According to some news outlets last week, the capital market regulator Securities and Exchange Board of India (SEBI) proposed to the Parliamentary Finance Standing Committee that celebrities should not be allowed to endorse cryptocurrencies.
About two months ago, the Advertising Standards Council of India (ASCI), an advertising industry self-regulatory body established in 1985, issued a detailed set of guidelines, which will come into effect from April 2022, for advertisers and celebrities on how cryptocurrencies or any other virtual digital asset should be advertised. The hype that many cryptocurrency exchanges created around these ads last year has come home as crypto prices have fallen sharply this year.
A big lesson for investors, who fell in love with the glitzy crypto ads of popular Bollywood actors and celebrities last year, is to do your own research. Over the last year or so, many investors have been buying cryptocurrencies for the first time as crypto prices hit new highs almost every day.
Financial planners call this the “fear of missing out” or the FOMO syndrome. Based on rave reviews from social media influencers, several millennial investors have invested small to large sums in cryptocurrencies. Raj Khosla, founder of MyMoneyMantra, says it’s best to invest less than 1% of your net worth in cryptocurrencies, if you must.
Rishabh Parakh, chartered accountant and founder of NRP Capitals, agrees. He says investors should avoid investing in cryptos if they don’t understand how cryptocurrencies work.
Be careful with cryptocurrency loans and deposits
Investing in cryptocurrencies has taken on new colors over the years. For example, many crypto exchanges allow investors to pledge their existing stock of coins and borrow money. Or even offer them a chance to earn passive income. Several crypto exchanges in India allow you to earn money by lending and depositing coins like Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Dai (DAI), etc.
Suppose you have some coins that you are sure won’t sell for months or even years. In the meantime, their values continue to fluctuate and you earn paper income. Instead, crypto exchanges allow you to deposit these coins with them and, in return, offer you a chance to earn 10-20% monthly revenue.
In the meantime, exchanges can sell your coins and create additional liquidity, which is easier than mining coins; an otherwise complex process of creating new parts using expensive warehouse-sized mainframe computers. These plans usually last for a few years during which you, the depositor, earn passive income (interest income). Once the mandate is over, you get your coins back.
Here is the caveat though: interest is paid in cryptocurrencies, not legal tender. If your coin prices go down, you lose money. The mechanism works like a bank deposit on which you earn interest, but unlike a bank deposit guaranteed by the Deposit Insurance and Credit Guarantee Corporation of the Reserve Bank of India (subject to a certain sum), your crypto deposits do not. are not. This is the other risk. Parakh says that in the meantime, if the exchange crashes or your wallet gets hacked, you could lose all your coins and there is no legal recourse.
Similarly, you can also borrow money by pawning your coins. Here too, the value of your pawned coins can drop significantly over a short period of time. Not only can your exchange (who lent you money) sell your coins in a hurry, but you would also need to make up for the loss of the exchange, in addition to seeing the value of your asset decrease.
Salman Khan is not always right!
She adds that since the guidelines took effect in April 2022, ASCI has detected violations in four crypto ads and 25 influencer-related ads about crypto products. To be sure, ASCI does not pre-approve ads; in other words, these ads were already in circulation.
The Indian government has turned its attention to cryptocurrencies since late last year, and particularly since the 2022 budget, when the finance minister imposed a 30% tax on virtual digital assets and a tax of 1% withheld at source (TDS).
With ASCI’s detailed guidelines on celebrity endorsements and SEBI and RBI refining their focus on cryptocurrencies (pending full legislation), hopefully ads like Ayushmann Khurrana’s CoinDCX’Future Yahi Hai‘(It’s the Future) or Ranveer Singh’s Commercials for CoinSwitch Kuber’s’Kuch Toh Badlega‘ campaign, would be a thing of the past.
Mrin Agarwal, Founding Director of Finsafe India Private Limited, says, “SEBI’s proposal to ban celebrity endorsements for cryptocurrencies is badly needed. Most of the ads featuring these influencers were misleading and made non-professional investors believe that their money would multiply quickly without any risk. Hopefully with the new guidelines there will be a standardization of information.
What should investors do?
The recent fall in crypto prices came as no surprise to the savvy and experienced investor. But those who have invested in cryptocurrencies for the first time in the last two years have had a taste of how quickly they could lose their money.
For those who still want to pursue their crypto adventures, despite the risks and lack of regulation, two tips: “Avoid gambling in crypto. Only deploy the amount you can afford to lose,” says Parakh.
“Book profits frequently,” says Darshan Bathija, CEO of Vauld, a crypto exchange. Do asset allocation, but be disciplined.