 "Cryptocurrency")
United States President Donald Trump on March 2, 2025, announced the establishment of a US Crypto Strategic Reserve, comprising Bitcoin, Ethereum, XRP, Solana, and Cardano. This move is being seen as a major step towards legitimising cryptocurrencies, which could also trigger a bull run in this asset class.
Impact: Inflows, price surge
The announcement led to a surge in trading volumes, with the crypto market seeing inflows of nearly Rs 300 billion overnight. Bitcoin surpassed Rs 94,000, while Ethereum climbed above Rs 2,500. “Such legitimisation of cryptos by the US government could drive mainstream adoption and increase institutional participation,” says Balaji Srihari, vice president, CoinSwitch.
Bitcoin and Ethereum are expected to maintain dominance due to their first-mover advantage, security, and institutional backing. “However, the inclusion of XRP, Solana, and Cardano in the US reserve could significantly boost their adoption,” says Raj Karkara, chief operating officer, ZebPay.
Whether the initial momentum witnessed after the announcement sustains will depend on supportive policies, their effective execution, sentiment, and economic conditions.
Several other factors currently favour cryptocurrencies. One major driver has been the launch of several Bitcoin exchange-traded funds (ETFs). “US spot Bitcoin ETFs have driven massive institutional inflows. They have also provided price stability and liquidity,” says Karkara.
Traditional financial institutions are increasingly adopting digital assets. “BlackRock, the world’s largest asset manager, now recommends cryptos as part of its model portfolio to clients,” says Srihari.
The regulatory landscape is improving, with the Securities and Exchange Commission (SEC) dropping several cases against crypto firms.
Key risks
Investors must, however, be mindful of risks before initiating or increasing exposure to cryptocurrencies.
Volatility: Cryptocurrencies exhibit high volatility. “This is due to their nascent market stage, limited depth, and sentiment-driven trading,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi) registered investment advisor (RIA) and founder, SahajMoney. Only investors with high risk tolerance should consider investing.
Policy uncertainty: Indian investors face regulatory uncertainty as cryptocurrencies exist in a legal grey area. “The key risk arises from the fact that this asset class could possibly be prohibited through pending legislation. Risks could also arise due to conflicting oversight from multiple regulators (like the Reserve Bank of India and the Securities and Exchange Board of India). There is also the possibility of abrupt policy changes and retroactive enforcement as regulatory frameworks develop,” says Kumar. Karkara emphasises the need for investors to stay informed about evolving policies.
Regulatory gaps: Cryptocurrencies’ decentralised technology operates outside frameworks designed for centralised institutions. “This creates regulatory gaps where misleading practices and security vulnerabilities can flourish,” says Kumar.
Crypto investments lack traditional consumer protections like deposit insurance, circuit breakers, and dispute resolution mechanisms.
Liquidity constraints: Regulatory shifts or market downturns can reduce liquidity, making it harder for investors to buy or sell assets when needed.
Limited exposure, long horizon
Since cryptocurrencies are high-risk assets, financial advisers recommend caution. Kumar advises capping crypto exposure at 1-5 per cent of a portfolio. “Only bet that money which you are willing to lose,” he says.
He also recommends a minimum five-year investment horizon to navigate through volatile phases in the market. Srihari warns against excessive leverage.
Security considerations
Investors must prioritise security when investing in cryptocurrencies. They should choose exchanges with strong security measures. “Look for an exchange that has a history of robust security measures and minimal breaches,” says Prashant Mali, cyber law expert and advocate, Bombay High Court.
The exchange should offer two or multi-factor authentication. A significant portion of assets should be stored offline to reduce vulnerability to hacking. The exchange must undertake regular security audits by independent agencies. “Nowadays some exchanges offer insurance to protect users against losses due to hacking, which is a useful feature,” says Mali.
The exchange should also have robust know your customer (KYC) practices.
Comply with tax norms
Profits from cryptocurrency sales are taxed at a flat 30 per cent (plus applicable surcharge and education cess). Only acquisition costs can be deducted. “Expenses related to transaction fees, transfer costs, etc., cannot be deducted while computing taxable gains,” says Suresh Surana, a Mumbai-based chartered accountant.
Tax deducted at source (TDS) of one per cent applies to crypto transactions, except in specific cases.
Crypto losses cannot be offset against other income or capital gains from other assets. “This is a major restriction that prevents investors from reducing their overall tax liability,” says Surana. Losses from one financial year cannot be carried forward to offset future gains.
Tax classification depends on transaction patterns. “Crypto gains are treated as capital gains when the investor buys and holds crypto assets for investment purposes, similar to stocks or real estate. If the transactions are infrequent and the crypto is held for the long term, the gains generally qualify as capital gains,” says Surana.
Conversely, frequent trading or business activities like mining or arbitrage classify gains as business income.
Investors must disclose crypto gains or losses in their income tax return (ITR) under “Schedule VDA”. Resident taxpayers holding cryptos on foreign exchanges must report them under the Foreign Asset Schedule in the ITR.
Precautions for safeguarding crypto assets
- Use a hardware wallet: Hardware wallets store your private keys offline, making them much more secure than software wallets
- Keep your private keys and seed phrases offline: Never store your private keys or seed phrases on your computer or mobile device. Write them down and store them in a safe place
- Use strong, unique passwords: Use a different password for each of your cryptocurrency accounts
- Enable 2FA/MFA: Add an extra layer of security to your accounts
- Be wary of phishing attacks: Never click on links or open attachments from unknown senders
- Keep your software updated: Install the latest security updates for your operating system and cryptocurrency wallets
