Treat Bitcoin as a pound, and not as an investment

The tech stocks in the US until a few months ago were getting the attention of investors, but that was more recently trumped by the multi-bagger earnings of some cryptocurrencies. Newspaper front-page comparisons of bitcoin’s value with the earnings on the Sensex and gold, where the crypto emerges as a multi-blocker, giving better returns than others. There are interviews with the owners of crypto exchanges discussing the value of unregulated virtual currency a decade old in the future. No wonder people feel that they have missed the biggest gold rush yet.

Crypto enthusiasts like to compare bitcoin with gold using analogues of ‘mining’ bitcoin – no matter that only keyboards are tapped and no underground mines are explored. The crypto logo has a shiny gold-like image to emphasize that society, but no one has yet worn a ring or necklace made of bitcoin because it’s a completely unregulated virtual currency.

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In India, buying and selling cryptocurrencies is moving in and out of being illegal. It was in March 2020 when the Supreme Court of India lifted a two-year ban from the central bank – the Reserve Bank of India – which effectively prevented cryptocurrencies from being traded and exchanged. Although the ban has been lifted, yet the discomfort with something completely virtual, lacking the value of an underlying and unregulated asset, does not leave the minds of financial advisers and trusted thinking planners.

But the returns are very interesting and if the buzz around crorepatis overnight gives you serious FOMO (fear of missing out), let’s go through this checklist – if you answer yes all of them, go ahead and put your money in (note that I hesitate to even use the word ‘invest’ in this scenario) this virtual casino. Proceed if:

  1. You are not a fixed deposit (FD), a life insurance investor, but understand financial markets. You are fine with holding unincorporated assets such as mutual funds or stocks because you understand the underlying value of these investments. You understand the risks of the uncharted territory and rightly lose the money put in.
  2. You like volatility and a sudden surge in value is of no concern. You don’t mind losing half your money in a day, because on other days, you’ve more than doubled your money – or at least heard of people who have and are willing to take risks. When the stock markets break down, you usually buy more and don’t use social media to defy the entire equity market and its participants.
  3. You have high-risk debt funds and you were right when six schemes froze in March 2020 – higher returns carry a higher risk, and you understand this very well. You routinely make high-risk investment decisions and right when some of these fall to nothing.
  4. You have a very diversified large portfolio and you are a very high net worth (UHNI) individual with about 20-30% of your net worth in liquid assets looking for investment. The real estate has been dead and you are already fully loaded with debt and equity. What you have in mind is a tactical allocation of a small part of your portfolio that you don’t mind losing, like just a pound.

I really doubt whether many of the people rushing to ‘invest’ crypto would check any of the boxes above. It’s a rush and most people get caught up in the feeding frenzy around the profits some people seem to have made.

But, if you identified yourself as a zero-risk investor in March 2020 when the equity markets fell 30%, and some debt funds froze, are you serious about what you’re about to double in something that can lose half its value in a day – as it did in March 2018 – or get an adrenaline rush and more than double in a day, as it did in November 2017? If volatility in stocks keeps you in FDs, what do you even think about when you think you can go on a cryptocurrency roller coaster ride?

If the itching to dip your toes in this is very strong, use less than 5% of your irrecoverable amount in a year, to pound cryptos only. Stay away from ICOs – initial coin offerings – most are scams. Stay away from multi-level marketing crocks that will require you to build crypto ‘outlines’ to make money.

I can’t say this often enough – find a fee-only financial planner and build a plan rather than go from last year’s winner to last month’s winner – you only catch losers and a sleepover. Money and investing is about setting you free, not making you tied to a trading screen.

Monika Halan is an editorial consultant at Mint and writes on home finance, policy and regulation.

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