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Cryptocurrency is a virtual currency that uses digital files as money. Transactions carried out can be kept safe with digital signatures and the companies have their own currencies called tokens, which are virtual. When people invest in a stock they expect that its value will increase in the future; in the same way, people bet on the value of cryptocurrency to go up in the future. While stock price depends on the company’s earnings the cryptocurrency valuation depends on the utility of the crypto blockchain and the other investors buying crypto.
The cryptocurrencies are at an early stage of their development and use; so they are volatile, but once the market matures the prices will stabilize. India has the highest number of cryptocurrency owners globally at 10.07 crores followed by the USA at 2.74 crore and Russia at 1.74 crore. People from across the country are investing in cryptocurrencies with a sizable population coming from tier 2 and tier 3 cities. The crypto investors are very young mainly millennials and Gen Z. If we compare the age the average age of a stock investor in India is 32 years; the mutual fund investor is 28 years while that of a crypto investor is only 24 years.
How does cryptocurrency work?
Cryptocurrency works on blockchain technology which is made up of units called blocks that have information about every transaction that includes the date, time, value, buyer and seller, and unique identifying code for each exchange. The entries are connected in a chronological order thereby creating a chain of blocks. The block is accessible to anyone who wants to view it acting as a ledger of crypto transactions.
There is no single system that controls the ledger but instead, a decentralized network of computers keeps a blockchain running. When people buy a crypto asset they believe in the utility of its blockchain. The staunch supporters of the system believe that it improves transparency and the security of data being shared in a network, while the detractors claim that it uses too much energy and is inefficient.
What is cryptocurrency mining?
Crypto mining is the process of gaining cryptocurrencies by solving complex cryptographic equations with the help of high-power computers. This requires verifying data blocks, solving complex mathematical puzzles, and adding transaction records to the ledger called a blockchain. The computers that are used to prove the authenticity of blockchain transactions are called miners, who receive cryptocurrency in return for their work and the method is called mining.
The process of mining requires a high-performance computer, a wallet, and the person joining a mining pool. The pool consists of a group of miners who join their resources to increase their mining power and accelerate profitability. This mining pool helps the individuals to work effectively and the profit generated is distributed evenly among all the members of the pool.
What is a cryptocurrency wallet?
The crypto wallet is a digital wallet where you can keep your crypto and it allows you to send and receive crypto. The wallet contains the private keys required to sign crypto transactions.
The types of crypto wallets are –
Web wallet-
The web wallet is a browser-based wallet that can store cryptocurrency. These wallets can be accessed from anywhere, using any device. The main concern here is security as there are risks of phishing and malware.
Desktop Wallets-
The desktop wallets are installed on desktop or laptop and store the private keys of the crypto on the computer’s hard drive. These are not so secure because the security of a computer could get compromised.
Mobile Wallets-
The mobile wallet is a software program installed on a mobile device and performs the same functions as a desktop wallet. These are mobile-based apps that store private keys and are compatible with Android or iOS. It allows you to track and control your cryptocurrency.
Hardware Wallets-
The hardware wallet is a crypto wallet that stores a user’s private keys in a secure hardware device. This is the most secure type of wallet as it stores the private keys on a device that can’t access the internet. These types of wallets are immune to virus attacks.
What is a crypto exchange?
A crypto exchange is a platform for buying and selling cryptocurrency. It can convert digital currency into money and vice versa. It acts to match the orders of those who want to buy to that of those who want to sell. Many exchanges are coming up and the increasing competition would be good for the investors as they would be able to select the exchange according to the service and brokerage structure.
Things to consider when selecting a cryptocurrency exchange crypto trading-
1) What are the coins offered?
The exchanges do not offer each and every cryptocurrency that exists in the world. Popular coins like Bitcoin, Ethereum, and Litecoin are offered by most of the exchanges while your favorite altcoin or meme coin would require a bit of looking around. If there are a large number of coins, you can study and select the best and spread your risk.
2) Fees-
A trader or investor should consider every aspect of the fee involved as it eats into his profits. The exchanges charge fees on buying and selling, to depositing and withdrawing. The fee may be a flat amount or a percentage or it may even differ depending on the currency you trade. A higher percentage could be fine if there is added protection and insurance.
3) Accessibility-
Different countries have different rules for trading in cryptocurrencies and many of the countries are thinking of bringing in regulations. There are countries like China that have banned trading in cryptocurrencies and consider the transactions illegal. In the United States, some states have made their own regulations and India is currently having no regulations of cryptocurrencies and would bring the bill in the parliament session this year. You can the find accessibility of the exchange on its website.
4) Payment method accepted on exchange-
The Indian Crypto market is still unregulated and in the past, there have been some confusing signals where RBI had prevented transferring money to the crypto exchanges. The RBI has been vocal about its concern about cryptocurrency, while the government is thinking of classifying it as an asset class.
5) Liquidity and services offered
Liquidity is the ease with which an asset can be easily bought and sold at stable and transparent prices. In the cryptocurrency market there is liquidity at three levels; asset liquidity which is a function of buyers and sellers and its easy availability on the exchanges, exchange liquidity is the ease with which an asset can be converted to another asset, and the market liquidity is all these put together displaying the health of crypto markets. For a trader’s asset liquidity and exchange, liquidity is most important.
If there is good liquidity in the market it is more stable. Like when buying Bitcoin there are enough traders who are willing to sell and fill orders so there is minimum impact on its price. For an altcoin, this is not the case, and the less liquid the coin is, the more it will be impacted by a large trade. The other thing is that it is little or no regulatory framework for cryptocurrency and an illiquid market can allow large players or groups of large players to manipulate the price to their advantage. This can be difficult in more liquid asset classes.
The number of financial products and services offered by an exchange makes it go further up the ladder in terms of demand. All the facilities like simple trading, derivative trading, and NFT trading should be available in the exchange.
6) Mobile app for trading-
The mobile trading apps allow you to trade from anywhere with the physical location being no hindrance to trading. A person need not think about where to trade if he is getting an attractive price. The crypto trading app is a great choice for investors as they can buy and sell from anywhere and get the latest insights on their mobile.
7) Transaction Speed-
The transaction speed of some crypto exchanges has been a point of contention with the investors. Due to high traffic sometimes the larger exchanges slow down and sometimes the smaller ones crash. During times of high volatility to be able to enter and exit a position at the earliest can make an impact on the profits.
8) Security-
When you plan to keep your crypto holding in an exchange or after a while move it to your own wallet the security of the exchange should be a priority; after all, it’s your hard-earned money. A large and fast-growing exchange will most likely keep a security team. Check how much of the assets the exchange keeps offline. Many long-term investors move their crypto holdings from an exchange to a wallet where they have more control.
It is generally safe stocking with popular exchanges having a large customer base than the newer ones. There is some security measures required from your end, which is the two-factor authentication. Have a strong password with special characters and there is a need to verify your identity each time you log in, like entering a code that you receive by text message.
Some of the cryptocurrency exchanges in India-
Taxation pertaining to Cryptocurrencies in India-
The rules and regulations surrounding cryptocurrencies are still ambiguous. When the cryptocurrencies are held for more than 36 months the gain is considered as long-term capital gains taxed at a rate of 20 percent. The gains when held for a shorter than 36 months’ time frame are categorized as short-term capital gains and taxed according to the taxable income of the person and the income tax slab rate. For a trader who carries out crypto trading very often the profit is taxable as business income. It is good to maintain a record of all the crypto transactions.
Future of Cryptocurrency in India-
In India, the hardline view on the ban on cryptocurrency is not found feasible as Indians have invested in the cryptos in large numbers. A middle path will be followed that balances the concern of all the stakeholders. A presentation on the pros and cons and regulations adopted by other countries has been made to the policymakers and the finance ministry, and the officials are trying to fast track the modified crypto bill.
The legislation is expected in the winter session of the parliament scheduled from November 29th. The bill would take into account the technological developments in the digital asset space and look for ways to help the country’s fintech sector.
How to select a good cryptocurrency?
There are 6000 cryptos traded as in 2021. An investor should do his thorough research before investing and should consider the following factors:-
- Revenue
Crypto is a financial asset and is supposed to generate some revenue. We have to find the revenue model or the economic impact of the crypto. For example- The purpose of creating Bitcoin was to send money over the internet and provide an alternative payment system that would be free of any central control. If the cost of Bitcoin transactions is faster and lesser than the traditional ones, it would become the preferred means of transaction which is a big opportunity all around the world.
- Organization
There is a team of people working to make the crypto a success like the founders, marketers, and developers. The team should be highly skilled with strong relevant experience and a good social media status.
- Project Milestones
Go through the history of the crypto and see if the project milestones have been achieved on time. The crypto should also have a growth in its trading volume and be listed on many exchanges.
- Crypto community-
Check the engagement of the crypto community which should be active and vibrant.
- Comparison of cryptos
The demand and supply of each crypto will change over time depending on factors like supply and the upper limit in the availability of coins, mining and release rates of coins, the reputation of the crypto. An increase in the application could lead to price surges and transaction speed and scalability.
How much percentage of your portfolio should be invested in cryptocurrencies?
Crypto is a high-risk asset class and experts say that it should not exceed 5% of the total portfolio beyond which the volatility and uncertainty can affect you as the price changes not only by the day but there is hourly variation. It is an emerging asset class and you can do a Systematic Investment Plan (SIP) and invest a portion of the amount every month.
Out of the crypto portfolio, 40-50% investment should be in Bitcoin, 25% in the top 20 tokens, and the remaining 25% in the new coins.
Investment in cryptocurrency can be a hedge against inflation in the long term and many of the cryptocurrencies have given good returns over the last few years. The government in many countries is on its way to working out regulations and would like to adopt a middle path that would work out for the benefit of the stakeholders as the crypto ecosystem will contribute towards technological and financial development. Retail investors should be aware of the taxation aspects and select the best exchange or exchanges for transactions; all the while monitoring the crypto by studying the community behind the project, market cap, and the problem it is solving and come to an informed decision.