Crypto Investing

How to Invest in Cryptocurrency in India.

Investing in cryptocurrency has captured the global financial discourse, and India is no exception. As more Indian investors are drawn to the potential high returns of digital currencies, understanding the legal, strategic, and practical aspects of crypto investing becomes crucial. This article aims to guide you through the process of investing in cryptocurrencies within the legal framework of India.

Cryptocurrency is digital or virtual money that operates without the need for a central authority, such as a government or bank. Crypto transactions are secured using cryptography, hence the term “cryptocurrency.”

Global Crypto Scenario

Bitcoin to ETF

Since Bitcoin’s launch in 2009, numerous other cryptocurrencies have been developed, each with its own unique features and purposes. This expansion includes major names like Ethereum, Ripple, and Litecoin, among others. The crypto market’s growth has been fueled by its appeal as an alternative investment class and its potential to provide a decentralised financial system.

Bitcoin ETFs: A Milestone in Crypto Acceptance

One of the most significant recent developments in the crypto space is the introduction of Bitcoin ETFs (Exchange-Traded Funds) in January 2024. These financial products allow investors to buy shares of funds that hold large amounts of Bitcoin, enabling investment in cryptocurrency through traditional investment accounts without the need to directly purchase and secure the digital assets. This marks a major milestone because it bridges traditional finance and the innovative world of crypto, offering a regulated pathway for institutional investments. Bitcoin ETF offers a familiar and regulated investment vehicle for mainstream investors who might be hesitant about directly dealing with cryptocurrency exchanges. This in effect increases accessibility to crypto investing. Increased demand from new investors could influence Bitcoin’s price, pushing it further into the mainstream. The approval of a Bitcoin ETF could be seen as a vote of confidence in the legitimacy of Bitcoin and the cryptocurrency market as a whole.

Bitcoin as Legal Tender

The global attitude towards cryptocurrencies is shifting, with some countries even accepting them as legal tender. El Salvador became the first country in the world to make Bitcoin legal tender in September 2021. Central African Republic (CAR) became the second country in the world to adopt Bitcoin as legal tender in April 2022.

Global Crypto Regulators

The world of cryptocurrency is booming, but governments are scrambling to keep up. Here’s a snapshot of the current state of crypto regulation around the globe.

EU’s MiCA: The European Union took a big step with the introduction of the Markets in Crypto-Assets Regulation (MiCA) in May 2023. This represents the world’s first comprehensive set of crypto regulations.

National Approaches: While MiCA sets a precedent, individual countries still have their own approaches. Some, like the US, have a patchwork of regulations from different agencies.

Focus Areas: Regulatory bodies are generally focusing on areas like anti-money laundering (AML) and combating the financing of terrorism (CFT). Consumer protection and ensuring financial stability are also key concerns.

Varying Levels of Adoption: The level of crypto adoption varies greatly by country. This often influences the urgency and stringency of regulations. Places like Singapore and Japan have established themselves as crypto hubs with relatively clear regulations.

Global Collaboration: International organisations like the Financial Stability Board (FSB) are pushing for global collaboration on crypto regulation to create a more unified approach.

Legal Status in India

The Indian landscape for cryptocurrency is pretty opaque. The legal status of cryptocurrencies in India has been a subject of intense debate and fluctuating policies. Here’s a breakdown of the current situation.

Legal Status:

Not Banned, But Unregulated: Cryptocurrency trading is not illegal in India, but there’s currently no specific law governing it. This creates some uncertainty for investors.
Proposed Bill: The Indian government has proposed a bill, the “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021,” which aims to regulate cryptocurrencies. However, the bill’s status is currently unclear.

Taxation:

Crypto Gains Taxed: The Indian government treats crypto gains as income subject to a 30% tax. Additionally, there’s a 1% tax deducted at source (TDS) on all crypto transactions.

Legal Considerations and Compliance:

Limited Banking Support: Traditional banks may be hesitant to facilitate crypto transactions due to the uncertain regulatory environment.
The 2018 ban by the Reserve Bank of India (RBI) – prohibiting banks from facilitating transactions – faced strong pushback from cryptocurrency enthusiasts and businesses, culminating in a landmark decision by the Supreme Court of India in March 2020. The Court overturned the RBI’s ban, citing the disproportionate nature of the restriction compared to the risks.

Cryptocurrencies have exploded in popularity globally, but their primary use case remains within the realm of investing and trading, rather than as a mainstream medium of exchange. Investors currently face significant risks due to the lack of regulations. Oversight by the Securities and Exchange Board of India (SEBI) could establish guidelines for crypto exchanges, protect against fraud, and ensure fair market practices. A collaborative effort between SEBI and the RBI is crucial for creating a comprehensive regulatory framework for cryptocurrencies in India. This framework should address concerns about financial stability and money laundering while fostering innovation and responsible growth in the crypto market.

As of now, while cryptocurrencies are not illegal in India, the government and regulatory authorities are working on clarifying and establishing a stable regulatory framework. Crypto investors and businesses operate in a landscape of legal ambiguity, awaiting clear guidelines that could potentially make India a major hub for blockchain and cryptocurrency innovation.

Crypto Exchanges

A crypto exchange is a platform where individuals can buy, sell, or trade cryptocurrencies. These exchanges serve as the primary means for crypto enthusiasts to interact with the digital currency market, similar to how traditional stock exchanges facilitate the buying and selling of stocks.

Best Global Crypto Exchanges

Binance

It is the largest global cryptocurrency exchange by trading volume.
It offers a more than 500 cryptocurrencies for trading
Binance is known for its low trading fees
It also provides additional services like crypto staking and an in-built wallet.

Kraken

Kraken is praised for its security
It offers a wide range of cryptocurrencies and fiat currencies

Bitfinex

It caters primarily to professional traders
It has advanced trading features, high liquidity, and low spread

Huobi

It is another leading exchange that offers a vast selection of digital assets for trading, providing liquidity and a
It has a multi-language support system.
It is known for its user-friendly interface
Its services include an advanced trading platform for experienced traders and minimal fees for high-volume traders.

Best Indian Crypto Exchanges

WazirX

Known for its easy-to-use platform, suitable for beginners.
It offers trading in over 100 cryptocurrencies
It offers its own utility token which can be used to pay for transaction fees with discounts.

CoinDCX

It provides a range of products including spot trading, margin trading, and even lending.
It has ties with global exchanges to provide ample liquidity.
It allows staking to earn interest on cryptocurrency holdings.

ZebPay

It is one of the oldest crypto exchanges operating in India since 2014.
It claims to store about 98% of funds in cold storage (high security) and offers features like disable outgoing transactions with one click.
It offers a clean and intuitive user interface ideal for beginners.
It allows users to lend their coins to gain interest.

Unocoin

It offers a unique feature for regular weekly or monthly Systematic Investment Plan (SIP) in Bitcoin.
it provides over-the-counter trading for high-volume traders.

Bitbns

It supports over 100 cryptocurrencies for trading.
It offers up to 4x leverage (margin) on certain coins.
it has a fixed income plan that guarantees returns on crypto investments.
It runs regular promotional events and flash sales that offer cryptocurrencies at discounted rates.

Benefits of Using Cryptocurrency

Cryptocurrencies offer several advantages over traditional banking systems, including lower transaction fees, faster transaction times regardless of location, and increased privacy.

High Return Potential

Cryptocurrencies have shown the ability to yield significant returns over short periods. Early investors in major cryptocurrencies have seen their investments grow exponentially.

Liquidity

The cryptocurrency market operates 24/7, offering high liquidity. This means you can easily buy and sell cryptocurrencies at any time without much impact on their price.

Diversification

Adding cryptocurrencies to a diversified investment portfolio can decrease risk. Crypto markets have different risk-return metrics compared to traditional markets.

Innovation and Future Potential

Investing in crypto puts you at the forefront of technological innovation. Blockchain technology, which underpins cryptocurrencies, has the potential to revolutionise industries.

Risks in Crypto Investing

Extremely High Volatility

Investing in cryptocurrencies can be risky due to their highly volatile nature. Prices can dramatically increase or decrease within short time frames, which could lead to significant losses.

Regulatory Uncertainty

The lack of consistent regulation globally creates uncertainty. Changes in regulations can affect the value of cryptocurrencies and the ability to use or trade them.

Security Risks

While blockchain itself is secure, cryptocurrencies are still susceptible to hacking and theft. High-profile hacks have resulted in substantial losses for investors.

Limited Historical Data

The relatively short existence of cryptocurrencies means there is limited data for predicting future trends, making it a speculative investment.

Setting Up Crypto Investing

How to choose the right cryptocurrency exchange in India?

When selecting a crypto exchange, consider the following factors:

Security: What security measures does the exchange use?
Liquidity: Higher trading volumes can lead to more favourable prices and faster transactions.
Fees: Understand the fee structure for trading and withdrawing funds.
User Interface: Is the platform easy to use?
Regulatory Compliance: Ensure that the exchange complies with regulations applicable in your jurisdiction to avoid any legal issues.

Security Measures

Security is a major consideration for crypto exchanges, as they frequently handle large volumes of valuable cryptocurrencies. Common security measures include two-factor authentication (2FA), encryption, and cold storage of funds. Despite these precautions, exchanges can still be vulnerable to hacks and other security breaches.

How to Buy Crypto in India

Purchasing cryptocurrency in India has become straightforward thanks to progressive regulations and a growing number of exchanges. Here is a clear path for buying your first cryptocurrency and offers tips to ensure safe transactions.

Choose a Reliable Crypto Exchange

Select a reputable cryptocurrency exchange that operates in India, such as WazirX, CoinDCX, or ZebPay. Register using your email address. Complete the KYC (Know Your Customer) process by submitting the required identification documents. This step is crucial for account security and compliance.

Secure Your Account

Set up strong security measures. Enable two-factor authentication (2FA) for an added layer of security. Use a strong, unique password for your exchange account and change it regularly.

Deposit Funds

Link your bank account to the crypto exchange. Deposit funds into your exchange wallet. Most exchanges accept deposits via NEFT, RTGS, IMPS, or UPI. Check for deposit fees, if any.

Place Your Order

Navigate to the market section on the exchange. Select the cryptocurrency you wish to purchase. You can opt to buy at the current market rate or set a limit order to specify a different price.

Safe Transaction Tips

Use a Secure Internet Connection

Always use a secure, private Wi-Fi network when buying cryptocurrency. Avoid public Wi-Fi networks due to potential security risks instead use your mobile data for crypto transactions.

Withdraw to a Personal Wallet

For enhanced security, transfer your cryptocurrencies from the exchange wallet to a personal wallet. Choose between hardware wallets or software wallets based on your needs.

Stay Informed

Keep yourself updated on the latest security practices and any regulatory changes in the crypto space in India.

Monitor Your Investments

Regularly check your account and transactions. Set up alerts for withdrawals and other significant account activities. Maintain details of your crypto holding in your personal spreadsheet or journal.

Safely Store Seed Phrases

A seed phrase, also known as a recovery phrase or backup seed, is a list of words which store all the information needed to recover cryptocurrency funds on-chain. One of the most secure methods is to write down your seed phrase on paper. To enhance security, place the paper with your seed phrase in a tamper-evident envelope. Do not store your seed phrase in digital form (e.g., text files, photos, cloud storage) to avoid exposure to online threats.

Risk Management in Crypto Investing

Risk management in cryptocurrency investing is essential due to the inherent volatility of the market, which can see rapid and significant price changes driven by factors such as regulatory updates, technological advancements, and shifts in investor sentiment. To mitigate investment risks, investors should employ a variety of strategies including diversification to spread risk across different assets, using stop-loss orders to automatically sell at a predetermined price and minimise losses, and only investing money they can afford to lose to protect personal finances. Additionally, thorough research and continuous monitoring of market trends are crucial to making informed decisions, while implementing robust security measures (such as 2FA) for digital wallet protection further safeguards investments from potential cyber threats.

Crypto-related frauds have become increasingly sophisticated, leveraging various methods to deceive investors. Common tactics include phishing attacks, where fraudsters trick individuals into giving away sensitive information such as private keys and wallet passwords by mimicking legitimate websites or emails. Another prevalent scheme is the Ponzi or pyramid scheme, promising high returns for new investments that are actually paid out from incoming funds from new recruits rather than legitimate business activities. Scammers also use fake ICOs (Initial Coin Offerings) to lure investors into buying nonexistent cryptocurrencies. Additionally, pump-and-dump schemes are frequent; orchestrators artificially inflate the price of lesser-known cryptocurrencies by spreading misleading information, only to sell off their holdings once naive investors have driven up the price. These frauds highlight the critical need for vigilance and thorough research before engaging in any crypto transactions or investments.

Role of FIU-IND

The Financial Intelligence Unit-India (FIU-IND) plays a crucial role in the oversight and regulation of cryptocurrencies in India, aiming to curb illegal activities associated with crypto transactions. As a central national agency responsible for receiving, processing, analysing, and disseminating information relating to suspect financial transactions, FIU-IND is instrumental in combating money laundering and terrorism financing that can be facilitated through the anonymity of digital currencies. There are about 48 crypto related entities registered with FIU-IND.

Passive Income from Crypto

Generating passive income from cryptocurrencies is an appealing strategy for those looking to grow their wealth without active trading. Staking, where investors lock up coins to support a network’s operations and earn rewards, is one popular method. Another effective approach is yield farming, which involves lending crypto assets on decentralised finance (DeFi) platforms to earn interest and fees. Crypto lending also allows investors to deposit their digital assets into lending platforms in exchange for interest payments. Additionally, some investors run master nodes to support blockchain networks, earning rewards for their services. Each of these methods offers a way to capitalise on your crypto holdings through different levels of engagement and risk, providing a steady income stream while contributing to the blockchain ecosystem.

Crypto Investment Strategies

Crypto investment strategies vary widely, catering to different types of investors based on their risk tolerance, investment horizon, and market expertise. For conservative investors, a long-term holding (or “HODLing”) strategy may be suitable, where they buy and hold cryptocurrencies expecting long-term appreciation. More active investors might engage in day trading or swing trading, leveraging the market’s volatility to make quick profits from short-term price movements. Another approach is staking or yield farming for those interested in generating passive income from their crypto assets by participating in network consensus mechanisms or providing liquidity. Each strategy requires a different level of engagement and understanding of the market, and investors should choose based on how closely they can monitor market movements, their expertise in technical analysis, and their overall financial goals.

Staying Updated

Staying updated and informed is crucial for anyone involved in the volatile world of cryptocurrency. Being aware of both global and local crypto news can significantly impact investment decisions and market strategies. Investors should regularly consult a variety of resources to ensure they receive accurate and timely information. Reliable sources include well-known financial news websites, dedicated crypto news platforms, official blogs and forums of major cryptocurrencies, and updates from regulatory bodies. Additionally, subscribing to newsletters, following influential crypto analysts on social media, and participating in community discussions can enhance understanding and provide deeper insights into market trends. This continuous learning helps investors make informed decisions and stay ahead in the fast-evolving crypto market.

Final Thoughts

In conclusion, starting your investment journey in cryptocurrencies in India involves several essential steps. Begin by choosing a reputable crypto exchange and complete the necessary KYC procedures to ensure compliance and security. Next, understand and implement robust security measures for your digital wallets. It’s important to diversify your investments and use strategies suited to your financial goals and risk tolerance. Always stay informed by following reliable sources of crypto news and market trends. Lastly, responsible investing in cryptocurrencies is not just about potential gains but also about continuous education and adapting to new information and market changes. By staying educated and cautious, you can make the best return out of your cryptocurrencies investing.