains wider mainstream acceptance.
But investors should be clear that the crypto space at the moment involves high risks and rewards. In other words, you need to have a big risk appetite to gain from crypto trading.
At the same time, investors should note that cryptocurrency is far more resilient than it appears.
Nischal Shetty, CEO of popular cryptocurrency exchange WazirX, has highlighted in the past that the asset has survived two major global recessions and has been around for over a decade.
Shetty had said that cryptocurrencies, like gold, act as a hedge to protect fiat currencies and equities. This is one reason why cryptocurrency demand grew rapidly during the first wave of the pandemic.
Unlike fiat currencies and stocks, cryptocurrencies are not impacted as much by inflation and offer an ideal alternative to gold, which is another preferred hedge investment.
It should also be noted that investing in cryptocurrencies is legal in India and there are no laws that prohibit individuals from buying or selling virtual coins.
For people who have a high risk appetite and have the patience to remain invested for a longer period, exploring the cryptocurrency space may not be such a bad idea. People should also ensure that they conduct adequate research before investing.
Having said that, there are visible risks that cannot be ignored.
REGULATORY HURDLES, POSSIBILITY OF BAN
In India, like many other parts of the world, the biggest risk involved in cryptocurrency trade is the lack of regulation and oversight. The fact that the government has not been able to come up with a concrete stand on cryptocurrency is the reason behind the lack of regulation.
The problem dates back to 2018 when the Reserve Bank of India (RBI) came out with a circular to impose a blanket ban on such trade.
In 2018, the Reserve Bank of India released a circular to caution users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. It had advised all entities regulated by it to no deal in virtual currencies or provide “services for facilitating any person or entity in dealing with or settling virtual coins”.
While the RBI circular was set aside by the Supreme Court on March 4, 2020, banks remained hesitant in dealing with cryptocurrencies. It is only after the RBI clarified its stance on cryptocurrency recently that banks have started dealing liberally with cryptocurrency exchanges.
Another issue that poses a risk to crypto trade in the country is the possibility of a ban. Though the government has softened its stance recently, it is still not clear whether it will go for a complete ban or regulation.