- It is important to understand the risk that accompanies the investment in cryptocurrencies.
- There are enough signs in the market that digital currencies will stay even if they don’t replace conventional money.
- Given the fact that cryptocurrency is highly volatile, it does not mean that one can not make money out of it.
First things first: If you are a risk-averse investor and are satisfied with lower returns then probably cryptocurrencies are not for you as it is highly volatile and can make wide swings on either side.
But given that the crypto-mania has taken the world, including billionaires and celebrities such as Elon Musk and Snoop dog, by storm, and many new investors want to invest in the digital currencies, it’s important to understand the risk that accompanies the investment in this new age asset class.
Other than high volatility in price there has been a massive increase in cryptocurrency crimes of late. According to a report from Crypto Head, a cryptocurrency news outlet that used Federal Trade Commission data in the US to analyse cryptocurrency crime trends in recent year, crimes related to cryptocurrency have increased 312% on average since 2016. These crimes can include everything from hackers stealing investors’ coins to people falling for scams related to crypto investing.
So let’s understand the risks involved in cryptocurrency investment keeping in mind the following factors.
1. Will cryptocurrencies be banned in India?
The Reserve Bank of India recently issued a notification clarifying its stance after State Bank of India and HDFC Bank cautioned their customers against dealing in virtual currencies citing the April 2018 order of the RBI. The RBI in its notification said, “In view of the order of the Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from,”.
The clarification from the RBI is expected to give some relief to those who have invested in cryptocurrencies in India. As many Indians have invested in cryptocurrencies, the RBI move will be a big respite for them and their money won’t be blocked.
So it is clear that banks can’t take action against investors in virtual currencies following the court and RBI directives. And given the fact that acceptance of digital currencies is increasing globally, India may no more stay behind and soon come up with a proper regulatory framework for this asset class, making it safer to trade.
2. How to handle price volatility
Given the fact that cryptocurrency is highly volatile, it does not mean that one can not make money out of it. A patient and attentive investor can always make money out of crypto trade, say experts. To start with one should not invest more than 5% of his investible surplus in cryptocurrencies and always research any cryptocurrency before you invest. Track its price movement for few days and try to assess the downside risk before making any trade.
3. Theft and scams
The biggest security concern for many people those who invest in cryptocurrencies is the risk of hacking and fraud. Crypto scams have become common these days. According to reports, scammers impersonating Elon Musk had stolen over Rs 14.63 crore in digital currencies since October 2020. Also, crypto crimes involve scammers requesting payment in cryptocurrency, or sending unsolicited offers to help you make money or increase your holdings. So you should also avoid any unsolicited offers related to crypto and buy your coins yourself using a reputable crypto exchange.
4. Stay invested for long-term
If you are planning to invest in crypto for short-term gains then chances are high that you may lose money in the trade. There have been many instances when cryptocurrencies have fallen more than 20% percent in a single day. But if you stay invested for the long term and continue to buy the digital currency on every big fall (of more than 20%), then you will definitely make money in the longer term. It has been observed in the past that these currencies rebound faster compared to any other asset class from a slump. Those who had invested in cryptocurrencies at least before three years and are still holding that investment are sitting on massive profit.