Cloud lifts over cryptocurrencies, but volatility remains: Analysts

Start with small investments, but exclude from portfolios aimed at key financial goals

Last week, the Reserve Bank of India (RBI) asked banks not to cite its 2018 order as a reason for denying services to customers who deal in cryptocurrencies. After this, both the cryptocurrency industry and investors heaved a sigh of relief. It appears that India may not emulate China and deny the industry access to banking services.

Perilous existence

Cryptocurrency exchanges in India have lived under the threat of closure for many years. First, the central bank issued a circular in April 2018 banning banks and other entities regulated by it from providing services to the exchanges. As a result, investing ground to a halt. In April 2020, however, the Supreme Court lifted the ban. Nonetheless, the regulatory uncertainty lingered owing to reports that the government may pass legislation to ban cryptocurrencies. Finance Minister Nirmala Sitharaman’s statement in March that the government would take a calibrated approach brought some relief. In May, however, crypto exchanges once again began to complain of banks denying services. China’s crackdown on the industry also stoked fears. 

RBI’s latest instruction has bolstered the view that Indian investors may be allowed to invest in cryptocurrencies. Says Sumit Gupta, chief executive officer (CEO) and co-founder of CoinDCX: “RBI’s clarification is a welcome move for both the crypto investor community and crypto exchanges operating in the country.”

To allay the government’s apprehensions that crypto investments could become a conduit for illegal activities, the industry has decided to undertake self-regulation. The Blockchain and Crypto Assets Council (BACC), a part of the Internet and Mobile Association of India (IAMAI), is setting up a board to oversee the implementation of a self-regulatory code of conduct for member exchanges. The code includes voluntary compliance with anti-money laundering, know your customer (KYC) regulations, company and taxation laws, and combating of terrorism financing.

Volatility remains high

While the regulatory cloud hanging over cryptocurrencies has dissipated for now, volatility remains a concern. Bitcoin traded at around $11,200 in end-July 2020. From there it rose to $63,300 by mid-April 2021, and then fell sharply to around $30,000 in mid-May.

Says Avinash Shekhar, co-CEO, ZebPay: “Cryptocurrencies are a new asset class and investors should treat it as an investment in a start-up—as a high-risk high-reward category. As in any new asset class, there will be price volatility in the short term.” He adds that it may become a more stable asset class as it matures.

Every retail investor may not, however, be able to handle such high volatility.

What should you do?

Most financial planners (FPs) remain skeptical about cryptocurrencies, one reason being that it is not a regulated asset class. “I would advise retail investors to avoid any asset class that is not tightly regulated,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

FPs believe cryptos can’t be made a part of regular portfolios. Says Pankaj Mathpal, managing director and CEO, Optima Money Managers: “They can’t be a part of portfolios aimed at achieving goals like children’s education, retirement, etc.” He says investors can at best set aside some money, which they can afford to lose, for investing in cryptocurrencies, provided they are clear they are speculating with this money, just as one would on a lottery ticket.

Adds M Barve, founder, MB Wealth Financial Solution: “If you have checked all boxes of financial management and have some cash left which you can write off mentally, you may invest in cryptocurrencies but for the long term.”