How much crypto should you hold in your portfolio? 

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On 1st February, India’s Finance Minister, Nirmala Sitharaman, announced that The RBI would issue digital Rupee or Central Bank Digital Currency in the coming fiscal year. She also said that discussions about private cryptocurrencies and central bank-backed digital currency have continued with the Reserve Bank. A decision is to be made after due deliberations. Besides the taxation announcement, the FM did not touch upon legalizing private cryptocurrencies.

 

What is a digital asset?

A digital asset or the virtual asset is generated through cryptographic means, offering a representation (digitally) of value exchanged. It functions as a storage of a unit of account or value, including use in an investment or financial transaction, but not limited to investment scheme, and can be transferred, stored or traded electronically.


Cryptocurrency: –

A cryptocurrency is currency that has digital or virtual existance. It uses cryptography to secure transactions. Cryptocurrencies do not have a regulating authority or central issuing. Instead, it uses a decentralized system to record transactions and issue new units.

Cryptocurrency does not rely on banks in order to verify transactions and is a digital payment system. It is a system that enables anyone anywhere to send and receive payments.

 

Some of the very well-known cryptocurrencies are Bitcoin, Solana, Ethereum, Tether, etc.

Here are it’s advantages and its disadvantages

Advantages  Disadvantages 
Potential for high reward  30% tax rate plus a TDS of 1% on purchase price 
Replacing traditional banks  Price Volatility with Cyber security issues 
Round the clock trading  Complicated regulations accompanied by transaction difficulties. 

 

Crypto Volatility

Investing in something that includes speculation is a way to add volatility to your portfolio. Without anything intrinsically valuable backing up the currency, crypto’s market value is based entirely on speculation. This means that the invested money isn’t very safe or secure, which makes its price extremely sensitive to even the slightest change in the investors’ expectations and perceptions.

Source: EduFund Research 

The above graph shows the net changes(volatility) in the price of the volatility taking BTC as the base for the period of one year. 

Standard Deviation: It is the measure of the amount of variation of a set of values. A low Standard deviation shows that the data set is closer to its mean or average, whereas a high standard deviation shows higher volatility.

 

Analysis: Cryptocurrency shows the highest standard deviation(risk) compared to BSE small-cap and mid-cap throughout the period. This shows that the crypto monthly returns are highly volatile and move farthest from their average. With the highest risk, crypto delivers the highest returns, but at the same time, with lower average risk and low volatility, BSE Small-Cap and Mid-cap outperform the market and deliver good returns.


Crypto taxation: –

A flat 30 per cent tax on digital asset gains regardless of any long-term or short-term holding by the investor. Additionally, if a virtual digital asset investor incurs losses during the transaction, it can’t be set off against any other income. The gifting of virtual digital assets has also been proposed to be taxed in the hands of the recipient.

The above example shows the profits earned in the period of 1 year by investing in Bitcoin. Here, there is a 30% taxation on the capital gains or profits. Additionally, the buyer of the crypto pays a TDS of 1% on the purchase price to the government.


What is CBDC?

CBDC is Central Bank Digital Currency which is an electronic form of central bank money that citizens can use to make digital payments and store value. A CBDC, in short, is a digital currency issued by the central bank and is universally accessible. It eliminates the risks of extreme volatility and lack of government backing, which is seen in cryptocurrencies.


Should you invest in crypto: –

Investing in crypto has definitely made money to a lot of investors. Investing in crypto assets is very risky but, at the same time, extremely profitable. But it is like signing up for a bumpy ride. Consider the volatility and the standard deviation. Imagine the value of your investments changing in value (increase or decrease) by almost 20-30% in a day.


Now, let’s consider the taxation part. The official budget announcement acts as the first step towards a full regulatory framework and a classification of crypto as a virtual digital asset. But a flat tax rate of 30% on the capital gains is like losing almost a third of your profits generated from crypto. This tax rate further discourages day trading in the crypto market.


Moreover, the central governments are also moving towards the banking sector for issuing CBDC, which is well regulated and legalized. This provides a currency with more backing.


Investing in the crypto market is very time-consuming. Since the market is working round the clock and is highly volatile, investors are likely to spend more hours in a day analyzing the market to keep a check on their investments. Investors also face a challenge of a time difference in the markets of different countries. For e.g., an Indian investor would have to be up in the middle of the night to check the movement of the crypto market.


Another major factor to be considered in the Crypto market is the weightage of the investors. The majority of the crypto market is held by 4-5% of the big players in the market. This causes a great sense of unpredictability for retail investors. Any big decision (to buy or sell) by these players causes great manipulation in the market, which has an adverse effect on retail investments.
In short, an investor with an extremely high-risk appetite can hold not more than 5% of the digital virtual asset (preferably a digital currency) in their portfolio. Anything more than this would increase the volatility of the entire portfolio and would question the safety of the principal amount. One must understand that crypto is a highly speculative and highly volatile investment.

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