ET Wealth Wisdom Ep 126: 7 Crypto Trading Rules
Hello everyone and welcome to episode 126 of the ET Wealth Wisdom podcast
I am Tania Jaleel
The maniacal ups and downs of cryptocurrencies have been in the news lately
Are you someone who is considering putting money into cryptocurrencies?
Cryptocurrencies are a new class of investment, with very little data for fundamental analysis or past performance.
It will therefore be difficult for a new investor to make an informed decision.
In this week’s ET Wealth edition, Babar Zaidi wrote about the rules to follow when trading crypto
Here’s what to keep in mind as you step into this high-risk, high-reward arena.
Don’t take really big bets
The phenomenal returns given by some cryptos over the past year are mouth watering.
Rs 10,000 invested in Dogecoin six months ago are now worth Rs 5.75 lakh.
But don’t get carried away by these numbers.
Only invest what you are willing to lose
Even if you have a high risk appetite, start trading small amounts.
Don’t put more than 2% of your overall portfolio in cryptos, say financial advisers
After you have familiarized yourself with the arena, educate yourself about the different coins and understand their value and prospects, before allocating more.
Be prepared for extreme volatility
Investing in cryptocurrencies is the best way to get to know them.
But this is a high risk, high reward game and you have to be able to handle very high volatility.
As the May Crash showed, a 70-80% drop overnight is also a possibility.
Keep in mind that even a bluechip like bitcoin is down 48% from its April high of Rs 50 lakh.
Use trusted platforms
The crypto space is not regulated in India and new outfits are multiplying every day.
Although the Supreme Court has overturned the RBI’s ban on cryptos and the government has hinted that it will take a calibrated approach to regulating the sector, investors should be careful when choosing the middleman.
Keep in mind that investing through an overseas platform may require more tax compliance.
Don’t act on tips without checking
The crypto space suffers from a serious lack of credible information.
Investors rely heavily on unverified information on social media.
Self-proclaimed crypto analysts create WhatsApp groups filled with their accomplices who guarantee their accuracy.
These analysts trap gullible investors, first charging fees for tips and then using them for their pump and dump operations.
Generally, you should verify the information before investing
Check the market cap and trading volumes of the coin. Low market cap and insignificant daily volumes are obvious red flags
Focus on bluechips
Like the stock markets, the crypto market also has bluechips, mid-caps, and penny coins.
Don’t be tempted to buy obscure coins just because you can get a lot of them at a low price. Bigger parts can be more expensive but are more stable.
Either way, you can buy in fractions so don’t worry about the price.
Bitcoin is the bluechip of the crypto space and fuels general market sentiment.
Focus on blue chip coins like Bitcoin and Ethereum, with some of your money in emerging counters like Dogecoin
Keep abreast of global developments
Even if you are buying and selling in India, the crypto market is widespread all over the world.
Any global development can have an impact on prices, so be aware of what is happening in key markets like the United States, Singapore and Europe.
An alert investor will not be taken on the wrong foot.
It helps that crypto trading is 24/7, so you can act immediately unlike stock markets where you have to wait for trading to open the next day.
Don’t ignore the tax
Last but not the least, don’t ignore the tax payable on income from crypto trading.
Even though cryptocurrencies are not specifically mentioned in income tax law, income in any form from any source is taxable unless it is specifically exempt under the law, according to tax experts.
Cryptos are not considered a currency by the RBI, so they should be treated as fixed assets.
This means that short term earnings will be added to income and taxed at normal rates while long term earnings will be taxed at 20% after indexation.
Much depends on the volumes and frequency of trading, which can lead to the income being treated as business income.
And on that note that will be all for this week
Come next week for more wealth wisdom