Considerations in investing BITCOIN
Bitcoin
was launched in 2009 by an anonymous user(s) as a decentralised digital
currency not overseen by any authority. Since its launch, bitcoin has seen its
price vault from $0.0008 to nearly $35,000 now amid hopes it could become the
dominant medium of exchange of the future. There is around 1650 cryptocurrencies,
but the 3 top cryptocurrencies by trading volume and market capital are
Bitcoin, Ethereum and Ripple / XRP. Exposure in cryptocurrencies is considered a high risk given the
volatility it has displayed. The value relies on network effect that how many
users are using it and how active the users are. The cryptocurrency benefited
from a number of events this year, beginning with the pandemic which prompted
monetary authorities to print currency, leading to fears of inflation, etc. to
bitcoin gaining, but it should be keep in mind that since 2016, it has declined
20% ten times, 30% seven times, and 48%+ four times. Financial experts suggest
not more than 2 percent at this point as part of your portfolio.
Need
of investing in Bitcoin :-
In
October, PayPal entered the cryptocurrency market allowing its users to buy and
sell cryptocurrencies using their accounts and said that it would allow customers to pay through popular cryptocurrencies such
as bitcoin and Ethereum. Bitcoin can
possibly evolve into a global market asset. India is the
second-biggest bitcoin nation in Asia after China.
Who
can invest in bitcoin? :-
Anyone who has the
risk appetite of dealing in a volatile new asset class along with a
sufficiently long-time horizon to meet their financial goals should invest in
bitcoin.
Should
investors buy bitcoin? :-
Even though the
brokerage doesn't rule out further price increases, it is hard to estimate a
fair value for Bitcoin. Thus, to avoid the real risk of losing one’s entire
investment, I am advising investors in cryptocurrencies to limit the size of
their investments to an amount they can afford to lose and also suggests thinking
about an exit strategy. Given the strong price momentum, the potential for
further institutional adoption, huge media, and social media attention, and the
limited supply, it expects prices to continue climbing in the near term.
Things
to remember while investing in bitcoin :-
If you
want to invest in Bitcoin, I strongly recommend that working only with Indian
cryptocurrency exchanges because these people conduct know your customer (KYC)
the way Reserve Bank of India (RBI) licenced entities conduct the KYC. Bitcoins
are intangible digital assets that must be
stored in secure wallets. Since these are digital assets, all the best
practices of the online world are to be followed. The below things to be keep
in mind while investing bitcoin :-
(a) Deciding the
entry/exit plan which can be detrimental to their financial planning.
(b) Investors
should always study the risks and volatility associated with bitcoin investing.
(c) Avoid getting
swayed by hype and invest time in studying risks and volatility associated with
bitcoin and other cryptocurrencies.
(d) Beginners would
be well advised to start with an amount of INR 10, INR50, INR100, depending on
their risk appetite, disposable income, and such factors.
How
to invest in bitcoin?
First, investors
need to choose an exchange that does proper KYC. He added that exchanges need
to declare how they will ensure security of details. Once, the buyer / investor
has selected an exchange, and have a verified account by the exchange, all they
need to do is transfer / start with an investment of as low as INR 100 to the
exchange's bank account or use their net banking feature to load INR into their
exchange wallet and then buy bitcoin with a click of a button. All of this can
happen in as less as 30 minutes. The other way to invest in bitcoin is by going
to an online peer-to-peer trading platform which acts as an escrow agent to
hold the bitcoin and allow the buyer to send money to the seller.
Factors
for selecting right crypto exchange :-
(a) Check the
security norms
(b) The measures
like security to investors’ wallets, two-factor authentication, confirmation
while depositing or withdrawals, etc. are of utmost importance.
(c) Consider the
history and reputation of exchange
(d) Check
legitimacy
(e) Consider
exchanges that offer ease in liquidity
(f) Be aware of
charges
Pros
and Cons of investing in bitcoin :-
(A) Positives
(a) An attractive
investment opportunity.
(b) A hedge against
depreciating fiat currency i.e. relates to
unorthodox central bank policies for over a decade. Some investors fear that
the use of central bank money to fund emergency expenditure programs will
eventually result in high inflation, eroding the purchasing power of their
currencies.
(B) Negatives
(a) Sentiment shifts
i.e. the brokerage also noted that most cryptocurrencies
are volatile, and the increase in institutional participation may make things
worse.
(b) Competition
i.e. cryptocurrency prices are also sensitive to new
supply and since they are not legal tender in any jurisdiction, they may at
some point be replaced by other digital currencies with better features. These
features could include being faster, cheaper, more environmentally friendly, or
gaining government backing.
(c) Regulation i.e. the risk of regulatory change is also crucial, stated UBS. Aside from Libra, the digital currency project launched by Facebook, cryptocurrencies haven’t received significant attention from authorities and regulators in recent years. This might change with the rise of institutional participation and the increase in market capitalisation. Regulators might see the more widespread institutional exposure to cryptocurrencies as a risk to financial stability, resulting in new regulations like higher capital requirements.
(d) It is still a nascent technology and it could just fail for whatever technical reason. Its value is extremely volatile, and it may wash away the entire investment and there is no obligation for anyone to protect one’s investment or buy his bitcoin. A mistake in the security of the bitcoin wallet can consummate the entire bitcoin holdings to the exploiter.
How
bitcoin investments can be taxed in India?
Experts believe
that it’s not a good idea to skip paying taxes on gains made from the sale of
bitcoin. According to regular income tax parlance, the tax implications on
cryptocurrencies should depend on the investment's nature, whether held as a
currency or held as property. Gain from the sale of bitcoin may be taxed as
business income if traded frequently or taxed as capital gains if held for the
purpose of investment. If regarded as business income, then the gains would be
taxed as per the applicable slab rate. However, for investors in bitcoin,
taxation may be similar to that of gains taxed as capital gains. This means if
taxpayers redeem their investments before 3 years, they may have to pay
short-term capital gains as per the current tax slab. If redemption is after 3
years, any redemption may be treated as long term capital gain and could be
taxed at 20 percent with indexation. Bitcoins created by mining are
self-generated capital assets and may be taxed as capital gains but section 55
of the Income Tax Act, 1961 (cost of acquisition and improvement) does not
recognize the same. On the other hand, as per some tax experts, Profits from
cryptocurrencies can be treated as income from other sources and gains from
frequent trading can be treated as income from speculative business income.
However, more clarity is awaited on this from the tax authorities.
Verdict
:-
As bitcoin’s price
dropping from $40,000 is a healthy correction and it will help to build a more
solid foundation for price appreciation. As of now, it’s a high risk, high
return investment option. Only time will tell how solid Bitcoin's current price
levels are in terms of price support. However, India is yet to come up with
formal regulations for trading cryptocurrencies.
Disclaimer
The views and investment tips by SCR Gallery are their own and not that
of the website or its management. SCR Gallery advises users to check with
certified experts before taking any investment decisions.
[Source : https://www.cnbctv18.com]
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Thank you,
Chandra Sekhar
Reddy
Author and Sole proprietor,
SCR Gallery
Website : https://www.scrgallery.com
Blogger : https://scrgalleryindia.blogspot.com
E-mail : scr@scrgallery.com
