Cryptocurrencies saw a massive rise in 2021 and the same year, these attracted lakhs of investors from India alone. But, the rise was somewhat short-lived as major cryptos like Bitcoin and Ethereum started crashing at the start of this year and fell to major lows in June’22. While experienced investors are able to adjust to this extreme volatility, it’s the new entrants who are unable to gauge how cryptocurrency returns will behave in the future.
This brings us to a commonly asked question these days: What should investors do with their crypto holdings? Should this crash be taken as a signal for sell-off or should be used as an investment opportunity? Here are answers to these questions and other factors that investors should know about cryptos.
2022 – a rough year for cryptocurrencies
Since the start of 2022, cryptocurrency investors have seen significant profit bookings and a massive drop in price levels since 2021. As the cryptocurrency market is seeing a bearish phase, investors are stuck, since they cannot come out by booking significant losses and the uptrend does not seem to be anywhere closer.
The price of Bitcoin, which has the largest market capitalisation among all cryptos, closed at Rs. 17.55 lakhs on 13 June 2022. This is the lowest level since December 2020.
Here are some of the major reasons for the price crash:
- This drop is primarily attributed to rising fears of recession setting in the US and rising interest rates. As per recent data, the US retail inflation has risen to four-decade high levels. Further, with fresh Federal Reserve rate hikes, the economic growth is likely to be stalled.
- Apart from rising interest rates, stock market and commodity market corrections have resulted in a shift in the crypto market.
- Heavy institutional selling is also said to be a key reason for the crypto selloff leading to lower prices.
What strategy should crypto investors follow in 2022?
Cryptocurrencies are highly volatile assets and also have a relatively small market size. Thus, any significant economic movement tends to have an immediate impact on the prices and they fall steeply. Experts suggest that there are chances of cryptocurrency prices reviving to acceptable levels. However, any further drop in prices could indicate significant losses to investors. Therefore, investors should also be ready for worse price action scenarios.
Commonly asked questions by investors:
Let’s have a look at some of the commonly asked questions by cryptocurrency investors and their answers. These can help investors make an informed decision on investment strategies.
- I have invested in Bitcoin. What should I do in the current scenario?
Crypto experts suggest that if an investor’s crypto portfolio has significantly dropped but he/she is not faced with liquidity issues, then it is better to hold. Investors must ensure that their decisions are not taken in panic due to the current price crash. Those who need the cash in hand or are sceptical about the future prices can partially sell their holdings to invest in alternatives that can help diversify the portfolio.
- Since cryptocurrency prices are in the correction phase, I plan to invest in Bitcoin now and have a long-term investment horizon. What is the right strategy to adopt?
Investors must avoid investing in a lump-sum manner during this price crash. It is better to adopt a systematic investment plan (SIP) mode for investing small amounts periodically to gauge the price levels in the near future.
Did you know?
Some cryptocurrency exchanges, such as Unocoin and Zebpay, allow investors to invest in cryptos through the SIP route. With the help of SIPs, one can also average the buying price and stay away from severe losses in the long run.
- Which cryptocurrency is best in the current scenario?
New investors should ideally opt for safer cryptos like Bitcoin and Ethereum since these are like the blue chips of the crypto market. In the current scenario, there may be a lot of scams and upcoming projects that promise high returns. However, investors are better off staying away from any new crypto coins in the current market situation.
- How much should I invest in cryptocurrencies?
Crypto investments can carry significant risk. Therefore, it is better to avoid investing in assets that you are not comfortable with. The ideal strategy would be to invest only as much as one can afford to lose.
Since the cryptocurrency market is currently going through a rough phase, investors must avoid falling for any hearsay while taking decisions on their investment. Instead, it is better to carry out some DIY research. While strategising on crypto investments, investors must remember to book profits regularly, limit their exposure and avoid additional investments until volatility settles.
Cryptocurrency investments are expensive for Indian investors now that the government has declared a 30% income tax on the returns earned from these investments. There are also various fees associated with these investments, as chargeable by the respective crypto exchange.
There is no standard minimum amount required for cryptocurrency investment. This depends on the exchange from which one is buying cryptocurrency, and also the cryptocurrency price in the market.
Although cryptocurrencies are not regulated, it is legal to invest in cryptocurrencies in India.
With a large number of exchanges opening their platforms in India and also many India-based exchanges starting up, investors can easily invest in cryptocurrencies.