Does Cryptocurrency still fit into your asset allocation?
As per an estimate, published in The Mint, there are 10 crore people in India who own digital currencies and there are about 20,000 crypto-currencies in circulation though only 1500-odd coins are regularly traded.
In my earlier article, published on 2nd Jan’22, (Cryptocurrency: Does it fit into your asset allocation?), I stated that investing in crypto-currency is tantamount to speculation (wherein a financial position is taken without the availability of adequate/ proper information). To drive home the point, I had compared the performance of Top 10 performing Crypto Coins with that of Top 10 performing Flexicap fund, during the year 2021. Evidently, the variation in the 1st and last Coin/ Fund (among the Top 10) was hugely different in the two investment options. Since then (between Dec’21 and Aug’22) both the categories have seen significant correction and the price-led volatility has been extremely high in case of crypto-currencies, relative to the Flexicap funds. The variability in their respective performances have been equally sharp, though on the opposite side (as seen in the table below).
| Top 10 Coins | Returns (1st Jan’21 to 16th Dec’21 | Returns (17th Dec’21 to 23rd Aug’22) | Flexicap Funds | Returns-1Y (17th Dec’20 to 17th Dec’21) | Returns (17th Dec’21 to 23rd Aug’22) | |
|---|---|---|---|---|---|---|
| Solana (SOL) | 10233% | -80.83% | Parag Parikh Flexi Cap Fund | 45.50% | -4.12% | |
| Avalanche (AVAX) | 2825% | -78.03% | BOI AXA Flexi Cap Fund | 44.50% | -0.25% | |
| Binance Coin (BNB) | 1329% | -44.93% | PGIM India Flexi Cap Fund | 43.35% | -3.72% | |
| Cardano (ADA) | 676% | -64.76% | Franklin India Flexi Cap Fund | 39.35% | 2.83% | |
| Ethereum (ETH) | 459% | -59.25% | Union Flexi Cap Fund | 37.20% | -0.59% | |
| XRP | 261% | -58.18% | HDFC Flexi Cap Fund | 35.91% | 12.87% | |
| Polkadot (DOT) | 232% | -72.26% | IDBI Flexi Cap Fund | 35.39% | 3.69% | |
| Bitcoin (BTC) | 69% | -56.16% | UTI Flexi Cap Fund | 34.72% | -7.11% | |
| USD Coin (USDC) | 11% | 0.00% | Edelweiss Flexi Cap Fund | 33.13% | 2.92% | |
| Tether (USDT) | 0% | 0.00% | HSBC Flexi Cap Fund | 32.90% | -2.46% | |
| 17th Dec’21 to 23rd Aug’22 | as on 17th Dec’21 | 17th Dec’21 to 23rd Aug’22 |
The question is: whether the Cryptocurrency still fit into your asset allocation?
Some of the key concerns are as below:
- Regulatory headwinds:
- RBI’s disdain for the unregulated crypto-currencies is well known. Moreover, the government has been trying to bring in legislation to regulate the same but has been unable to do so. It is this opacity of the crypto-currency ecosystem that disqualifies it from being a worthy asset class. Moreover, largely unregulated till about a few months back, the moment the government started mulling regulating the space, it unleashed chaos and mayhem – trading volumes plummeted, crypto-frauds started emerged – creating a crisis-like situation for investors and service providers (crypto exchanges, banks) alike.
- Taxation:
- Crypto-currencies are now being taxed. In the budget announcements for the FY22-23, the government has proposed the highest tax band of 30% on the income generated from the transfer of virtual digital assets. While doing so no deductions and/ or exemptions would be allowed.
- Not all Coins are the same:
- From among the Top 10 Coins (Dec’21), given in the table above, Solana delivered a return of more than 10,000% in one year, while Bitcoin delivered 69% in the same period. If you compare the trading volumes of the two, the volumes for Solana are less than 3% of that of Bitcoin. Low trading volumes mean illiquidity and hence investors can get trapped while trying to exit their positions when they need to, especially during a crisis. But then Bitcoin investors would have fared better investing in any of the funds shown in the table.
Conclusion: Investing in cyrpto-currencies is fraught with uncertainty and unfathomable risks. It is prudent for the investors to stay away from it. Speculators, however, may just go right ahead!!!
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