Investors who have a long horizon should wait for crypto prices to recover

Those who don't anything to do with this highly volatile asset class may also throw in the towel

The Bloomberg Galaxy Crypto Index has declined 47.1 per cent over the past year and 75.6 per cent from its peak on November 9, 2021. Bitcoin, which had touched a peak of $67,734 on the same date, is currently trading at around $21,483, about 68.3 per cent lower.

Trouble in crypto universe

High inflation is forcing central banks across the globe to hike interest rates and roll back liquidity. With monetary conditions tightening, prices of most asset classes have corrected. Cryptocurrencies, which are highly volatile and don’t produce any earnings (unlike companies and stocks), have been hit hard. “The total market capitalisation of cryptocurrencies has declined from a peak of nearly $3 trillion to less than $1 trillion currently,” says Joseph Massey, managing director, CryptoWire. 

The massive price erosion has led to a wave of collapses. First, Terra (a stablecoin) and Luna collapsed. “Within the crypto space, there are several experimental projects. Some of these experimental projects, such as Luna, have taken a severe beating,” says Manhar Garegrat, executive director of policy and special projects, CoinDCX.

Crypto lending platform Celsius (which lent cryptos owned by one set of customers, whom it paid an interest, to another) has frozen withdrawals. A hedge fund called Three Arrows Capital has been liquidated. More such hedge funds, which made leveraged bets on cryptos, could collapse.  

Stringent tax norms

The Indian government and the Reserve Bank of India's (RBI) stringent regulatory stance vis-à-vis cryptocurrencies has affected local investor sentiment.

The government introduced guidelines for their taxation in Budget 2022 (without confirming the legality of cryptocurrencies). “Any income arising from the transfer of virtual digital assets (VDAs) will be taxable at the rate of 30 per cent, with no setoffs allowed as deduction. The cost of acquisition is the only deduction allowed,” says Deepak Jain, chief executive, TaxManager.in.

Any loss sustained on sale can’t be set off against any other income, nor can it be carried forward to subsequent years.

Tax deducted at source (TDS) at the rate of 1 per cent will be deducted while paying the sale consideration of VDAs. “The purpose is to capture the details of all transactions and regulate this space better,” says Jain.

The threshold for applying TDS is if the sale consideration exceeds Rs 10,000 in a financial year (for people who don't have to get their books audited) and Rs 50,000 for specified persons (who have to get their books audited), including individuals and Hindu Undivided Families (HUFs).

India’s crypto ecosystem also faces payment-related challenges vis-à-vis the banking system, with access to Unified Payments Interface (UPI) being denied.

In hindsight, the regulators’ stringent attitude has proved a blessing as it led many investors to exit cryptos before the current crash.

Among Indian cryptocurrency exchanges, CoinDCX has stopped withdrawals, causing disquiet among its customers. A statement from the company says it has restricted crypto withdrawal from its platform, but users can deposit or withdraw funds through the INR (Indian rupee) route as usual. The statement further says the restriction is a measure “to strengthen safety protocols and was gradually initiated over the past one month for multiple users”. The exchange did not clarify when the restriction would end.
 

Hang on or exit?

Investors should respond to the current downturn based on their individual situations. Says Lovaii Navlakhi, board member, Association of Registered Investment Advisors (ARIA): “If your existing exposure to cryptos is significant, and you require funds urgently, or you don’t want any more exposure to such a high-risk investment, then trim your exposure in tranches, as and when prices increase.”

Navlakhi adds that if the exposure is limited, the investor should not sell in panic and should instead wait for prices to revive.

Suresh Sadagopan, founder of Navi Mumbai-based Ladder7 Financial Advisories, says investors’ reaction should also be dictated by their time horizon. “Someone who has invested with a long-term view, and is cognisant of the risks in this asset class, should keep her investments,” he says.

Sadagopan suggests those who had entered the crypto markets for short-term gains should cut their losses, draw a lesson about the downside of such speculative forays, and move on.

Time for contra bet

Many investors may regard the current downturn as an opportunity to place a contrarian bet. The best time to enter any asset class is indeed when there is blood on the streets.

Be careful while selecting a crypto. “The current crash will differentiate dependable projects from the high-risk ones,” says Massey. The former have a higher probability of recovering. Also, be cognizant of the risks. “Cyptocurrencies are extremely volatile. There is no underlying investment. 

It has no regulatory backup and no legal recourse. In the past, crypto wallets and exchanges have been hacked,” says Sadagopan.

For cryptocurrencies to do well, monetary policy may have to turn loose again. Currently, that scenario is nowhere on the horizon. Only those with a long horizon should enter. Most investors should limit their allocation to this asset class to 5 per cent of their portfolio.

As for the situation arising due to a cryptocurrency exchange not allowing investors to withdraw crypto holdings, Prashant Mali, cyber and privacy expert lawyer says: “In this volatile situation, investors should hold cryptocurrencies in their own wallets as exchanges are prone to many risks.” He adds that the cyber risks faced by these exchanges are not covered in their insurance policies, nor is there an RBI policy to insure investors in case a crypto exchange goes kaput.