Investing in cryptos: Be mindful of high volatility, regulatory overhang

Potential investors should be mindful of regulatory overhang and high volatility

The United States (US) markets regulator, the Securities and Exchange Commission (SEC), recently gave its approval to spot exchange-traded funds (ETFs) that will invest in Bitcoin. The leading cryptocurrency, which is trading at over $46,000 currently, has rallied about 153.2 per cent over the past year.      

Factors driving the upsurge

SEC approval: BlackRock, Invesco, Fidelity, and several other players have received approval for spot ETFs.

“The Bitcoin ETF approval is a landmark decision that will legitimise Bitcoin and cryptos as an asset class. It also marks the beginning of easy access for institutional capital to this space,” says Parth Chaturvedi, investments lead, CoinSwitch Ventures.

Until now, many institutions have stayed away from cryptos because of the lack of regulatory clarity. “With an SEC-approved product available, a lot of institutional money could flow into this asset class,” says Rajgopal Menon, vice president, WazirX.  

Bitcoin has been rallying since mid-2023, when BlackRock, one of the world’s largest asset managers, applied for a spot ETF.

Halving: The halving event in April 2024 will reduce the supply of Bitcoins. “The impending halving is anticipated to reduce monthly selling pressure from miners to less than $500 million, down from the previous levels of around $1 billion,” says Minal Thukral, executive vice president, growth & strategy, CoinDCX.   

Looser monetary policy: In 2024, the US Federal Reserve is expected to cut interest rates, which could result in money flowing into non-interest-yielding assets (like cryptocurrencies and gold).

No devaluation risk

Central banks can print fiat currencies at will. “The supply of Bitcoins is fixed and it will only reduce over time,” says Menon.

Having crypto assets in a portfolio can diversify it. “The price movements of cryptos may not always align with that of traditional assets such as stocks and bonds,” says Thukral.

Regulatory, other risks

Cryptocurrencies remain under a regulatory cloud. There is always the risk that the government could ban it. Ever since the Indian government introduced taxation on gains from cryptocurrencies, stakeholders have interpreted it as a sign that this asset class will not be banned. While that risk may have reduced, it has not gone away. The Reserve Bank of India, which has its own digital currency, would want it to enjoy primacy.    

Another risk in this asset class is its extreme volatility. “Bitcoin went up to $67,000 in 2021 and then collapsed to $15,000 within six months,” says Menon. Intraday swings of 30-40 per cent occur. Unlike stock exchanges, crypto exchanges do not have circuit breakers.

Cryptos are 24/7/365 assets. For those trading in these assets, monitoring them around the clock can be fatiguing.

Should you invest?

Investors should be mindful of regulatory risk. “As a registered investment advisor with the Securities and Exchange Board of India (Sebi), I will not recommend cryptos until regulations become clear. Currently, there is the risk of investors falling on the wrong side of the law,” says Abhishek Kumar, Sebi registered investment advisor and founder, SahajMoney.    

Those who still want to invest should consider their risk appetite. Youngsters may go for it as they have a longer horizon to recover from a setback. Investors with a low risk appetite, who may find it difficult to handle its high volatility, should stay away. Retirees and those approaching retirement should also steer clear.

Safety tips for investors
 

Invest only that money whose loss will not damage your finances (avoid putting more than 1-2% of your portfolio)
 

Invest a fixed amount regularly and scale up gradually
 

Enter with at least a five-year horizon
 

Stick to exchanges that are Financial Intelligence Unit-compliant; avoid overseas exchanges not compliant with Indian tax laws
 

Stick to cryptocurrencies with an established track record