How to invest in Cryptocurrency?

Planning to get started with cryptocurrency investment. Read this article to know more.

“Cryptocurrency”, or digital money, has seen an incredible growth since its inception with bitcoin in 2009. As per industry estimate, India has 15 million (1.5 crores) crypto investors, who hold more than 100 billion (10,000 crores). Cryptocurrency is said to be a digital gold and there are good enough reasons as to why you should consider it in your investment portfolio.
India has strict rules on crypto, with RBI not favouring crypto citing the negative impact it has on financial stability. Though banks and other payment gateways are pulling out of the major Indian crypto exchanges, buying and selling cryptocurrencies is still legal in India. You cannot use cryptocurrency in India as a medium of payment for goods and services, but it can be used as a store of value.

Today in this article we will try to answer how to invest in cryptocurrency in India. But before understanding how to invest in cryptocurrency, let us first see why you should invest in cryptocurrency?

Why should you invest in cryptocurrency?

1. No dilution in value through inflation:
Unlike fiat (or printed) money, the total supply of most cryptocurrencies is fixed, capped by mathematical algorithms. For instance, 21 million bitcoins can be mined, beyond which no bitcoins can be mined. This makes it impossible for the policy makers to dilute their value through inflation, as is done in case of paper notes.

As the demand for cryptocurrencies (especially bitcoins) is increasing and the supply is fixed, the value of these digital money is expected to rise. Hence, it is profitable to hold this as an asset for higher profits in the future.

2. No Government Intervention:
Cryptocurrency is based on a decentralized network, where the government cannot freeze your account or prevent transfer of funds.You can own and use the digital money anonymously.

3. Secured:
Cryptocurrency got its name from the combination of cryptography and currency. Cryptographs are mathematical algorithms which secures this digital money, preventing hackers from shutting it down.

4. Portfolio diversification:
One of the most heavily traded cryptocurrencies, Bitcoin has historically shown almost no price correlation with the stock markets. So, investing in cryptocurrencies will diversify your portfolio and will lower your risk when added with other assets in your portfolio.

How to invest in cryptocurrency in India?

Cryptocurrency is still new in the financial market. It is unregulated and not supported by the RBI. It operates within its own network. Hence, you can go neither to banks nor investment brokerage firms to buy cryptocurrencies. For buying cryptocurrency in India, you must open an account online with a crypto exchange. There are many crypto exchanges in India. The most popular ones are Binance India, WazirX, Zebpay, Coinbase India, Coin switch Kuber, CoinDCX, Unocoin. Now let’s see how to invest in cryptocurrency online.

Step by Step guide to buy cryptocurrency in India

1. Decide the fraction of your portfolio you want to invest in cryptocurrencies:

You should dedicate a small percentage of your investment portfolio to cryptocurrencies. Why?

a. Unlike stocks and bonds, cryptocurrencies do not pay you dividends. They can be a good investment if their price is increasing and remains high till the time you hold it. Their prices are highly volatile such that price is affected heavily simply by the tweets of the industry stalwarts like Elon Musk.

b. Moreover, cryptocurrency was originally designed as an alternative currency to paper money, or in other words, as a means of payment. Though it is not accepted now by the merchants in India, it may be accepted in the future.

2. Choose the type of cryptocurrency:

There are more than hundreds of cryptocurrencies available in India. Not all exchanges offer the same type of cryptocurrencies. But before investing in any cryptocurrency, do your own research.

To choose a particular cryptocurrency, you must look at the following factors before deciding to invest in a particular crypto asset:

a. Historical price movements of the asset over a particular time period
b. Historical trading activity over a particular time frame
c. Macroeconomic and microeconomic conditions like industry conditions, condition of business underlying the crypto asset.
d. Public blockchain data, also known as on-chain metrics like the number of daily transactions over a given time frame, number of active addresses, average time for which the asset is owned.
e. Social community review like twitter sentiments, telegram sentiments, etc.

To get a detailed insight and comprehensive reports on different crypto assets, you can look at the Binance research projects.

Types of cryptocurrencies available in India:

a. Bitcoins
b. Altcoins – All cryptocurrencies other than Bitcoin like Ethereum, Ripple, Tether, meme coins like Dogecoin (DOGE), Safemoon (SAFEMOON), Shiba Inu (SHIB) and Shiba BSC (SHIBSC)
c. Non-fungible tokens (NFT) – These are digital assets like artwork, music, real estate, video games, created by artists in India and sold on auction on NFT marketplaces, where payment is made generally through cryptocurrencies.

3. Choose the crypto exchange to buy the cryptocurrencies:

Picking the right cryptocurrency exchange can highly affect the returns on your crypto asset. The most important factors to be considered while picking a crypto platform are the reputation of the exchange, transaction fees charged, and the variety of currency pairs offered by the platform.

For instance, WazirX, one of the country’s largest cryptocurrency exchanges in terms of trading volume, offers a P2P exchange which automatically matches buyers and sellers.You can convert indian rupees to crypto instantly without paying any trading fees. WazirX  acts as an escrow, releasing the crypto to the buyer’s account only when the seller receives the payment from the buyer.

Moreover,cryptocurrency prices are different on different exchanges, hence you should choose a platform such that you get an optimal balance between the price of the chosen crypto and the security of the platform.

4. Open an online account with a crypto exchange:

For opening an online account with a crypto exchange it is necessary to verify your identity. Different exchanges have different rules but the following things are good to have before setting up an account with any exchange.

a. A private internet connection, preferably VPN (Virtual Private Network) for enhanced security
b. Soft copy of Aadhaar or other form of Identification document (ID)
c. A bank account from where you can deposit the rupees to the crypto exchange
d. A phone number/ email account for two factor authentication
e. A secured wallet where you can store the cryptocurrency bought from the exchange, although most of the exchanges have secured in-built wallets with them.

5. Choose the type of investment:

There are many ways of earning by investing in cryptocurrencies.

a. After buying a crypto you can hold it for a long period and sell it when its price is satisfactorily high.
b. You can trade it with other cryptocurrencies. For instance, if you buy Bitcoin (BTC) and want to trade it with other cryptocurrencies, there are several digital currency pairs available on WazirX like BNB/BTC, ETH/BTC and a lot others.
c. You can lend the crypto you bought to marginal traders and earn interest. For instance, on Binance India, you can find two lending options- fixed savings solution and flexible savings solution.

Flexible Savings allows you to subscribe and redeem assets at any time, suitable for short-term investment. Fixed Savings means that your subscribed assets can only be redeemed after the expiration of a fixed period. As you have no flexibility to access your assets, the interest rates will be higher than Flexible Savings products.

6. Choose the type of wallet:

After you have bought the cryptocurrency, it is essential to store it in a secured location. There are two types of wallets available for Indian crypto investors- online wallets, also known as hot wallets and offline wallets, also known as cold wallets.

a. Hot wallets: Crypto exchanges like Binance India,WazirX,Zebpay have in-built wallets where you can store your crypto assets.You can also download mobile app wallets (like Edge) and desktop wallets (like Electrum and Armory) from app store and google play if you don’t want to use the in-built exchange wallets. These wallets are easy to use and should be used only by those who regularly trade crypto. The major drawback of these online wallets is that they are prone to cyber attacks.

b. Cold wallets: hardware wallets in the form of USB  strips (where private keys are stored on harddrive) and paper wallets(where private keys are stored on a piece of paper) are the most secured storage solutions.Since they are not connected to the internet,the wallet’s private keys are not exposed to the hackers or any other third parties.

These types of wallets should be used by only those crypto investors who want to hold the  assets for a long term as it is laborious to send crypto frequently from a cold wallet to the hot wallet. Cold wallet has to be imported into a hot wallet via a scan of the private keys, hence it is impractical for everyday crypto usage. Hence, depending on your use and your priority- security vs convenience, choose any one of the above wallets. We hope through this article, we could give you a brief idea about how to invest in cryptocurrency online.