Indian Bitcoin Investment: Is It Legal?

Bitcoin is a decentralised digital currency that can be used as a mode of exchange and a store of value. It is the first and most popular cryptocurrency in the world. In India, investors can buy Bitcoin through online exchanges like CoinSwitch Kuber, Coinshare, Unocoin, ZebPay, Coinbase, and BuyUCoin. These exchanges allow investors to buy, sell, and hold Bitcoins. The minimum investment amount varies between exchanges, with some allowing investments as low as ₹100. It is important for investors to do their research and understand the risks associated with Bitcoin, as it is a highly volatile investment. Additionally, investors should be aware of the legal and tax implications of investing in Bitcoin in India.

How to buy Bitcoin in India

Step 1: Choose a crypto investment app/exchange

First, you need to select a suitable app or exchange to start investing in Bitcoin. Research various cryptocurrency apps and consider the following factors:

• Security: Ensure the app has two-factor authentication, encryption, and secure storage.
• Cryptocurrency options: Look for an app that offers a range of cryptocurrencies beyond the most popular ones to provide different investment options.
• User-friendly interface: Opt for an app with an intuitive and easy-to-use interface.
• Fees: Be mindful of the platform's fees, as they can impact your profits.
• Customer support and reputation: Choose a platform with good customer support and a solid reputation in the crypto market for reliability and assistance when needed.

Step 2: Sign up on the platform and complete KYC

After selecting a platform, install the app and sign up by providing your name, email, phone number, and Aadhar details. In India, financial platforms must complete the KYC (Know Your Customer) verification to comply with regulatory laws. Use your Aadhar and PAN card details for this process.

Step 3: Add funds and place an order to buy Bitcoin

Fund your account using various payment methods, including traditional fiat and cryptocurrencies. Look for platforms that support UPI transfers for convenience and quick transactions. After adding funds, search for Bitcoin (BTC) on the app, check the latest prices, and enter the amount of Bitcoin you wish to purchase.

Step 4: Select a safe storage option

Choose how you want to store your Bitcoin. Some applications offer cold or hot storage options, while others use integrated wallets or partner with crypto storage providers. Cold wallets store your private keys offline and provide an extra layer of security, but they require technical knowledge to set up and carry the risk of being misplaced or lost. Hot wallets, on the other hand, are connected to the internet and are typically mobile or desktop apps or web-based. They are more user-friendly but require online security measures such as strong passwords and two-factor authentication.

Things to keep in mind:

• DYOR (Do Your Own Research): Understand your financial goals, expectations, and investment timeline. Research and analyse Bitcoin's price movements to make informed decisions.
• Time your investments: Optimise your risk-reward ratio by timing your purchases and sales. However, if you set up a Systematic Investment Plan (SIP), you don't need to time the market.
• Manage risk: Only invest what you can afford to lose, especially when dealing with high-risk, high-reward assets like cryptocurrencies.
• Secure your private information: Protect your private information with multi-factor authentication to mitigate privacy and security concerns.
• Comply with regulations: Choose a crypto exchange or app compliant with local and international regulations to ensure the platform's safety and trustworthiness.
• Understand market volatility: The crypto market is prone to extreme volatility, but Bitcoin has historically shown resilience and recovery during market cycles.

Alternative ways to invest in Bitcoin:

• Peer-to-peer marketplace: Purchase Bitcoin directly from a holder.
• Bitcoin mining: Earn Bitcoin by successfully adding blocks of transactions to the blockchain network.
• Bitcoin ETFs: Invest in Bitcoin exchange-traded funds.
• Bitcoin ATMs: Purchase Bitcoin from specialised ATMs.
• Thematic crypto baskets: Invest in crypto baskets that include Bitcoin, such as Mudrex's Coin Sets.

Recommended platforms:

• Mudrex: A reliable investment platform with a low minimum investment of ₹500. It offers an intuitive UI, easy fund addition via UPI, bank transfer, and crypto transfer, and supports recurring investments or SIPs in Bitcoin.
• Binance: A centralised exchange offering various cryptocurrencies, including Bitcoin. It provides multiple payment options, including debit/credit cards and Google Pay/Apple Pay.
• CoinDCX: Recognised as one of the safest and most transparent crypto exchanges in India, offering access to 500+ cryptocurrencies.
• CoinSwitch: One of the top platforms in India, with over 2 crore registered users. It offers trading in nearly 100 cryptocurrencies and is beginner-friendly, allowing investments from as low as ₹100 in Bitcoin.
• WazirX: A reliable and rapidly growing platform with over 15 million users, providing access to 300+ cryptocurrencies.

Bitcoin's volatile nature

Bitcoin is well-known for its volatile nature, with its price fluctuating by thousands of dollars within a single day. This volatility is driven by a complex interplay of market factors, which are detailed below.

Firstly, Bitcoin is still in its infancy as a financial asset, lacking the historical data and long-term stability of traditional commodities and currencies. This means that Bitcoin is still in a price discovery phase, with its true value being continuously assessed by the market, leading to large price swings as new information and developments emerge.

Secondly, Bitcoin has a fixed supply cap of 21 million coins, which introduces a scarcity factor that can amplify price fluctuations as demand changes against this unyielding supply limit. As the supply cap is approached, the asset becomes scarcer, driving prices upwards in response to increasing demand. However, it is unclear what will happen to prices once the limit is reached, as there will no longer be any profit from mining Bitcoin.

Thirdly, the actions of large-scale investors, often called "whales", can significantly impact Bitcoin's price. These investors hold substantial amounts of Bitcoin, and their buy or sell orders can lead to sharp price changes. If whales were to suddenly start selling their Bitcoin holdings, prices would likely plummet as other investors panicked and followed suit.

Additionally, the relative immaturity of the cryptocurrency market infrastructure can lead to liquidity issues. This means that the capacity to buy or sell large amounts of Bitcoin without affecting the market price is limited compared to more established markets, resulting in significant price changes as investors attempt to enter or exit positions.

Media coverage and regulatory news also strongly influence Bitcoin's price. Positive media attention can increase investor interest and demand, while negative news or rumours of stringent regulations can lead to fear-induced sell-offs.

Lastly, market sentiment, shaped by news coverage, investor commentary, and broader economic events, plays a crucial role in Bitcoin's volatility. Announcements from influential figures or entities within the cryptocurrency space can lead to sudden surges or drops in Bitcoin's price as investors react to perceived opportunities or threats.

The legal and tax implications of investing in Bitcoin

Bitcoin is a decentralised digital currency that is not controlled by any individual, organisation, or government body. In India, it has slowly gained popularity, especially with the government's efforts to move towards a cashless economy.

While there is no explicit ban on Bitcoin in India, it is also not authorised as a medium of payment by any central authority. The Supreme Court of India, in 2019, required the government to come up with cryptocurrency regulation policies, but as of 2024, there is still no set of rules, regulations, or guidelines for resolving disputes that may arise while dealing with Bitcoin.

The Finance Ministry has repeatedly stated that Bitcoin is not a legal tender, and it is instead considered an asset. This means that there are specific tax implications for investing in Bitcoin in India, which are outlined below:

• Income from the transfer of virtual digital assets, including Bitcoin, is taxed at 30% (plus a 4% surcharge).
• No deductions are allowed when reporting income from the transfer of digital assets, except for the cost of acquisition.
• Losses from digital assets cannot be set off against any other income, including capital gains from other digital currencies.
• Gifting digital assets, such as Bitcoin, will attract tax in the hands of the receiver if the value exceeds Rs 50,000.
• From 1 July 2022, a 1% Tax Deducted at Source (TDS) will apply to all sell transactions of Virtual Digital Assets (VDAs), including Bitcoin.
• Mining income from Bitcoin will be taxed at a flat rate of 30%, and the cost of acquisition will be considered 'zero' when computing gains at the time of sale.
• If Bitcoin is held as an investment, it is considered a capital asset, and a 30% levy is imposed on any gains made.
• If Bitcoin is held as stock-in-trade, the income arising from trading activity will be considered "Income from Business and Profession", and a 30% tax will be levied without any deduction for expenses incurred other than the direct cost of acquisition.
• If Bitcoin is received as consideration for the sale of goods and services, the fair value of Bitcoin received can be considered a receipt against the rendering of such services, and subsequent sales of Bitcoin will give rise to capital gain or loss.

In summary, investing in Bitcoin in India carries legal and tax risks that individuals should be aware of. While there is no explicit ban, the lack of regulation means that disputes may be difficult to resolve. Additionally, the tax implications can be complex, and it is important to carefully consider these factors before investing.

How to store Bitcoin safely

Bitcoin and other cryptocurrencies have gained popularity in recent years, especially in lower and middle-income countries. However, the increased rate of adoption and use has led to a rise in hacks and thefts. Therefore, it is essential to understand how to store your Bitcoin safely. Here are some detailed, direct, and instructive guidelines on storing Bitcoin securely, specifically tailored for Indian investors:

• Understand the Different Types of Wallets: There are two main categories of Bitcoin wallets: custodial and non-custodial. Custodial wallets involve a third party, such as an exchange, managing your private keys. In contrast, non-custodial wallets give you full ownership and control of your private keys. Common types of wallets include hardware, mobile, paper, and web-based wallets.
• Consider Hot and Cold Wallets: Hot wallets are connected to the internet, making them convenient for quick transactions. Examples include mobile wallets and web-based wallets. However, they are more susceptible to hacking attempts. On the other hand, cold wallets are offline storage solutions, providing enhanced security. Examples include hardware wallets and paper wallets.
• Choose a Secure Exchange: If you plan to buy or sell Bitcoins, using a cryptocurrency exchange is the easiest option in India. Ensure that the exchange follows strict Know Your Customer (KYC) and anti-money laundering norms. Compare the rates, nature of KYC procedures, security, online reviews, and ease of usage before selecting an exchange.
• Utilize a Combination of Wallets: For optimal security and convenience, consider using multiple wallets for different purposes. For example, you could use a hardware wallet for long-term cold storage and a mobile wallet for spending and transactions. This approach balances security and accessibility.
• Backup Your Wallet Regularly: Back up your entire Bitcoin wallet frequently to prevent data loss. Store the backups in multiple secure locations, such as USB drives, CDs, or other removable devices. Additionally, use strong passwords and encryption to protect your backup files.
• Keep Your Software Up to Date: Update your wallet software and operating system regularly. Updates often include security patches that fix vulnerabilities, enhancing the protection of your Bitcoins.
• Use Strong Passwords and Two-Factor Authentication: Create complex and unique passwords for your wallets. Additionally, enable two-factor authentication (2FA) to add an extra layer of security. This will require both your password and a second form of verification, such as a code sent to your mobile device, to access your wallet.
• Consider Multi-Signature Wallets: A multi-signature wallet requires multiple keys from different people to sign a transaction. This adds an extra layer of security and is especially useful for group investments.
• Use a Seed Phrase: A seed phrase is a series of randomly generated words that act as a master password for your wallet. It is easier to memorize and store than a 64-digit hexadecimal key. You can write it down and store it in a safe place or use a titanium stamping kit for preservation.
• Only Keep Small Amounts in Hot Wallets: To minimize the risk of theft, only keep a small amount of Bitcoin in your hot wallet for everyday transactions. Transfer the rest of your Bitcoin to a secure cold wallet for long-term storage.
• Be Wary of Scams: Stay vigilant to avoid phishing scams and fraudulent websites. Never click on suspicious links or enter your private keys on unverified websites.

Remember to always do your research and stay informed about the latest security practices and threats in the world of cryptocurrency. By following these guidelines, you can significantly enhance the security of your Bitcoin holdings and protect your investments.

The minimum investment required to buy Bitcoin

Yes, Indians can invest in Bitcoin. The recent Bitcoin rally has attracted retail investors four times the initial number. The easiest way to buy Bitcoin in India is by going to one of the exchanges, such as CoinSwitch Kuber, which follow strict KYC and anti-money-laundering norms during account creation and transactions.

Through a peer-to-peer (P2P) transaction, you can avoid paying a transaction fee to a corporate platform. However, this method may require more time to complete, and it can be challenging to find a seller who matches your deal.

Another option is Bitcoin mining, which is the process of earning Bitcoin by adding blocks of transactions to the blockchain network. This method requires specialised equipment and a high degree of technical knowledge.

It is important to note that investing in Bitcoin carries certain risks, including high volatility and the potential for technical failures. Additionally, there may be restrictions and regulations in India regarding cash handling and cross-border payments.

Frequently asked questions