A Beginner's Guide To Investing In Virtual Currency In India

Investing in virtual currency in India has become a controversial topic. Cryptocurrency is a decentralised virtual currency that is protected by cryptographic encryption techniques. In India, there are no rules and regulations surrounding the framework, which has led to numerous cyberattacks and scams. However, with the emergence of new-age crypto platforms, it has become relatively easy and safer to invest in cryptocurrencies and make profits.

In 2018, the Reserve Bank of India banned cryptocurrency, but after the Supreme Court set aside the ban, the cryptocurrency market in India skyrocketed. There are now over 100 million investors in India, making it the highest holder of cryptocurrencies in the world.

To invest in cryptocurrency in India, you must first make an account on a crypto platform or exchange and complete the KYC process. Then, you can make a crypto wallet where the platform will store all the coins or tokens you buy. You must also connect your digital wallet to your bank account to enable deposits and withdrawals. Once you have put money into your digital wallet, you can place an order to buy any cryptocurrency listed on the platform, and the money will be automatically debited from your wallet.

There are two main types of cryptocurrency wallets: software wallets and hardware wallets. Software wallets are based on a browser extension or desktop program and are sometimes referred to as 'hot' wallets as the funds are kept online without any specific private key, making them vulnerable to cyberattacks. Hardware wallets, on the other hand, are external physical devices that can store cryptocurrency safely and can be accessed anywhere, anytime. They are considered safer than software wallets as they have a private key that only the investor can access.

How to create an account on a crypto platform or exchange

To start investing in cryptocurrencies, you need to create an account on a crypto platform or exchange. Here's a step-by-step guide on how to create an account and get started:

Choosing a Crypto Platform or Exchange

Before creating an account, it's important to choose a reputable and reliable crypto platform or exchange that suits your needs. WazirX is one of the most popular options in India, backed by Binance, the world's largest crypto exchange. Other popular options include CoinDCX, Zebpay, and Mudrex.

Downloading the App or Signing Up

Most crypto platforms offer a mobile app for convenience. You can download the app from the Play Store for Android devices or the App Store for iOS devices. Alternatively, you can sign up directly from their website.

Signing Up and Creating Your Account

Once you have the app or are on the website, you will need to sign up and create an account. This typically involves providing basic information such as your email address and choosing a secure password. After signing up, you will usually receive a confirmation email to verify your email address.

Completing the KYC Process

Know Your Customer (KYC) verification is an important step in the account creation process. You will be required to provide additional information and documents to verify your identity and address. This may include your name, address, date of birth, and government-issued identification documents.

Setting Up a Crypto Wallet

After your account is created and verified, you will need to set up a crypto wallet. This is where your purchased cryptocurrencies will be stored. Some platforms may offer different wallet options, such as software wallets or hardware wallets, each with its own security features and accessibility.

Connecting Your Bank Account

To fund your crypto wallet and make purchases, you will need to connect your bank account to the crypto platform. This will allow you to transfer funds seamlessly between your bank and the platform.

Placing Your First Order

Once your account and wallet are set up, you can start investing in cryptocurrencies. Browse the platform for the available options, decide on the amount you want to invest, and place your first order. The funds will be debited from your wallet, and the purchased coins or tokens will be stored there.

Selling and Withdrawing

You can sell your cryptocurrencies at any time and withdraw the funds back into your bank account. Remember that the value of cryptocurrencies can fluctuate, so be mindful of the market trends and make informed decisions.

It's important to note that investing in cryptocurrencies carries risks, and it's recommended to do your research and understand the market before investing large amounts. Additionally, always choose reputable and secure platforms to ensure the safety of your investments.

Understanding the different types of crypto wallets

There are several types of crypto wallets available, each with its own unique features and security measures. The main categories of crypto wallets are hot wallets and cold wallets. This classification is based on whether the wallet is connected to the internet or not. Hot wallets are online, making them more accessible but less secure, while cold wallets are offline, providing enhanced security but reduced ease of access.

Hot Wallets

Hot wallets, also known as software wallets, are typically installed as browser extensions or desktop programs. They enable crypto investors to invest, send, receive, and store cryptocurrencies. These wallets are often referred to as 'hot' wallets because the funds are kept online, making them vulnerable to cyberattacks. Software wallets are usually specific to a particular currency and do not support multiple currencies. Almost all crypto platforms in India are based on software wallets.

Hot wallets can be further categorised into the following types:

• Desktop wallets – These are installable software packs available for operating systems. They require anti-virus protection due to the inherent security risks of being connected to the internet. While they are easy to use and provide privacy and anonymity, regular backups of the computer are necessary. Examples include Exodus, Bitcoin Core, and Electrum.
• Mobile wallets – These are similar to desktop wallets but designed for smartphones. They use QR codes for transactions, making them convenient for daily operations. However, they are vulnerable to malware infection, and encryption is essential to ensure security. Examples include Coinomi and Mycelium.
• Web wallets – These are accessed through internet browsers and are often provided by third-party services such as cryptocurrency exchanges. They are user-friendly and ideal for small investments and quick transactions. However, they are prone to DDoS attacks and are considered the least secure type of wallet. Examples include MetaMask and Coinbase.

Cold Wallets

Cold wallets, also known as hardware wallets, are external physical devices that store cryptocurrencies securely. They can be connected to a desktop or mobile device when needed. Hardware wallets are considered safer than hot wallets as they have a private key that only the investor can access. They offer reasonable control over your assets and are available in different forms. However, they may be challenging for beginners to use, especially when dealing with significant investments. Popular hardware wallets include Ledger Nano S and Trezor.

Cold wallets can also include paper wallets, where private and public keys are physically printed or written down. While paper wallets are not prone to hacks, they have become less popular due to various flaws, such as the inability to send partial funds. Additionally, the risk of losing, misplacing, or destroying the paper makes this option less secure.

Custodial and Non-Custodial Wallets

Another important distinction is between custodial and non-custodial wallets, which relates to the control and security of private keys.

• Custodial wallets – These wallets are provided by third-party services, such as cryptocurrency exchanges or online wallet platforms. They manage your private keys and the security of your cryptocurrencies on your behalf. Custodial wallets are user-friendly and often have account recovery options, but they are more vulnerable to hackers targeting the service provider. Examples include wallets provided by Coinbase, Binance, and Kraken.
• Non-custodial wallets – Non-custodial wallets give you full control over your private keys and cryptocurrencies. They prioritise security, privacy, and anonymity, as your financial transactions and holdings are not subject to third-party data collection practices. However, the responsibility for securing private keys rests solely with the user, and losing access to these keys can result in the irreversible loss of funds. Examples include hardware wallets like Ledger Nano S and Trezor, and software wallets like Electrum, MyEtherWallet, and Trust Wallet.

When choosing a crypto wallet, it is essential to consider your personal needs, priorities, and risk tolerance. Assess the level of convenience, security, and control you require, and remember that using multiple wallets for different purposes can be advantageous.

Strategies for investing in Bitcoin

Investing in Bitcoin is highly speculative and risky due to its high volatility. However, investors can evaluate and analyse Bitcoin and take positions accordingly, based on past price patterns. Here are some strategies for investing in Bitcoin:

• Short-term investment: You can invest a large amount (based on your risk appetite) for the short term and sell if the price increases in the near future.
• Long-term investment: You can invest a comparatively smaller amount and hold it for several years.
• Mixed strategy: You can allocate a portion of your capital for the short term and the remaining for the long term, adjusting your invested amount as you go.
• Diversification: You can invest in multiple cryptocurrencies, including Bitcoin, to diversify your portfolio and reduce risk.
• Dollar-cost averaging: You can invest a fixed amount of money in Bitcoin at regular intervals, regardless of the price. This strategy helps to smooth out the impact of price volatility.
• Risk management: You can use stop-loss orders and take-profit orders to manage your risk and lock in profits when the price reaches a certain level.

It is important to note that there is no guarantee of profits when investing in Bitcoin, and you should only invest an amount you are comfortable losing. Additionally, it is essential to do your research, understand the risks, and consult a financial advisor before investing.

Pros and cons of using a virtual trading platform

Virtual trading platforms are a great way to learn the basics of trading in the stock market without risking any money. They provide a risk-free environment to try out different investment and trading strategies and refine your skills. Here are some of the pros and cons of using a virtual trading platform:

Pros:

• No need to open a demat/trading account or go through any complex documentation process.
• No real money is required to start virtual trading.
• Real-time market scenarios allow you to try out different strategies and learn the basics.
• Risk-free trading practice.
• It is okay to make mistakes and take risks as there is no real loss.

Cons:

• There is no emotional attachment as real money is not involved.
• You can quickly get bored as winning/losing virtual money is not very exciting.
• The real market scenario might be slightly different from the virtual trading environment. (In the virtual trading platforms, participants tend to take extra risks and bets than they would in a real scenario.)

How to buy and sell items using cryptocurrency

To buy and sell items using cryptocurrency in India, you will need to use a crypto exchange platform. Here is a step-by-step guide:

Step 1: Choose a Crypto Exchange

First, select a crypto exchange platform that is registered with the Financial Intelligence Unit India. Some popular options include:

• CoinDCX
• CoinSwitch
• Mudrex
• WazirX
• Binance
• Kucoin

Step 2: Set Up Your Account

Next, you will need to create an account on your chosen platform. This typically involves providing basic personal and bank details and setting up two-factor authentication for added security.

Step 3: Fund Your Account

Before you can start buying, you will need to fund your account. Different platforms offer different funding options, including bank transfers, net banking, UPI, cryptocurrency wallets, or credit/debit cards.

Step 4: Choose a Payment Option

When funding your account, consider the transaction fees associated with different payment options. For example, CoinDCX does not charge a fee for UPI and bank transfers but does charge 0.5% for net banking.

Step 5: Place Your Order

Once your account is funded, you can place your order to buy cryptocurrency. Depending on the platform, you may be able to purchase by tapping a button or entering the cryptocurrency symbol and the amount you wish to purchase.

Step 6: Store Your Cryptocurrency

You can typically store your cryptocurrency in an online wallet provided by the exchange or a third-party offline wallet if you prefer greater security.

Step 7: Sell Your Cryptocurrency

When you are ready to sell, you can place a sell order through your exchange, similar to when you purchased your cryptocurrency. Most exchanges offer multiple order types, allowing you to decide when to sell based on the price or place an immediate order.

Step 8: Transfer Funds

After selling your cryptocurrency, you can transfer the money to your bank account. Note that your exchange may have a holding period before you can transfer funds.

Tips for Secure Trading:

• Always verify account details before making or receiving a payment.
• Conduct all transactions within the platform to take advantage of its security features.
• Choose payment methods that offer proof of transaction, such as bank transfers.
• Enable two-factor authentication for added security.

Frequently asked questions