Is cryptocurrency story over? 4 things crypto investors should know to navigate the high-risk arena

What will you do if your investment zooms by over 300% in just a few months? Like most investors, you have four choices:

A. Sell them all

B. Book partial profits

C. Buy more

D. Hold for long term

It turns out that many crypto investors ticked the last option when the market was rallying in 2021. One of them was like Bangalore-based senior IT professional Sanjeev Mathur (see picture). The value of his crypto holdings rose from Rs.5 lakh to Rs.22 lakh but Mathur didn’t sell. “I didn’t need the money, so there was no need to sell,” he says.

In hindsight, that was a bad decision. The crypto market is very different from the stock market where prices are determined by fundamentals and holding for the long term has yielded high returns. In the crypto market, prices are driven by sentiments, and volatility can be unnerving. Last month, the Luna coin crashed to zero. Other coins are also down, some by almost 80-90% from the 2021 peak (see graphic). Is this the beginning of the end for cryptos? The industry does not think so. “Prices are driven by sentiments. There will be bumps along the way, but we are here to play a long-term game,” says Rajagopalan Menon, Vice-President, WazirX. Crypto prices have crashed, but Rajagopalan is confident that they will recover. “Bitcoin has lost 50% of its value seven times in the past 12 years,” he says.

Others are putting up a brave front as well. “Like any other market, the crypto market is also cyclical. All asset classes are in a downturn right now, and the crypto market is also going through a bear phase,” says Mridul Gupta, COO, Coin DCX. He points out that though Bitcoin is down 75% from its 2021 peak, it is still 10x higher than it was five years ago.

Sitting in his 16-storey flat in a leafy part of Pune, software engineer Anand Subramanian (see picture) has pinned his hopes on the recovery. Subramanian, who used to invest mainly in small savings schemes and insurance policies and a little in mutual funds, was lured into investing in cryptos when he saw his friends and colleagues make big money in this new space. His crypto portfolio is down almost 60% and Subramaniam has vowed never to invest in cryptos again.

Waiting for greater fools

Like many other investors, Mathur and Subramaniam are waiting for greater fools to buy their cryptos. Little do they realise that even if the crypto market recovers, chances of reaching the 2021 levels are fairly remote. The global markets are in turmoil after the hike in interest rates by the US Fed and the liquidity that boosted the markets during the past two years is quickly drying up.

Back home in India, the changes in the tax rules for cryptos has further dampened investor sentiments. This year’s Budget has put a flat tax of 30% on all gains, irrespective of the income level of the investor. This is very high compared to tax on other assets and income sources. Capital gains from stocks and equity funds are taxed at 10-15% and non-equity investments, property and gold taxed at 20% or marginal rate. But every rupee earned from cryptos will be taxed at 30%, even if the investor has no other income. Worse, losses from one crypto can’t be adjusted against any other income or even the gains from another crypto. They cannot also be carried forward to subsequent years. So the government pockets 30% of the gains while the losses are borne by investors.


Another major problem is the 1% TDS that kicks in from 1 July. As per a notification issued last week, a seller will have to deposit 1% of the transaction value as TDS (see box). Though this will get adjusted against the total liability and can be claimed as a refund later, it will lock up liquidity. As the CEO of a crypto exchange pointed out, in just 200-300 transactions the entire capital of an investor will get locked up in TDS. High frequency traders will be particularly hit.


The tax rules had caused a furore and the industry sought amendments, but the government did not relent. As a result, many trading platforms that had mushroomed in the past two years have already folded up. Even those that are functioning have seen a massive 70-75% decline in trading volumes.

The sharp decline in crypto prices has devastated Amit Kumar, a sales executive with a fintech company based in Gurgaon. Like Subramanian, he was also drawn into crypto trading by the buzz around what the industry likes to tout as an “emerging asset class”. The difference is that while Subramaniam put about 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 incurred by my relatives are worrying me to death,” he says glumly.

While investors like Amit Kumar have been badly singed, many others have made good money from cryptos. Bhushan Mittal, who runs a mobile accessory shop in Noida, entered the market in 2020 when prices were not red hot. Mittal hit the jackpot when Dogecoin zoomed from Rs.5 to Rs.50 in May last year. But Mittal did not let this success get into his head. Instead, he kept doing small trades and booked profits regularly without keeping long positions. “If an investment has gone bad, I am not afraid of booking losses. It is part of the game,” he says matter-of-factly.


This is sane advice indeed, especially for investors like Amit Kumar who are sitting on big losses. As the Luna crash shows, your entire capital can get wiped out in a day. Even a bluechip like Bitcoin is down 75% from its November high of Rs.54 lakh. “Enter this market only if you can stomach extreme variations and the implications of an investment going wrong,” says Prableen Bajpai, Founder, FinFix Research and Analytics. Here are a few things that crypto investors should keep in mind if they don’t want to get hurt in this high-risk arena.

Don’t take very big bets

The crypto market is driven largely by sentiments and tends to be very volatile. Prices can move 50-60% in a day, so don’t put very large amounts in this avenue. Even if you have a high risk appetite, put only a miniscule portion of your portfolio in cryptos. “Don’t put more than 2% of your overall portfolio in cryptos,” advises Vikram Subburaj, CEO, Giottus Cryptocurrency Exchange. Deep pocketed investors like Mathur understand this. He only put about 1% of his portfolio in cryptos. So while he has lost money, the decline is not really earth shattering for him.


Don’t invest at one go

Another piece of advice comes right out of the equity fund playbook: don’t invest large amounts at one go. “How prices will move in the days to come is anybody’s guess. So, investors should stagger their investments instead of committing large sums in lump sum. The SIP approach will work best,” says Gupta of Coin DCX. The fractional investments in cryptos allow investors to put in fixed amounts every month. “Invest Rs.500 a month in cryptos and maybe 5-10 years down the line it may be enough to take care of your child’s college education,” says Rajagopalan.


Stick to bluechips

There are almost 200-odd cryptos out there jostling for your attention. There’s also a lot of unverified information on social media and self-styled analysts offering investment advice. As a rule, verify the information before you invest. And don’t get tempted into buying obscure coins. Bigger coins may be costlier but are more stable. Check the market cap and trading volumes of the coin. A low market cap and insignificant daily volumes are obvious red flags.

Avoid behavioural biases

Lastly, and most importantly, don’t fall into behavioural traps such as anchoring and loss aversion. The price levels during the rally of 2021 may not be achieved in a hurry. If you are waiting for your cryptos to recover to those levels, banish the thought. Also, consider booking losses because the market may stay sideways for longer than you think.


The 1% TDS rule kicks in from 1 July. Here’s how TDS will get deducted

The 1% TDS rule that kicks in from 1 July will apply only when the value or aggregate value of the transactions by the 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 PAN of the buyer is not available, then TDS will be 20%. If the seller has not fi led his tax return, TDS will be 5%.

If the transaction is directly between buyer and seller with no third party (exchange) in between, the buyer will deduct TDS if the amount exceeds the threshold limit of Rs.50,000 in a financial year.

If the deal is routed through an exchange, the exchange will have to deduct tax at the time of transferring payment from buyer to the seller of the VDA. If the payment is done on exchange through a broker, then TDS can be deducted either by exchange or broker.

To ensure that TDS is not deducted twice, there can be written agreement between the exchange and broker. The broker shall be responsible for deducting tax on such credit/payment.

If the transfer of VDA happens via an exchange and VDA is owned by the exchange, then the buyer of VDA will be required to deduct tax at the time of making payment. However, it may happen that the buyer does not know that VDA is owned by the exchange.

In such cases, the exchange may enter into a written agreement with the buyer or his broker that in all such transactions the exchange would be paying the tax on or before the due date for that quarter.

Exchanges would be required to furnish a quarterly statement for all such transactions. Exchanges would also be required to furnish their tax returns and all transactions must be included in these returns.

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