Cryptocurrency: Investors can wait till clarity emerges

KS Badri Narayanan Chennai | Updated on June 18, 2021

Govt, RBI working out details

With risk-on sentiment in full flow, any volatile asset these days catches the imagination of retail investors. Cryptocurrencies such as Bitcoin have not lagged behind, as many retail investors are attracted to it in India. According to industry estimates, there are 10 million crypto investors in India with total holdings of $1.36 billion.

After tasting success in a bullish stock market, a lot of small investors in India now want to make a quick buck through this new asset class. Many crypto enthusiasts however either do not know the fundamentals of this new-fangled asset class nor its trading mechanism. Some think taking a risk with minimum amount, say 1 per cent of their portfolio, is worth a try given the track record of the likes of Bitcoin zooming from less than $10 in 2013 to $60,000 in 2021.

Enthusiasm of traders refuses to die down even as the Centre is mulling a draft Bill in India banning cryptos. The Government has listed a Bill providing for the banning of all private crypto currencies in India and provides for the creation of a legislative framework on an official digital currency.

Bitcoin was the first crypto currency to hit the market. Bitcoin is digital money that allows for secure peer-to-peer transactions on the internet, says Coinbase, one of the global exchanges that offer trading in crypto currencies. The other well known cryptos include Ethereum, Ripple, Dogecoin and XRP.

Digital currency, according to crypto enthusiasts, is very difficult to counterfeit or double-spend, as it is based on blockchain technology using open-source code. This allows anyone to track the owner of every single unit of such currency.

How trading works

One can trade on trade exchanges such as Coinbase, Binance, Vauld (international), WazirX, Unicorn, CoinDcX, Zepay and CoinSwitch Kuber (Indian) like share market trading where bid and offer prices are quoted.

Each person who directly joins the crypto currency network is issued a public key, which is a long string of letters and numbers that you can think of like an email address, and a private key, which is equivalent to a password, says Coinbase. Anyone can send bitcoin to an investor via public key, but only the holder of the private key can access the bitcoin in the “virtual vault”.

Chorus for Crypto

Recently, Central American country El Salvador officially approved Bitcoin as legal tender. Index major S&P Global launched S&P Bitcoin Index, S&P Ethereum Index and S&P Cryptocurrency MegaCap Index. Another index major MSCI is also planning to launch products based on cryptos.

However, the biggest grey area is regulation. Many countries are debating on how to regulate this asset class, though recently the UK has classified cryptos as property, pushing it under legal framework.

The US SEC said that it will seek more public comments on a proposal to list VanEck Bitcoin ETF on CBOE Global Markets Inc. Finance Minister Nirmala Sitharaman also recently said that a lot of negotiations and discussions are happening over the cryptocurrency with the RBI. The Centre’s position on cryptocurrencies will be a “calibrated one” she and added the RBI will be taking a call on what kind of unofficial cryptocurrency will have to be planned and how it has to be regulated. On its part, RBI has also on several occasions indirectly cautioned investors due to high risk.

The Enforcement Directorate recently issued a show cause notice to cryptocurrency exchange Zanmai Labs Pvt Ltd, known as WazirX, and its Directors under the Foreign Exchange Management Act, 1999 for transactions involving cryptocurrencies.

Traders who want to experiment with cryptocurrencies in India should ideally wait till the Centre comes out with clear trading framework with dos and don’ts.

Published on June 18, 2021

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