SOS to crypto buyers

RBI has flagged some major concerns on cryptocurrencies. Experts favor ban on such transactions
Representational Image [Source:  MichaelWuensch from Pixabay]
Representational Image [Source: MichaelWuensch from Pixabay]

In the past few days, cryptocurrencies have once again dominated news headlines. But, this time purely for all the wrong reasons. After witnessing huge unprecedented surge in price movement for months together, all major cryptocurrencies faced a fall from grace. It was on May 19, when the massive slide in cryptocurrencies wiped out billions from investors' wealth. Bitcoin, which is considered as synonym to cryptocurrencies, lost nearly 22% in a day. It witnessed a miserable dip to $35000 from a high of around $65000 in April. Thus, in a period of few weeks, Bitcoin investors helplessly witnessed their wealth stored in Bitcoins wiped out by almost 50%. Precisely, all major cryptocurrencies have faced major corrections in their value and we can sunup that the crypto market's behavior is nothing but erratic in nature

Even as cryptocurrencies have remained controversial and risky investment avenue following government of India's refusal to recognize the virtual currencies within the ambit of its financial system, we witnessed huge surge of crypto investors in the country, which mostly included young ones – precisely know as early birds in the world of investment.

Even as the government's stance on cryptocurrencies is  not clear yet, the Reserve Bank of India (RBI ) has in clear cut terms rejected cryptocurrency as a medium of exchange. Let me reproduce a recent crucial statement of the RBI Governor, Shaktikanta Das while he was speaking at the 7th edition of India Economic Conclave . He had said, "Both RBI and the government are committed to financial stability. We have flagged some major concerns to the government on crypto currencies. The government will come out with a decision sooner than later."

It's interesting to note that in this environment when present of the cryptocurrency is controversial and future is uncertain, approximately 1.5 crore Indian investors stand invested in cryptocurrencies with a holding reportedly worth Rs 15,000 crore. A latest data from crypto exchanges published by reveals that there are 350 startups who operate in blockchain and crypto. Crypto exchanges, WazirX, CoinSwitch Kuber and other exchanges, have seen a big rush in demand from users and these exchanges have been advertising heavily on investments.

Notably, the government has proposed to present a Bill to regulate cryptocurrencies called The Cryptocurrency and Regulation of Official digital currency Bill, 2021. The Bill has provisions to make any dealings in cryptocurrency illegal. But there is no clarity yet on when this Bill will be introduced in Parliament.

Meanwhile, there are local crypto investors, particularly young one or we can say early birds, who have listed series of queries about their fate of investment in these virtual currencies. At the moment they are scary after the dramatic crash which hit crypto market. At the same time, there are early birds who have now taken a dip in the crypto market, following the principle of 'enter the market when low'. Even, there are others who are just close watchers of the market but don't invest in any cryptocurrency. However, they too want to keep themselves updated with market (both crypto and share market), may be for knowledge sake.

What were the reasons for crypto market for its fall from grace?

By virtue of the nature of cryptocurrency market, it's evident that using this avenue as your investment option is always loaded with high risk. Of course, the market has the potential to give you large gains over a period of time, but anytime can be shocking for investors which many investors, possibly, wont bear and can see their wealth erosion in a jiffy. I think the recent 'unexpected' crash which saw Bitcoin losing nearly half of its value in a single shot serves a warning shot for crypto investors for all times to come.

Meanwhile, the cause of the huge correction witnessed in the value of cryptocurrencies, as pointed out by market experts, was fuelled by an announcement by Space-X founder and Tesla CEO Elon Musk which expressed concerns about carbon emissions while mining Bitcoin. Contrary to his earlier promise, Musk said his electric cars cannot be purchased with Bitcoin. This was followed by The People's Bank of China banning the use of cryptocurrencies.

One more thing, very important, globally influential personalities (like Elon Musk) hold sway in markets. It's up to them to turn the markets around – bullish or bearish. This only shows the fragile nature of the crypto market.

Does the market crash means not to board crypto market?

See. It's not that. Ups and downs are part of the market operations. You cannot totally dismiss cryptocurrencies as an investment platform. What you need as an  investor is to be careful while considering these digital currencies as investment option. However, there are certain basic things which you need to take into account while considering investment in cryptocurrency. First and foremost is that there is lack of clarity on regulation, which means investment in cryptocurrency is highly risky. If the government decides to ban cryptocurrencies in India, then chances are that investors would be losing their money. In other words, there is no underlying to the crypto currencies, so experts list it is highly risky for anyone to use it as asset. With high volatility seen in recent days, it is quite clear this is a speculative asset. So, check with yourself if you are ready for this shocker.

Besides, you should not get lured to wealth creation stories in the crypto market. Don't look at the recent crash in the value of these digital currencies as a ' healthy correction and a time to buy'. You need to do your own analysis of the market and evaluate your risk-bearing capacity.

If you find yourself tolerant to the given risk and keen to invest, then follow what market experts advise: "Investors should only invest a small portion of their overall portfolio in this asset class. The amount can vary between 5-10 per cent, or even lower, depending on one's ability to withstand losses on the invested amount."

In succinct, only those who have high risk-taking ability should invest in this market.

Meanwhile, a note of caution is that seamsters are on prowl on social media and other fake portals . The fraudsters offer investment advice to gullible investors. Don't rely on such crypto-market 'experts'. You should exercise due diligence and always directly deal with cryptocurrency entities.

Why RBI is against the use of cryptocurrency in the country's financial system? What if the government bans it?

By virtue of the nature of cryptocurrencies, they are not controlled by a country's regulators or even governed by them. Being operational in an unregulated environment, there is huge scope that criminal elements  may be using these virtual currencies for money laundering  activities. So, this makes a sense for the RBI to be suspicious of cryptocurrencies. Notably, banks in line with RBI guidelines have banned crypto transactions through their system.

In the event of a government intervention through tough regulatory measures (which may include blanket ban on these digital currencies as medium of exchange), there is possibility that investors may lose entire investment. Experts say the recent Chinese regulator's action may not be the last one on cryptocurrencies across the globe. Governments and regulators worldwide are watching closely. They believe that there could be more regulatory intervention coming in major markets and tightening regulations can spook the market at any time.

Let me quote chief economist of CARE rating agency. He says: Be it as a medium of exchange, mode of investment/ assets, cryptocurrency dealings should be banned in India and should be made as a criminal offense."

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