Cryptocurrencies have generated huge interest among common investors recently. But the extreme volatility has left them wondering whether cryptocurrencies be a part of their investment portfolio or not. Personal Finance experts advise against jumping to the crypto wagon at a time when there is no regulatory clarity and any sense of stability around the prices of all crypto tokens. However, the crypto industry insiders are enthusiastic about allocating some part of one’s portfolio to cryptocurrencies.
As per the data from cryptocurrency exchanges, nearly 1.5 crore Indians hold Rs 15,000 crore worth of cryptocurrency assets in India. The prices of many cryptocurrencies have skyrocketed in the past six months. Bitcoin was the top-performing asset class of FY 2020-21, having delivered returns of over 800%. However, cryptocurrencies are highly volatile and recently crashed by 30% in just one week.
As the debate on the merits and demerits of investing in cryptocurrencies continues, FE Online talked to several experts to get a view on whether cryptocurrencies should be a part of an investor’s personal finance portfolio or not.
Tax and Investment expert Balwant Jain advised against investing in cryptocurrencies. “It (cryptocurrency) is not backed by either tangible thing or sovereign guarantee so would advise not to invest,” Jain told FE Online.
Rachit Chawla, Finway FSC CEO and Founder, also said he would not recommend including crypto in the portfolio because of its ambiguities. “I don’t recommend at this time that crypto should be a part of a personal finance portfolio because there is a lot of ambiguity around it. RBI is not allowing investors so putting money and buying this asset class is one thing but what is the exit? There is no policy framework, especially for a country like India which is governed by RBI,” said Chawla.
Too volatile to be called an asset
“In the absence of any framework, it gets very difficult for such an asset class but still of people would want to buy it, it will restrict themselves from using only 1 to 2% of their total liquid portfolio in equity not more than that because cryptos are too volatile in nature. Anything which goes 10% up in one day and 10% minus in one day should not be considered as an asset. It is too volatile to be called an asset,” he added.
What to look at if you want to invest?
Despite the apparent risks associated with crypto investments, advertisement blitz, word of mouth campaigns and the lure of quick returns are driving many people towards crypto investment. Archit Gupta, Founder and CEO, ClearTax, shared points you should look at before making cryptocurrencies a part of your personal finance portfolio.
- Cryptocurrencies are suitable for aggressive investors who understand the risk involved with the investment. It’s similar to investing in penny stocks, which may give extremely high returns in a short time, or you could lose the entire amount invested in them.
- Cryptocurrencies are not legal tender in India. You could wait until clarity emerges around regulation and taxation before including cryptocurrencies in your personal finance portfolio. There are instances where a lack of regulation in gold loans and microfinance have led to a crisis.
- Individuals who are first-timers in cryptocurrencies could invest through the systematic investment plan or SIP. It staggers the investment in cryptocurrencies over time, thereby reducing the cost of purchase.
- Individuals who must invest in cryptocurrencies could allocate 1%-2% of their portfolio to them. You must never borrow and invest in cryptocurrencies for the personal finance portfolio. Investing in cryptocurrencies is similar to penny stocks, where you invest funds (play money) you can afford to lose.
Diversification key to building wealth
Edul Patel, Co-founder & CEO of crypto trading platform Mudrex, gave a “resounding yes” to investing in cryptocurrencies. He said, “Diversification is the key to building wealth over a long period of time. Building wealth needs to be considered a marathon, and not a short sprint. Cryptocurrency as an asset class offers the much-needed alpha to the portfolio, and at the same acts as a moat.”
“All investors need to consider this fact and invest a part of their capital into cryptocurrency with a long term horizon. Considering the volatility, most large investors are currently allocating 3-5% of their net worth to crypto as an asset class and the number is consistently growing,” Patel added.