A sell them all
B. Book partial profit
c. buy more
D. Hold for long term
It turns out that many crypto investors In 2021, when the market boomed, the last option was ticked. One of them was a Bangalore-based senior IT professional like Sanjeev Mathur (see picture). The value of his crypto holdings increased from Rs 5 lakh to Rs 22 lakh, but Mathur did not sell. “I didn’t need the money, so there was no need to sell,” he says.
In the end, it was a bad decision. The crypto market is very different Share Market Where prices are determined by fundamentals and holding for a longer period has yielded higher returns. In the crypto market, prices are driven by emotion, and volatility can be troubling. Last month, Luna’s coin fell to zero. Other coins are down as well, with some down around 80-90% from the 2021 peak (see graphic).
Is this the beginning of the end for crypto? The industry doesn’t think so. “Prices are driven by emotion. There will be obstacles along the way, but we are here to play a long-term game,” says Rajagopal Menon, vice president, WazirX. Crypto prices have crashed, but Rajagopal is confident they will recover. “Bitcoin has lost 50% of its value seven times in the past 12 years,” he says.
Others are also valiantly taking the front. “Like any other market, the crypto market is also cyclical. All asset classes are bearish right now, and the crypto market is also going through a bearish phase,” says Mridul Gupta, COO, CoinDCX. He pointed out that although Bitcoin 75% below its 2021 peak, yet 10 times higher than it was five years ago.
Software engineer Anand Subramaniam (see picture), sitting in his 16-storey flat in a lush green part of Pune, has expressed hope of recovery. Subramaniam, who mainly invested in small savings schemes and insurance policies and a little bit in mutual funds, was tempted to invest in crypto when he saw his friends and colleagues making big money in this new space. His crypto portfolio is down almost 60% and Subramaniam has vowed to never invest in crypto again.
waiting for the big fools
Like many other investors, Mathur and Subramaniam are waiting for big idiots to buy their crypto. They have no idea that even if the crypto market recovers, the chances of reaching 2021 levels are slim. Global markets are in turmoil after the US Fed hikes interest rates liquidity The boost markets have been drying up fast during the past two years.
Back in India, the change in tax rules for crypto has further dampened investor sentiments. This year’s budget has imposed a uniform tax of 30% on all profits, even if revenue Investor level. This is much higher than the tax on other assets and sources of income. Capital gains from stocks and equity funds are taxed at 10-15% and non-equity investments, property and gold are taxed at 20% or a nominal rate. But every rupee earned from crypto will be taxed at 30% even if the investor has no other income. Even worse, losses from one crypto cannot be adjusted against any other income or gains from another crypto. They cannot be carried forward even in subsequent years. So the government makes 30% profit while the loss is borne by the investors.
Another major problem is the 1% TDS starting from July 1. As per a notification issued last week, a seller will have to deposit 1% of the transaction value as TDS (see box). Though it will get adjusted against the total liability and can be claimed as refund later, it will lock the liquidity. As pointed out by the CEO of a crypto exchange, in just 200-300 transactions an investor’s entire capital will be locked in TDS. High-frequency traders will be particularly affected.
The tax rules had created a ruckus and the industry had demanded amendments, but the government did not agree. As a result, many of the trading platforms that emerged in the past two years have already folded. Even the ones that are working have seen a massive 70-75% drop in trading volume.
A sharp drop in crypto prices has devastated Amit Kumar, a sales executive at a Gurgaon-based fintech company. Like Subramaniam, he too was drawn into crypto trading, which the industry hails as an “emerging asset class”. The difference is that Subramaniam kept about 1% of his investment portfolio in crypto, while Kumar allocated around 24% to this untapped avenue. Even worse, he convinced some relatives to invest in the crypto space. “My own losses are bad enough, but I can live with it. The damages done by my relatives are worrying me to death,” he says sadly.
While investors like Amit Kumar have been bullied badly, many others have made decent money from crypto. Bhushan Mittal, who runs a mobile accessory shop in Noida, entered the market in 2020, when prices were not red. Dogecoin rose from Rs 5 to Rs 50 in May last year when Mittal hit the jackpot. But Mittal did not let this success go to his head. Instead, he kept making short trades and booked profits regularly without holding long positions. “If an investment has gone bad, I am not afraid of booking losses. It is part of the game,” he says indeed.
This is indeed sensible advice, especially for investors like Amit Kumar who are sitting in huge losses. As Luna Crash shows, your entire capital could be 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 withstand the effects of extreme diversifications and investment missteps,” says Praleen Bajpai, Founder, Finfix Research & Analytics. Here are some things crypto investors should keep in mind if they don’t want to get hurt in this high-risk sector.
don’t bet too big
The crypto market is largely driven by emotions and is very volatile. Prices can move 50-60% in a day, so don’t invest too much in this avenue. Even if you have high risk appetite, keep only a small portion of your portfolio in crypto. “Don’t put more than 2% of your total portfolio in crypto,” advises Vikram Subburaj, CEO, Giotus cryptocurrency exchange. Deep-pocketed investors like Mathur understand this. He only kept 1% of his portfolio in crypto. So while he’s lost money, the fall isn’t really earth-shattering for him.
don’t invest all at once
Another piece of advice comes from the Equity Funds Playbook: Don’t invest in large amounts at once. “No one has any idea how the prices will rise in the coming days. Therefore, investors should reduce their investments rather than depositing a large lump sum amount. The SIP approach will work best,” says Gupta of CoinDCX. Fractional investing in crypto allows investors to invest a fixed amount of money every month. “Invest Rs 500 every month in crypto and maybe after 5-10 years it could be enough to take care of your child’s college education,” says Rajagopalan.
stick to bluechips
There are about 200-odd cryptos out there that are vying for your attention. There is also a lot of unverified information on social media and self-styled analysts offering investment advice. As a rule, verify the information before investing. And don’t be tempted to buy obscure coins. Large coins can be expensive but are more stable. Check the coin’s market cap and trading volume. A low market cap and negligible daily volume are clear red flags.
Avoid Behavioral Prejudices
Lastly, and most importantly, don’t fall into practical traps like anchoring and loss aversion. Price levels may not be achieved in a hurry during the 2021 rally. If you’re waiting for your crypto to recover to those levels, drop the idea. Also, consider booking a loss as the market can stay sideways longer than you think.
1% TDS rule has come into effect from 1st July. Know here how TDS will be deducted
The 1% TDS rule with effect from July 1 will be applicable only if the value or aggregate value of transactions by individuals exceeds Rs 50,000 during the financial year.
The buyer of a Virtual Digital Asset (VDA) is required to deduct TDS of 1% from the amount paid to the seller. If the PAN of the buyer is not available, TDS will be 20%. If the seller has not filed 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 limit of Rs 50,000 in a financial year.
If the transaction is done through an exchange, the exchange will have to deduct tax while transferring the payment from the buyer to the seller of the VDA. If the payment is made on the exchange through a broker, TDS can be deducted either by the exchange or the broker.
To ensure that TDS is not deducted twice, there may be a written agreement between the exchange and the broker. The broker will be responsible for deducting tax on such credit/payment.
If the transfer of VDA is through an exchange and the VDA is owned by the exchange, the buyer of the VDA will need to deduct tax while making the payment. However, it may happen that the buyer is not aware that the VDA is owned by the exchange.
In such cases, the Exchange may enter into a written agreement with the Buyer or its broker that in all such transactions the Exchange shall pay tax for that quarter on or before the due date.
Exchanges will be required to submit quarterly statements for all such transactions. Exchanges will also be required to submit their tax returns and all transactions must be included in these returns.