Is the history of cryptocurrency over? 4 things crypto investors need to know to navigate the high-risk arena
A. Sell them all
B. Reserve partial benefits
C. Buy more
D. Hold for the long term
It turns out that many crypto investors ticked the latter option when the market rallied in 2021. One of them was like Bangalore-based senior IT professional Sanjeev Mathur (pictured). The value of his crypto holdings rose from Rs.5 lakh to Rs.22 lakh but Mathur did not sell. “I didn’t need the money, so there was no need to sell,” he says.
In hindsight, it was a bad decision. The crypto market is very different from the stock market where prices are determined by fundamentals and long-term holding has yielded high returns. In the crypto market, prices are determined by sentiment and volatility can be confusing. Last month, the Luna coin crashed to zero. Other coins are down as well, some by as much as 80-90% from the 2021 peak (see chart). Is this the beginning of the end for cryptos? The industry doesn’t think so. “Prices are determined by feelings. There will be bumps along the way, but we are here to play a long-term game,” says Rajagopalan Menon, Vice President of WazirX. Crypto prices have crashed, but Rajagopalan is confident they will recover. “Bitcoin has lost 50% of its value seven times in the past 12 years,” he says.
Others also demonstrate bravery. “Like any other market, the crypto market is also cyclical. All asset classes are down right now, and the crypto market is also going through a bearish phase,” says Mridul Gupta, COO, Coin DCX. He points out that although Bitcoin is down 75% from its 2021 peak, it is still 10 times higher than it was five years ago.
Sitting in his 16-storey apartment in a leafy part of Pune, software engineer Anand Subramanian (pictured) pinned his hopes on the recovery. Subramanian, who used to invest mostly in small savings plans and insurance policies and a bit in mutual funds, was inspired to invest in cryptos when he saw his friends and colleagues make a lot of money in this new space. His crypto portfolio is down nearly 60% and Subramaniam has vowed never to invest in crypto again.
Waiting for bigger fools
Like many other investors, Mathur and Subramaniam are waiting for bigger fools to buy their cryptos. They fail to realize that even if the crypto market recovers, the chances of reaching 2021 levels are quite low. Global markets are in turmoil after the US Fed hiked interest rates and the liquidity that has buoyed markets over the past two years is rapidly drying up.
Back in India, changes to tax rules for cryptos further dampened investor sentiment. This year’s budget imposed a flat tax of 30% on all gains, regardless of the investor’s income level. This is very high compared to the tax on other assets and sources of income. Capital gains from stocks and stock funds are taxed at 10-15% and non-stock investments, property and gold are taxed at 20% or the marginal rate. But every rupee earned from cryptos will be taxed at 30%, even if the investor has no other income. Worse still, losses from one crypto cannot be adjusted against other income or even gains from another crypto. They also cannot be carried over to subsequent years. Thus, the government pockets 30% of the gains while the losses are borne by the investors.
Another major issue is the 1% TDS which comes into effect from July 1st. According to a notification released last week, a seller will be required to deposit 1% of the transaction value as TDS (see box). Although this is adjusted against total liability and can be claimed later as reimbursement, it will lock in liquidity. As one crypto exchange CEO pointed out, in just 200-300 trades, an investor’s entire capital will be locked up in TDS. High frequency traders will be particularly affected.
The tax rules had been all the rage and the industry was asking for changes, but the government did not give in. As a result, many trading platforms that had proliferated over the past two years have already retreated. Even the ones that work have seen a massive 70-75% drop in trading volumes.
The sharp drop in crypto prices has devastated Amit Kumar, a sales manager at a Gurgaon-based fintech company. Like Subramanian, he was also drawn into crypto trading by the buzz around what the industry likes to portray as an “emerging asset class.” The difference is that while Subramaniam invested around 1% of his investment portfolio in cryptos, Kumar allocated almost 24% to this untested avenue. Worse, he also convinced some relatives to invest in the crypto space. “My own losses are bad enough, but I can live with that. The losses suffered by my loved ones worry me to death,” he said sullenly.
While investors like Amit Kumar have been badly burned, many others have made big money from cryptos. Bhushan Mittal, who runs a mobile accessories store in Noida, entered the market in 2020 when the prices were not searing. Mittal hit the jackpot when Dogecoin jumped from Rs.5 to Rs.50 in May last year. But Mittal didn’t let that success get into his head. Instead, he continued to make small trades and consistently take profits without holding long positions. “If an investment has gone bad, I’m not afraid to book losses. It’s part of the game,” he says evenly.
This is indeed sound advice, especially for investors like Amit Kumar who are sitting on big losses. As the Luna crash shows, all of your capital can be wiped out in a day. Even a bluechip like Bitcoin is down 75% from its November high of Rs.54 lakh. “Only enter this market if you can handle extreme swings and the implications of an investment going wrong,” says Prableen Bajpai, founder of FinFix Research and Analytics. Here are a few things crypto investors should keep in mind if they don’t want to get hurt in this high-risk area.
Do not take very big bets
The crypto market is largely driven by sentiment and tends to be very volatile. Prices can fluctuate 50-60% in a day, so don’t put huge amounts down this avenue. Even if you have a high risk appetite, invest only a tiny portion of your portfolio in cryptos. “Do not put more than 2% of your overall portfolio in crypto,” advises Vikram Subburaj, CEO, Giottos Cryptocurrency Exchange. Deep-pocketed investors like Mathur understand this. He only put around 1% of his portfolio in cryptos. So, although he lost money, the decline is not really upsetting for him.
Don’t invest all at once
Another piece of advice comes straight from the equity fund handbook: don’t invest large sums all at once. “Nobody knows how the prices will evolve in the days to come. Thus, investors should stagger their investments instead of committing large sums all at once. The SIP approach will work better,” says Coin DCX’s Gupta. Fractional investments in cryptos allow investors to invest fixed amounts each month. “Invest Rs.500 per month in cryptos and maybe 5-10 years later it can be enough to support your child’s college education,” says Rajagopalan.
Stick to bluechips
There are nearly 200 cryptos jostling for your attention. There is also plenty of unverified information on social media and self-proclaimed analysts offering investment advice. As a general rule, verify the information before investing. And don’t be tempted to buy obscure pieces. Larger parts can be more expensive but are more stable. Check the market capitalization and trading volumes of the coin. Low market capitalization and insignificant daily volumes are obvious red flags.
Avoid behavioral biases
Last but not least, don’t fall into behavioral traps like anchoring and loss aversion. Price levels during the 2021 rally may not be reached in a hurry. If you are waiting for your cryptos to return to these levels, banish that thought. Also consider booking losses, as the market may stay sideways for longer than you think.
The 1% TDS rule comes into effect from July 1. This is how the TDS will be deducted
The 1% TDS rule which comes into force on July 1 will only apply when the value or aggregate value of transactions made by persons exceeds Rs 50,000 during the financial year.
The buyer of a Virtual Digital Asset (VDA) is required to deduct 1% TDS from the amount paid to the seller. If the buyer’s PAN is not available, then the TDS will be 20%. If the seller has not filed their tax return, the TDS will be 5%.
If the transaction is directly between the buyer and the seller with no third party (exchange) between the two, the buyer will deduct the TDS if the amount exceeds the threshold of Rs 50,000 during a financial year.
If the transaction is routed through an exchange, the exchange will have to deduct the tax at the time of transfer of the payment from the buyer to the seller of the VDA. If the payment is made on an exchange through a broker, the TDS can be deducted either by exchange or by broker.
To ensure that the TDS is not deducted twice, there may be a written agreement between the exchange and the broker. The broker will be responsible for deducting tax from this credit/payment.
If the VDA transfer is through an exchange and the VDA is owned by the exchange, the VDA buyer will need to deduct the tax at the time of payment. However, it may happen that the buyer does not know that VDA belongs to the exchange.
In such cases, the exchange may enter into a written agreement with the buyer or its broker that, in all such transactions, the exchange would pay the tax on or before the due date for that quarter.
Exchanges would be required to provide a quarterly statement for all such transactions. Exchanges would also be required to provide their tax returns and all transactions must be included in those returns.