Follow these seven rules while trading in cryptocurrencies

Investing in cryptocurrencies is the best way to learn about them. But it is a high-risk high-reward game and you must be able to digest very high volatility.

New Delhi: Of late, cryptocurrencies have drawn a lot of investor attention because of the wide swing in their prices and their past returns. Even after the recent decline, crypto prices have zoomed in the past 12 months, churning out mind-boggling returns for investors. Price of a Bitcoin has rallied nearly 400%. Some smaller coins like the Dogecoins are trading at 140 times its June 2020 level while Matic Network has risen by over 7000%, according to a report in ET Wealth.

As cryptos are a new asset class, with very little data for analysis or past performance or fundamentals investors need to keep in mind the following seven things while starting trading in these high-risk high-reward digital currencies.

Invest small amounts initially: Despite the phenomenal returns offered by cryptos in the past investors should not get carried away by the return figures. Initially, one should only that much amount which he/she can afford to lose. As you are new to the trade it is obvious that you will make mistakes and in the learning process it is highly likely that you will lose money in your initial days of trade. So, to avoid any big financial shock, you should not put a very big bet initially. Once you get familiar about the cryptos that you are investing in and understand their value and prospects, you can allocate more amount to this asset class. Experts say one should not allocate more than 2% of his investment portfolio to cryptos.

Keep yourself prepared for extreme volatility: As cryptocurrencies have shown extreme volatility in the past one must be prepared for such events in the future as well. In the May crash, we have seen that even an overnight fall of 70-80% is also possible in cryptocurrencies. Keep in mind that even a bluechip like bitcoin is down 48% from its April high of Rs 50 lakh. “Enter this market only if you can stomach extreme variations and the implications of an investment going wrong,” ET Wealth quoted Prableen Bajpai, Founder, FinFix Research and Analytics as saying.

Use trustworthy platform: As the crypto space is not regulated in India many new outfits are mushrooming every day. Though the Supreme Court has struck down the RBI ban on cryptos and the government has hinted that it will follow a calibrated approach towards regulating the industry, investors need to be careful when choosing the intermediary. “Invest through an established and trustworthy platform so that your money does not get stuck if there is a regulatory setback or the promoter company goes under,” Vineet Nanda, Co-founder, Globalise told ET Wealth. Keep in mind that investing through an overseas platform may require greater compliance on the tax front.

Don’t act on unsolicited tips: As it is a new asset class, the crypto space suffers from a severe lack of credible information. Investors are dependent largely on unverified information on social media. Self-styled crypto analysts create whatsapp groups packed with their accomplices who vouch for their accuracy. These analysts trap gullible investors, first by charging a fee for the tips and then using them for their pump-and-dump operations, the publication mentioned. “As a rule, you should verify the information before you invest,” the personal finance magazine quoted Raj Khosla, Managing Director, MyMoneyMantra.com as saying. “Check the market cap and trading volumes of the coin. A low market cap and insignificant daily volumes are obvious red flags,” he says.

Focus on bluechips: Like the stock markets, the crypto market also has bluechips, mid-caps and penny coins. Don’t get tempted into buying obscure coins just because you can get a lot of them at a low price. Bigger coins may be costlier but are more stable. In any case, you can buy in fractions so don’t worry about the price. Bitcoin is the bluechip of the crypto space and drives the overall market sentiment. “Focus on the bluechip coins like Bitcoin and Ethereum, with some of your money in emerging counters like Dogecoin and Matic,” Gaurav Garg, Head of Research, Capital Via told ET Wealth. Widely held coins with large market capitalisation are less likely to be manipulated than coins that are closely held by a few people, points out Nanda of Globalise.

Keep tracking global developments:  As the crypto market is spread across the world it is essential that you track all development related to this asset class globally. Any global development can impact prices, so one needs to be abreast with what is happening in key markets like the US, Singapore and Europe. “The crypto tax in the US was one of the reasons for crypto prices falling in May,” Manish P. Hingar, Founder, Fintoo, told the publication. An alert investor will not get caught on the wrong foot. It helps that crypto trading is 24×7, so one can act immediately unlike stock markets where one has to wait for trading to open the next day.

Don’t ignore the tax: Although there is no mention of taxability of income from cryptocurrencies in the Indian Income Tax Act, one should be aware that income in any form is taxable unless specifically exempted under the Income Tax Act. As per RBI, cryptos are not considered currency, so they must be treated as capital assets. “There is no judicial precedent but it can be assumed that cryptos will be treated as capital assets,” ET Wealth quoted Homi Mistry, partner at Deloitte India as saying. This means short-term gains will be added to income and taxed at normal rates while long-term gains will be taxed at 20% after indexation. “A lot depends on the volumes and frequency of trading, which may lead to the income being treated as business income,” says Mistry.