What cryptocurrencies are and how to invest in them?
These days cryptocurrencies are regularly making news headlines. Whether for the dramatic rise in prices over a short period or for the 20-30% fall in a single day, they are all over the place. They are one of the most volatile financial products. In this article, we will discuss what cryptocurrencies are and how to invest in them.
What are cryptocurrencies?
A cryptocurrency is a digital currency or virtual currency. It is encrypted and based on blockchain technology. Cryptocurrencies are not issued or backed by Central Banks or Governments as in the case of traditional currencies like USD or INR. Thus, these are totally decentralised. The volatility of crypto prices had led to it being traded as an asset/security instead of it being used as a currency.
You can also use them for buying goods and services based on the value of each unit. However, few merchants accept cryptocurrencies as a mode of payment. So, they are still far from being considered mainstream currency that acts as a medium of exchange. The blockchain ledger records the cryptocurrency transactions.
What are the different types of cryptocurrencies?
There are thousands of different cryptocurrencies. It started with Bitcoin being the first cryptocurrency, and it is still the most popular with the highest market share. All other cryptocurrencies apart from Bitcoin are categorised as altcoins. Every altcoin has its own purpose. As per data from Coinmarketcap.com, as of 12th October 2021, there are a total of 12,644 different cryptocurrencies with a total market capitalisation of USD 2.3 trillion.
The ten biggest cryptocurrencies by market capitalisation include:
|Sr. No.||Cryptocurrency||Market capitalisation (USD)|
|3||Binance Coin||72 Billion|
|8||USD Coin||33.23 Billion|
Returns given by Cryptocurrencies
In the last few years, the returns given by some cryptocurrencies have been phenomenal. Since Bitcoin is the biggest cryptocurrency, let us look at the last 10-year returns given by it.
As seen in the above chart, at the start of 2012, a single Bitcoin traded at around $5 only. As of today (12th October 2021), a single Bitcoin is trading at a huge $57,000. So, in the last ten years, the price of Bitcoin has multiplied a whopping 11,400 times! But, the last ten years' journey of Bitcoin from $5 to $57,000 has been very volatile. There have been quite a few instances when the price of Bitcoin has multiplied in a very short period, and then it has crashed by 20-40% in just a couple of trading sessions. So, the risk involved in trading Bitcoins is very high.
Comparison of Bitcoin returns with other asset classes
In the above section, we saw how Bitcoin had given mind-boggling returns in the last ten years. Let us now compare the Bitcoins returns with other asset classes such as Nifty 50, gold, and fixed deposits. Ten years ago, if an investor had invested a lump sum of Rs. 10,000 in each of these asset classes, then as of October 2021, the returns would look like this.
As seen in the above chart, a lumpsum investment of Rs. 10,000 in Bitcoin has multiplied into a whopping Rs. 22.90 crores in 10 years. In the same period, the Nifty 50 investment was worth Rs. 35,000, a fixed deposit was worth Rs. 20,610, and gold was worth Rs. 16,000.
While Bitcoin has given tremendous returns in the last ten years, it is very volatile, as seen in its ten-year price chart in the earlier section.
Are cryptocurrencies legal?
The legality aspect of cryptocurrencies is the most tricky part about them. Currently, El Salvador is the only country that has legalised Bitcoin. Some countries, such as China, Ecuador, etc., have banned them. However, most countries have neither legalised nor banned cryptocurrencies but are in the process of introducing regulations to regulate the crypto market the same way the currency market is regulated.
Legality of cryptocurrencies in India:
In 2018, the RBI banned cryptocurrencies in India. However, this decision was challenged, and in 2020, the Supreme Court ruled against the RBI ban. In India, banks are regulated by RBI, and hence they are wary of cryptocurrencies even as the Supreme Court has set aside the RBI ban. The Government is yet to introduce the “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” in Parliament.
So, as of now, cryptocurrencies are NOT illegal in India. But, at the same time, they are unregulated in India. As of today, you can invest in cryptocurrencies in India. However, there is ambiguity on what lies in the future on the legality aspect of cryptocurrencies in India.
Should you invest in cryptocurrencies?
As an investor, you can invest in cryptocurrencies. Before that, you need to understand that cryptocurrencies are very volatile, and hence they should form a very small percentage (not more than 5%) of your overall investment portfolio. Be prepared for a rollercoaster ride. Cryptocurrencies are very volatile. They can easily rise substantially over a short period and experience drastic falls of 10-30% in a single day.
Asset allocation with Glide Invest App
As discussed earlier, due to the very volatile nature of cryptocurrencies, you should allocate a very small part of your investment portfolio (less than 5%) to them. You need to follow asset allocation to diversify your investment portfolio as per your risk profile. Appropriate asset allocation includes investing in various asset classes like equity, debt, gold, real estate, etc. To understand your risk profile and get recommendations for the appropriate investment products, you can partner with the Glide Invest App. You will get advice on how to plan and systematically invest towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved