Investors should limit cryptocurrency exposure to 2% of corpus: Experts

Investors with low appetite for volatility must avoid it altogether

Cryptocurrency investors in India face two risks currently. One arises from media reports that the Reserve Bank of India (RBI) has issued an informal directive to banks to not have dealings with cryptocurrency businesses. 

The second risk arises from the high volatility, which saw Bitcoin plunge by around 30 per cent on May 19. 

Other cryptocurrencies witnessed even sharper falls.

Another ban on banking services?

Those running cryptocurrency exchanges concede they are witnessing greater reluctance among banks to have dealings with them. 

"It is true that several banks are becoming reluctant,” says Avinash Shekhar, co-chief executive officer, ZebPay. 

However, he is hopeful the RBI’s ban on providing banking services to cryptocurrency exchanges will not be repeated. 

"We hope banks will realise there is a Supreme Court decision that had overturned the RBI notification," adds Shekhar.

Those who run cryptocurrency exchanges are also pinning their hopes on a statement by the finance minister that the government will adopt a calibrated approach towards cryptocurrencies. 

“A recent media report actually indicates the government’s view of the cryptocurrency industry has turned more positive,” says Siddharth Menon, co-founder and chief operating officer (CEO), WazirX. 

The report he is referring to says the Subhash Garg Committee’s view, which had advocated a complete ban, is being viewed by some in the government as outdated, and that a new panel may be formed.

The bottom line, however, remains that the regulatory uncertainty surrounding this asset class persists. 

However, in the event that the government decides to ban cryptocurrencies completely, it is likely to allow investors a window of three-six months to exit.

High volatility

Bitcoin and other cryptocurrencies plunged recently on news that China was withdrawing all banking support from the industry.

Experts say Bitcoin had run up a lot within a short period of time and a correction was imminent. 

"Bitcoin had gone from around $20,000-level in December last year to above $60,000, and now it is at around $40,000. Investors are still up around 2x," says Kumar Gaurav, founder and CEO, Cashaa, which provides banking services in many countries to crypto businesses.

Experts say volatility is inherent in the very nature of this asset class. It had fallen from the $18,000-plus level in December 2017 to around $3,400 by December 2018. Anyone who enters this still-evolving asset class should be prepared for high volatility.

What should you do?

Investors should start off with investing only a limited portion of their total corpus. Instead of investing a lump sum, they should do rupee-cost averaging to benefit from volatility. Above all, retail investors should avoid leveraged bets. Having a longer investment horizon can also help prevent losses. 

"Investors who have stayed invested for at least two-three years have made money," says Shekhar.

Only enter this asset class after studying its history of sharp price movements. 

"Retail investors should also invest in educating themselves about the prospects of blockchain and cryptocurrency technology, which are bright. They will then have the confidence to hold on during bouts of steep correction," says Menon.

Finally, be aware of the conflict over this asset class. 

“For cryptocurrencies to succeed, governments will need to cede control over currency and money supply. This is not something they will do willingly," says Vishal Dhawan, chief financial planner, PlanAhead Wealth Advisors. He says most retail investors should avoid this asset class until there is complete regulatory clarity around it.