Five things investors should be wary of while investing in cryptocurrencies

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The massive slide in the major cryptocurrencies wiped out billions from investors’ wealth on May 19. The big boy of the crypto lot – Bitcoin – lost nearly 22% in a day and closed at $35000. According to reports, the plunge resulted in an erosion of $500 billion from the highs that the digital currency has seen. Bitcoin had scaled to a high of around $65000 in April. Thus, nearly half of its value has been wiped out within weeks.

The story is similar with other major crycptocurrencies such as Ethereum and the recent market favourite, Dogecoin. Cryptocurrencies have seen major corrections across the board.

Though Bitcoin prices have revived a bit in today’s trade, the rather erratic behaviour of the market raises many questions. The basic among them is whether cryptos are good investments? How should ordinary investors interested in participating approach this somewhat new asset class, especially in India?

Though one should not totally dismiss cryptocurrencies as an investment option given the high volatility and the lack of regulation, investors need to be careful while considering investing in these digital currencies.

So, investors should keep in mind these defining features:

It is a high-risk game

The recent price action clearly indicates that cryptocurrencies is a high-risk game. While the potential to make gains is large over a period of time, there could be occasional shocks which many investors might not be able to withstand. The fact that a 20-30 per cent erosion of wealth can be caused just by a tweet of an influential person (read Elon Musk) or a regulatory action by the People’s Bank of China which banned digital currency as a payment option shows the fragile nature of the market. Only those who have high risk-taking ability should invest in this market.

Do not get carried away by the noise

As the price of currencies rose during recent times, the noise over it has also got louder. Those players who stand to gain from an expansion of the market have become more vocal and visible in selling the idea of cryptocurrencies as the next multi-bagging, wealth generator asset class. In fact some players have been quick to say that the current mayhem in the market as a ‘healthy correction and a time to buy’. Many ordinary investors often get attracted by the promise of getting rich quickly. Investors need to check their greed and do their own homework on the crypto market and also analyse their asset allocation based on financial goals before investing.

Invest only a small portion of portfolio

Since the cryptocurrency market is a volatile one, investors should only invest a small portion of their overall portfolio in this asset class. The amount can vary between 5-10 per cent, or even lower, depending on one’s ability to withstand losses on the invested amount.

Beware of scamsters

Since the crypto market is mostly unregulated and global in nature, scammers have started making merry. According to reports, the US Federal Trade Commission (FTC) has received nearly 7,000 complaints from those who fell victim to crypto scams involving $80 million since October 2020. Many scamsters pretended to be Elon Musk to make investors part with their money. The scams happen mainly though fake websites which offer investment advice to gullible investors. Besides global cheats, Indian scammers are a hugely active lot too in the financial market. Investors should deal with cryptocurrency entities only after doing adequate due diligence.

Regulatory actions may spoil the party

The Chinese regulator action may not be the last one on cryptocurrencies across the globe. As prices of the currencies zoom up and fall in a volatile pattern, governments and regulators worldwide are watching closely. There could be more regulatory intervention coming in major markets, including the United States. Tightening regulations can spook the market at any time. Hence it is always advisable to approach the crypto segment with caution.