Cryptocurrency and other digital assets for the average Indian investor and trader
In spite of having a very active capital market in India, not a lot of Indian’s are active market participants. Statistically less than 1% of Indian population trade in listed shares. However the sudden rise is cryptocurrencies like Bitcoin, Ethereum and some related digital assets like Golem, Iconomi has got a lot of us excited to get hold of these so called ‘coins’ to make a quick buck.I agree it’s almost impossible to ignore something like a Litecoin that has appreciated 10x in just 3 months, but it’s equally important to understand these things clearly before jumping into the bandwagon.The main intention of this post is to understand risks, right asset allocation and ways to invest or trade in cryptocurrencies in India. If you are looking for a basic understanding of cryptocurrencies (or Bitcoin in specific), I suggest you go through this Quora thread and this Coindesk article.
Risk management and asset allocation
The primary thumb-rule in investing in cryptocurrencies is to put only that much amount which you are comfortable in losing. Strictly limit yourself to investing an amount such that you would not have any heart burn to loose it completely.Speaking in terms of asset-allocation, this should range between 1% to 5% of your liquid portfolio (Fixed Deposits, Mutual Funds, Shares etc). Anything beyond this can be a big risk. At a broad level the volatility and certainty of this as an asset class compares with penny stocks and hence investors should exercise similar caution in dealing with these.Secondly, it is important to create a portfolio and not depend on only a single currency or a digital asset. Go beyond just Bitcoin. Do your own research and create a portfolio consisting a mix of prominent cryptocurrencies like Bitcoin, Ehtereum, Ripple, Litecoin as well as digital assets like Golem, Iconomi, Augur. If you build your cryptocurrency portfolio, you can use the portfolio tool at CryptoCompare to track it.You can use CoinMarketcap to keep track of various cryptocurrencies, digital assets and their prices and market capitalization.
Acquiring cryptocurrencies
The simplest way the average investor can invest in a cryptocurrency is to outright buy some. Today, buying is simpler than ever, with many exchanges in India operating the business of buying and selling Bitcoins and other cryptocurrencies.Cryptocurrencies can be bought at an exchange but need to be stored in a wallet. Most exchanges in India also provide an integrated online wallet. Though using an online wallet is not the safest way to store your cryptocurrencies, but for a new-entrant this is the easiest way to get on-boarded.Real exchanges are really just a medium between traders. People can set limit orders to buy / sell bitcoins for a certain price. The exchange will match buyers and sellers when conditions of both the buyer and the seller are met. More concrete, there are two types of orders: limit orders and market orders. Limit orders allow a trader to buy bitcoins at a price lower than the current price or sell bitcoins higher than the current price. However, these orders will only be executed once another user accepts them. Market orders will just find the best matching limit order.Most exchanges in India are not ‘real’ exchanges in this sense. As far as I know, most do not allow for limit orders. I’m not sure how they implement trading, but it’s possible that they charge a little higher price and take the risk for themselves or they may just make your order at another real exchange they partner with. But in any case, if no limit orders are supported, it is not a real person-to-person exchange like ideally it should be.In India, a cryptocurrency is almost largely synonymous with Bitcoin. As of writing this post, there are only a few exchanges that let you buy or swap cryptocurrencies apart from Bitcoins.
Prominent Bitcoin and other cryptocurrency exchanges in India
- Zebpay is well known and highly trusted bitcoin exchange in India. It has offices in Ahmedabad, India. They provide only app to trade bitcoin. The app is very friendly to use. Zebpay supports only Bitcoins.
- Unocoin is one of the first bitcoin startup of India. It has offices in Bengaluru, India. It also supports swapping of cryptocurrencies like Ethereum, Ethereum Classic, Litecoin, Monero, Ripple, Lisk and Factom to Bitcoin.
- Coinsecure provides cheapest bitcoin rates because they operate like a real order matching exchange. It has offices in Delhi, India and supports only Bitcoins.
- Bitcoin-India is a very young bitcoin exchange in with offices in Hyderabad, India. The best part is that it supports Bitcoins, Ethereum, Litecoin and Dashcoin.
- Btcxindia is one of the first bitcoin exchange in India. It has offices in Hyderabad, India and it supports Bitcoins and Ripple.
- Ethexindia is a product of the same parent company as Btcxindia. It supports Ethereum and seems to operate like a real order matching exchange.
- Bitxoxo comes across as the fastest exchange in all aspects like KYC, transfers etc. It has offices in Telangana, India and supports only Bitcoins.
For traders that want a traditional bitcoin exchange, Coinsecure or Ethexindia may be a better option. With these ‘real’ exchanges, you are trading with other users and not the company, which only acts as a middleman. Liquidity is higher and you can almost always find another person to take the other side of your trade.All exchanges employ a strict KYC process that would need you to upload your PAN card and also might involve an Aadhaar based e-verification. Typically exchanges take between a few hours to 4–5 days for KYC and account activation.
Other ways to buy Bitcoins
Exchanges are not the only way you can acquire bitcoins. Other ways of acquiring a cryptocurrency is to ask someone to transfer it for you for it’s current value (more like an offline trade). A popular route for buying BTC offline is with Local Bitcoins. The website pairs up potential buyers and sellers. When buying Bitcoins, the bitcoins are locked from the seller in the escrow. The seller can only release them to buyers (in case of a problem, file a dispute after 24 hours). You can choose to transact with people from your city. Also when buying Bitcoins offline, you should take the usual precautions as you would when meeting a stranger.
Swapping and moving around your alt-coins
By design cryptocurrencies are global in nature and hence once you acquire any of these alt-coins via the above mentioned Indian exchanges, you are free to swap them with other alt-coins or move them to exchanges or transfer them to other services. You may feel the need to do this if you want to purchase a cryptocurrency that’s not supported by the exchange that you are using or for any such reason.These swapping services allow users to convert cryptocurrency in a far more convenient manner. ShapeShift and Changelly are two of the most popular services in this regard, and they both provide a valuable service.Using such services, buying bitcoin or any of other supported cryptocurrencies can be done through a VISA or MasterCard, as long as the value is denominated in either US Dollar or Euro. Using this approach, you can completely do away with an Indian exchange for acquiring cryptocurrencies; but you will need an Indian exchange for withdrawing and getting back INR in your bank account and hence it makes sense to have an account with an Indian exchange anyways.In case of cryptocurrencies, it’s best not to move them much using these services though. You are typically charged a blockchain fee (higher in case of Bitcoins) as well as charges of exchange or such services. Hence a swap or movement of currencies across exchanges or services should be done only if necessary.
Legality of cryptocurrencies in India
Currently the government’s stand seems neutral / undecided on this. A government panel is currently looking at ways to fix accountability for transactions done through virtual currencies and whether a separate oversight body needs to be created. A committee comprising officials from finance ministry, NITI Aayog, ministry of information technology, State Bank of India and the Reserve Bank of India (RBI) is giving final touches to a report on the way forward for virtual currencies in India and whether or not to legalise or regulate them. The panel is also examining the existing international framework on virtual currencies and will suggest measures on consumer protection and prevent money laundering. The panel report is expected by end of July 2017.Meanwhile, the Reserve Bank of India has cautioned the users, holders and traders of virtual currencies, including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to, vide its press releases.The Digital Asset and Blockchain Foundation of India is an association of people interested in advocacy of use of cryptocurrency and digital assets in India. It aims to create awareness about the benefits and risks of cryptocurrencies, liaise with regulators and get clarity on taxation, attract investment and set up incubators to promote startups.Nishith Desai Associates, a leading law firm in the country says that cryptocurrencies are legal under all existing laws in India. Their point of view document is available here.Here’s an overview of legal status of Bitcoin in other countries.
Conclusion
No doubt it’s an exciting time for cryptocurrencies however an average investor should take care of the following:
- Not to over expose yourself and carefully plan a portfolio spread.
- Choose the exchange that’s right for you — in terms of currency coverage and advanced features that you may use. Do not do an offline trade unless you are completely sure about it.
- Be watchful of blockchain fees and service charges while moving currencies between services or swapping.
- Keen an eye on developments on legality of this.
Hope this helps you getting onboard this phenomenon and happy making some money!