Cryptocurrency: Invest Now Or Miss The Boat?

Investing in cryptocurrency has become an increasingly popular topic of discussion, with some sources claiming that crypto is having a moment in 2024. However, it is important to approach this topic with caution as it is a highly volatile and risky asset. Cryptocurrency is a digital currency that is not regulated by any central government authorities, making it immune to government interventions. This also means that there are very few consumer protections in place.

The value of cryptocurrencies like Bitcoin has been extremely volatile, with prices soaring and plummeting over the years. In addition, there are risks of fraud and cybercrime, as well as a lack of clarity on how cryptocurrencies will be regulated by government bodies.

Despite these risks, some experts argue that adding cryptocurrency to a diversified portfolio can be a wise decision. The real question to consider is not if crypto is too risky, but if it is too risky not to have some exposure to it.

Ultimately, the decision to invest in cryptocurrency depends on several factors, including your financial goals, risk tolerance, and investment considerations. It is crucial to do your own research and understand the risks involved before making any investment decisions.

Volatility and risk

Cryptocurrency is a rapidly growing market that has made some people very rich and others very poor. However, these wins and losses are not necessarily due to the investors' choices of coins but rather the timing of their investments. Cryptocurrency is an incredibly volatile investment, and huge fluctuations in valuation can be observed in a very short period. For example, in one day, Bitcoin's value dropped by 30%.

The volatility of cryptocurrencies is driven by several factors, including market speculation, regulatory news, technological advancements, and macroeconomic trends. The lack of intrinsic value in cryptocurrencies, unlike traditional currencies, also contributes to their volatility. The value of cryptocurrencies is based on speculation and how much people are willing to trade for them. This makes investing in cryptocurrency a risky and speculative endeavour.

The high volatility of cryptocurrencies means that they can be a risky asset for investment. The returns generated by cryptocurrencies can be very high, but they are accompanied by high volatility. This makes it challenging to predict the behaviour of the market and the future value of these assets.

The volatility of cryptocurrencies can also be asymmetric, with some currencies exhibiting a positive relationship between negative news and increased volatility, while others may show a decrease in volatility following negative news. This asymmetric volatility is influenced by the market capitalization of the cryptocurrency, with Bitcoin and Ether exhibiting different behaviours compared to currencies with lower market capitalization.

The high volatility and risk associated with cryptocurrencies make them unsuitable for investors who are risk-averse or uncomfortable with significant fluctuations in their investments. However, for investors who are willing to take on the risk, cryptocurrencies can provide the opportunity for high returns.

The decision to invest in cryptocurrencies should be made carefully, considering the high volatility and risk involved. Investors should also diversify their portfolios to manage the risk associated with this volatile asset class.

Taxation

UK Taxation of Cryptocurrency:

In the UK, cryptocurrency is not considered money or currency by financial authorities. Instead, crypto assets are taxed similarly to shares, resulting in potential Capital Gains Tax (CGT) liabilities for investors. The following activities involving cryptocurrency are typically taxed:

• Buying and selling crypto: CGT is applicable if you sell your crypto for a profit. Trading losses can offset CGT liability. Swapping cryptocurrencies is also a taxable event.
• Mining and validating: Mining income may be treated as hobby income or business income, depending on factors such as the degree of activity and organisation. Mining income treated as business income is subject to income tax deductions, while hobby income must be declared as miscellaneous income.
• Income tax: Income tax is usually applied to individuals who actively trade crypto assets with a short-term profit motive, known as 'day traders'. Net profits are subject to income tax at rates ranging from 20% to 45%, depending on the individual's tax bracket.
• Disposing of crypto assets: Disposing of crypto assets, including selling, exchanging for other cryptocurrencies, using tokens to pay for goods or services, and gifting to someone other than a spouse, triggers a taxable event.
• Record-keeping: Crypto investors must maintain detailed records for each transaction, including the date of disposal, the number of tokens disposed of and retained, the value of the tokens in pound sterling, bank statements, wallet addresses, and records of pooled costs.

India Taxation of Cryptocurrency:

The taxation of cryptocurrency in India has evolved in recent years. Here are some key points:

• Tax on profits: A 30% tax is charged on earnings from the transfer of virtual or digital assets, including cryptocurrencies and NFTs.
• Cost of acquisition: When reporting gains from the transfer of virtual assets, the cost of acquisition is permitted without any deductions.
• Tax deducted at source (TDS): If the buyer's payment exceeds the threshold limit, a 1% TDS is applicable.
• Beneficiary taxation: If cryptocurrency is received as a gift or transferred, the beneficiary is subject to tax.
• Loss considerations: Losses from virtual asset investments cannot be offset against other income.
• Airdrops and trading: Income tax applies to airdropped crypto received in return for carrying out a service. Crypto traders or businesses receiving airdrops include the valuation increase in their trading profits, subject to income tax and National Insurance Contributions (NICs).

Fraud and cybercrime

Cryptocurrency fraud and cybercrime are serious issues that have been on the rise in recent years. The FBI's Internet Crime Complaint Center (IC3) reported a significant increase in crypto-related fraud, with losses escalating from $2.57 billion in 2022 to $3.94 billion in 2023, a 53% surge. This type of fraud often lures individuals with the promise of high returns on investments in digital currencies. The schemes are becoming increasingly sophisticated, leveraging the rapid growth of the digital asset industry to deceive victims.

The IC3 report emphasizes the importance of security measures such as two-factor or multi-factor authentication to protect against scams. Additionally, it highlights the need to verify payment and purchase requests through secure methods beyond email communication to mitigate the risk of falling victim.

The use of cryptocurrencies in cybercrime, such as Business Email Compromise (BEC) scams and ransomware attacks, has also increased. BEC scams involve manipulating email accounts to authorize fraudulent transactions, resulting in significant financial losses for victims. Ransomware attacks, on the other hand, involve demanding payment in crypto for the decryption of data. The IC3 reported an 18% annual increase in ransomware complaints and a 74% increase in reported losses, totaling $59.6 million in 2023.

To combat the rise in crypto fraud, the IC3's Recovery Asset Team (RAT) has played a crucial role in freezing fraudulent transfers, securing over $538 million of the reported $758 million in losses in 2023.

As cybercriminals continue to exploit the digital currency landscape, there is a growing need for increased vigilance, improved cybersecurity measures, and greater public awareness. A collective effort is required to safeguard against the evolving threats in the digital age, especially in the rapidly expanding realm of digital assets.

• Be cautious of investment opportunities that seem too good to be true, promising high returns with little to no risk.
• Do your research and due diligence before investing in any cryptocurrency project. Look for white papers, roadmaps, and transparent development teams.
• Use secure cryptocurrency wallets and enable additional security features such as two-factor authentication.
• Be wary of phishing attempts and never share your private keys or recovery seeds with anyone.
• Keep your software and antivirus programs up to date to protect against malware and other cyber threats.
• Monitor your cryptocurrency accounts and transactions regularly for any suspicious activity.
• Report any suspected fraud or cybercrime to the appropriate authorities, such as the IC3 or your local law enforcement agency.

Regulatory stance

The regulatory landscape for cryptocurrencies is ever-evolving and varies across jurisdictions. Currently, there is a lack of uniform global regulation regarding the treatment of cryptocurrencies, which creates both opportunities and risks for investors. On one hand, the lack of stringent regulations has allowed the cryptocurrency market to flourish and provided investors with relatively unrestricted access to this emerging asset class. This regulatory approach has fostered innovation, encouraged the development of blockchain technology, and attracted a wave of retail and institutional investors.

However, the absence of comprehensive regulatory frameworks also gives rise to concerns about consumer protection, market integrity, and financial stability. As cryptocurrencies gain mainstream traction, regulatory authorities are increasingly recognizing the need to implement guidelines and oversight. This is evident in the recent efforts of global regulatory bodies and governments to establish legal definitions, licensing requirements, anti-money laundering provisions, and tax frameworks specifically targeting cryptocurrencies. For instance, the European Union's Markets in Crypto-Assets (MiCA) regulation, which is expected to come into force in 2024, will provide a comprehensive regulatory framework for crypto-assets and service providers across the EU.

The regulatory stance on cryptocurrencies has significant implications for investors. Clear and supportive regulations can boost investor confidence, mitigate risks associated with fraud and manipulation, and pave the way for wider institutional adoption. Conversely, stringent regulations that impose strict capital requirements, reporting obligations, or even bans on cryptocurrency activities, can hinder innovation, limit investment opportunities, and dampen market sentiment. As such, investors must closely monitor the regulatory developments in their respective jurisdictions and assess how these policies may impact their investment strategies and the overall health of the cryptocurrency market.

While regulatory clarity is generally welcomed as a means to mature the cryptocurrency market and attract institutional capital, the pace and variability of regulatory change remain a challenge. Investors should be mindful of the potential for regulatory arbitrage, where market participants exploit differences in regulations across borders, as well as the risks associated with operating in an environment of regulatory uncertainty. Therefore, it is crucial for investors to conduct thorough due diligence, understand the regulatory landscape, and carefully consider the potential impact of future regulatory changes on their cryptocurrency investments.

Long-term investment potential

Cryptocurrency is a very young and volatile market with a lot of speculation, varying liquidity, and scammers looking to take advantage of investors. However, it is also a market with a lot of potential.

Time in the Market vs Timing the Market

The "time in the market" strategy involves holding onto investments for an extended period, riding out short-term price fluctuations and capitalizing on long-term growth. For example, if you had bought 1 Bitcoin in 2015 when the price was around $300, you would have seen your investment reach an all-time high of over $75,000 in March 2024, despite periods of significant volatility.

On the other hand, "timing the market" involves attempting to predict and capitalize on market movements by buying low and selling high within shorter time frames. This strategy requires more frequent trading and a close eye on market trends and news.

Dollar-Cost Averaging

Dollar-cost averaging is an investment strategy that can be seen as a compromise between "timing the market" and "time in the market". It involves investing a certain amount of money at regular intervals without aiming for specific price points. This strategy reduces the impact of short-term crypto volatility by spreading out the purchase over time. For example, instead of investing a large sum of money all at once, you could invest $100 worth of Bitcoin every month.

Buy-and-Hold Investing

The most straightforward approach to crypto investing is a simple buy-and-hold strategy. This involves finding one or more cryptos that you believe will appreciate over the long term, despite being prone to high volatility in the short term.

Bitcoin, the largest cryptocurrency in the world with a $1.3 trillion market cap, is often the first crypto that both individual and institutional investors buy. Over the past decade, it has been one of the best-performing assets globally. Cathie Wood of ARK Invest predicts that Bitcoin could soar to a price of $1 million by 2030.

ETFs for Diversification

Lastly, exchange-traded funds (ETFs) could be an effective way to diversify a long-term cryptocurrency portfolio. They are particularly popular with investors who would prefer not to invest directly in the crypto market. The new spot Bitcoin ETFs, for example, allow investors to invest in the digital currency in the same way they would invest in tech stocks.

Inflation Protection

Cryptocurrencies such as Bitcoin have a hard cap on the total number of coins that will ever be minted. As the growth of the money supply outpaces the growth in the supply of Bitcoin, its price is expected to increase. This makes cryptocurrencies an appealing hedge against inflation.

Cost-Effective Transactions

Cryptocurrencies can facilitate cost-effective transactions, eliminating the need for third parties like VISA to confirm transactions. The transactional cost with the help of cryptocurrency can be minimal or even zero.

Diversification

Cryptocurrencies are generally not correlated with other markets like stocks or bonds, making them an acceptable source of portfolio diversification. Combining assets with less price correlation can give you more stable returns. For example, if your stock collection decreases, your crypto asset might rise and vice versa.

Security

Cryptocurrency offers a high degree of protection for investors. Blockchain technology, which cryptocurrencies rely on, is a decentralized technology spread across many computers, making it difficult to hack. Additionally, no one can access your funds unless they gain access to your crypto wallet's private key.

Long-Term Potential

Cryptocurrency has a lot of untapped potential. It is seen as a field with many opportunities, which is attractive to many forward-thinking people. If cryptocurrency gains wider public acceptance and governments put together a sensible regulatory framework, it could become the wave of the future.

However, it's important to remember that all the cryptocurrency market needs is one high-profile incident to scare off investors, and things could turn sour. Cryptocurrency is a risky and volatile asset class, and investors need to be aware of the potential for significant losses.

Frequently asked questions