It was a midsummer nightmare for investors like Tyagi. In a week from May 13, the value of his crypto holdings collapsed by over 60%, from around Rs 55,000 to less than Rs 20,000 as panicked investors rushed to sell their coins . “Elon Musk has acted irresponsibly without caring about the millions of investors who would be affected by such decisions,” he said grimly.
Did you know?
- $ 1.635 billion is the estimated market capitalization of all cryptocurrencies. Bitcoin’s market cap of $ 674 billion (Rs 50 57,561 crore) is more than three times India’s most valuable company Reliance Industries (market cap Rs 14 11,500 crore).
- Rs 1,000 to 1,500 crore is the combined daily turnover of crypto trading in India. This is less than 1% of the Rs 2.00,000 crore daily trading volumes of stock exchanges in India.
- 10-12 million is the estimated number of active investors and crypto traders in India. This represents 16 to 20% of the 60 million investors and traders active in the country.
- 24×7 trading takes place in the cryptocurrency market. The market is open even on Sundays and public holidays, unlike the stock and bond markets in India which open at 9 a.m. and close at 3:30 p.m. and are closed on weekends.
- 40-50% was the drop in crypto prices after Elon Musk tweeted that Tesla would not accept Bitcoin payments and expressed concern about the environmental impact of crypto mining.
Tesla’s crypto U-turn wasn’t the only trigger. Around the same time, the Chinese government cracked down on institutions dealing with cryptocurrencies. Both of these developments sparked panic selling in cryptos. “Besides the panic sell, many investors have chosen to make a profit at this point, which has caused crypto prices to drop more sharply,” points out Nischal Shetty, CEO and founder of WazirX, a crypto exchange established in 2018.
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Crypto prices have risen over the past 12 months, producing mind-blowing returns for investors. Even after the recent drop, the price of a bitcoin is close to 400% of what it was a year ago. Some smaller coins like Dogecoin are trading at 140 times its June 2020 level while the Matic network has risen by over 7000%.
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Attracted by high returns
These huge returns have drawn investors to what crypto evangelists call an emerging asset class. There are around 12 to 15 crypto exchanges operating in India and daily turnover estimates range from Rs 500 crore to Rs 1,500 crore. As big as it sounds, it represents less than 1% of the daily turnover of 2,000,000 crore rupees on the stock exchanges in India.
Shetty admits that the daily turnover is low, but points out that the number of investors is much larger. He estimates that there are over 10-12 million active investors trading cryptocurrencies on a dozen crypto exchanges in India, which is around 16-20% of the estimated 60 million active investors. .
These numbers suggest that the average crypto investor doesn’t have very deep pockets. Even so, he is able to trade because cryptos can be bought and sold in fractions. A bitcoin is priced at around Rs 27 lakh and ethereums are priced at Rs 2 lakh. But you can buy a fraction of these coins with Rs 50-100.
Such rules made crypto trading easy and spawned a new breed of traders with characteristics that traditional investors would frown on. These investors are young, easily swayed by social media, and willing to take high risks. Their eagerness to get rich has compressed investment horizons. “I want to invest for the long term,” says 26-year-old Vikram Chaddha, seemingly shrewd. Then he adds: “I will last 2-3 months.
The crypto market’s trading hours add even more craziness. The stock exchanges are open 24 hours a day, seven days a week. No holidays, no weekends. You can trade all day and night. As one stock trader joked, “Now we can also lose money on weekends. ”
Meet Rajesh Rupala, a 31-year-old investor based in Bhavnagar, Gujarat who quit a job at a bank to become a full-time trader last October. Four months ago he was introduced to crypto and instantly got hooked. Rupala has almost Rs 12 lakh (25% of its total investment portfolio) invested in this very risky but also rewarding option.
Facing multiple risks
Investors like Rupala don’t mind that cryptocurrencies face multiple risks. First, there is the systemic risk. Cryptos are very volatile instruments and can move very quickly and without any warning.
“There is a second layer of risk related to regulatory ambiguity, cybersecurity threats and uncertainty about their acceptance in traditional finance,” says Prableen Bajpai, founder of FinFix Research and Analytics. Three years ago, the RBI practically banned cryptos when it asked banks and fintech companies to stop providing services to entities dealing in virtual currencies. But last year, the Supreme Court overturned the RBI ban, saying cryptos were unregulated but not illegal.
This is hardly reassuring. If a stock market investor has a grievance against a company or an intermediary, he can apply to the Sebi and the complaint is handled according to the codified rules. But in the absence of regulations for cryptos, the investor will likely have to go to the cybercrime cell or move a court. “That’s why regulation is important. Right now, self-regulation is done at the industry level, but we want the government to set the rules and appoint a regulator, ”said Shetty.
Crypto investors are also at risk of unscrupulous promoters and shady outfits. It is a landscape littered with stories of scams and frauds. “Given the scarcity of credible information and reliance on social media, the risk of price manipulation is very high,” says Gaurav Garg, head of research, CapitalVia Global Research.
Manipulation is also possible because many cryptos are not very widespread. “There is a concentration risk if a few investors hold very large amounts of a certain coin,” says Vineet Nanda, co-founder of Globalise. As the May Crash showed, if one tweet can lower the price by 40-50%, there is a high risk of price manipulation.
Too big to close
Many investors find solace in the numbers. The crypto industry has grown huge in recent years. Bitcoin’s market capitalization alone exceeds Rs 50 lakh crore, making it greater than the combined market capitalization of the six largest stocks in India including Reliance Industries, TCS, HDFC Bank, Infosys Technologies, Hindustan Unilever and HDFC. Ethereum’s market cap is equal to the following six stocks. So the two biggest cryptos are bigger than the 12 biggest stocks in India. “How can a government shut down something that has attracted so much investment,” asks Arun Shivshankar, a 22-year-old medical student based in Vellore. Shivshanker embarks on crypto after completing his education.
Stakeholders in the crypto ecosystem are also confident that the government will not ban virtual currencies. In fact, the government is planning to create its own sovereign digital currency. “Nobody thinks of banning them because it is practically impossible. The other reason is that the technology is really good. He is so beautiful that he will find a way to grow taller in the future. And when that happens and a nation is not part of it, it will simply lose out, ”says Vikram Subburaj, CEO and co-founder of Giottus Cryptocurrency Exchange.
Cryptocurrencies are risky, but if you are careful and understand the market, they can be very rewarding too.
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