Beware of high volatility, regulatory overhang

Beware of high volatility, regulatory overhang

The United States (US) market regulator, the Securities and Exchange Commission (SEC), recently gave its approval to find exchange-traded funds (ETFs) that invest in Bitcoin. The leading cryptocurrency, which trades for more than $46,000 today, has rallied about 153.2 percent over the past year.

Development factors

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SEC Approval: BlackRock, Invesco, Fidelity, and other players have received approval for spot ETFs.

“The approval of the Bitcoin ETF is an important decision to legitimize Bitcoin and cryptos as an asset class. It also marks the beginning of easy access for institutional capital in this space,” said by Parth Chaturvedi, investment lead, CoinSwitch Ventures.

Until now, many institutions have stayed away from cryptos due to the lack of regulatory clarity. “With an SEC-approved product available, more institutional money can flow into this asset class,” said Rajgopal Menon, vice president, WazirX.

Bitcoin has been rallying since mid-2023, when BlackRock, one of the world’s largest asset managers, applied for a spot ETF.

Halving: The halving event in April 2024 will reduce the supply of Bitcoins. “The upcoming halving is expected to reduce monthly sales pressure from miners to less than $500 million, from the previous level of around $1 billion,” said Minal Thukral, executive vice president, growth and strategy, CoinDCX.

Looser monetary policy: In 2024, the US Federal Reserve is expected to cut interest rates, which may result in money flowing into non-interest-yielding assets (such as cryptocurrencies and gold).

No devaluation risk

Central banks can print fiat currencies at will. “The supply of Bitcoins is fixed and it will only decrease over time,” Menon said.

Having crypto assets in a portfolio can diversify it. “The price movements of cryptos may not always align with traditional assets such as stocks and bonds,” Thukral said.

Regulatory, other risks

Cryptocurrencies remain under a regulatory cloud. There is always the risk that the government may ban it. Since the Indian government introduced a tax on profits from cryptocurrencies, stakeholders interpreted it as a sign that this type of asset is not prohibited. While that risk may have decreased, it has not gone away. The Reserve Bank of India, which has its own digital currency, wants it to enjoy primacy.

Another risk in this asset class is extreme volatility. “Bitcoin rose to $67,000 in 2021 and then collapsed to $15,000 within six months,” Menon said. Intraday swings of 30-40 percent occur. Unlike stock exchanges, crypto exchanges do not have circuit breakers.

Cryptos are 24/7/365 assets. For those who trade these assets, monitoring them around the clock can be tiring.

Should you invest?

Investors should be aware of regulatory risk. “As a registered investment adviser with the Securities and Exchange Board of India (Sebi), I will not recommend cryptos until the regulations are clear. Currently, there is a risk for investors to fall on the wrong side of the law, “said Abhishek Kumar, Sebi registered investment advisor and founder, SahajMoney.

Those who still want to invest should consider their risk appetite. Young people may do this because they have a longer horizon to recover from a setback. Investors with a low risk appetite, who may find it difficult to handle high volatility, should stay away. Retirees and those approaching retirement should also avoid.

Safety tips for investors

Only invest money whose loss will not harm your finances (avoid putting more than 1-2% of your portfolio)

Always invest a certain amount and gradually increase

Enter with at least a five-year horizon

Keep up with exchanges following the Financial Intelligence Unit; avoid foreign exchanges that do not comply with Indian tax laws

Stick to cryptocurrencies with an established track record

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