Cryptocurrencies are a new asset class with limited data for fundamental analysis or historical performance. Here are some things to consider before entering this high-risk, high-reward arena.

1. Don’t make big bets

The incredible gains made by several cryptos over the last year are enticing. Six months after investing Rs 10,000 in Dogecoin, it is currently worth Rs 5.75. However, don't get carried away by these figures. Vineet Nanda, co-founder of Globalize, advises, "Only invest what you are willing to lose." Start with minimal amounts, even if you have a strong risk appetite. Vikram Subburaj, CEO of Giottus Cryptocurrency Exchange, advises not to invest more than 2% of your overall capital in cryptos. After you've gotten a feel for the arena, conduct some study on different coins to learn about their value and future possibilities before allocating more.

2. Be ready for extreme volatility

Investing in cryptocurrencies is the most effective way to learn more about them. However, it is a high-risk, high-reward game, and you must be able to tolerate a high level of volatility. As demonstrated by the May crash, a drop of 70-80 percent overnight is also possible. Remember that even a blue chip like Bitcoin is down 48% from its April high of Rs 50 lakh. “Enter this market only if you are prepared to withstand extreme volatility and the consequences of a failed investment,” says Pableen Bajpai, founder of FinFix Research and Analytics.

3. Use a trusted platform

In India, the cryptocurrency industry is unregulated, and new businesses are springing up on a daily basis. Despite the Supreme Court's lifting of the RBI's ban on cryptos and the government's indication that it will regulate the market in a measured manner, investors must exercise caution when selecting an intermediary. “Invest through a well-established and trusted platform so your money isn't stuck if there's a regulatory backlash or the promoter company goes out of business,” said Vineet Nanda, co-founder of Globalize. It's important to remember that investing through a foreign platform may necessitate additional tax compliance.

4. Don't respond to tips without first double-checking them

There is a severe paucity of reliable information in the cryptosphere. Investors rely heavily on unaudited social media information. Self-proclaimed crypto analysts form WhatsApp groups with a slew of backers who attest to their correctness. These experts deceive unsuspecting investors by charging for suggestions and then employing them in their pump-and-dump schemes. According to Raj Khosla, executive director of MyMoneyMantra.com, “as a general guideline, you should evaluate the facts before investing.” “Look at the coin's market capitalisation and trading volume. Low market capitalisation and low daily volumes are apparent red signals, according to him.

5. Concentrate on blue chips

The crypto market, like the stock market, has blue chips, mid-caps, and penny coins. Don't be fooled into purchasing obscure coins simply because you can get a large quantity of them for a low price. Larger coins are more expensive, but they are also more stable. Don't worry about the price because you can buy in fractions. Bitcoin is the crypto space's blue chip, and it is driving overall market sentiment.

“Focus on blue-chip coins like Bitcoin and Ethereum, with some money moving into up-and-coming metres like Dogecoin and Matic,” said Gaurav Garg, Capital Via's Head of Research. According to Globalize's Nanda, coins having a big capitalization are less likely to be tampered with than currencies held by a few people.

6. Stay up to date with global developments

Even if you purchase and sell in India, the cryptocurrency industry is global. Any global development can have an impact on prices, so it's important to keep up with what's going on in key markets like the United States, Singapore, and Europe. “One of the reasons for the drop in crypto prices in May was the US crypto tax,” said Manish P. Hingar, founder of Fintoo. A cautious investor will not be taken off guard. It also helps because crypto trading is available 24 hours a day, so you can start trading right away, unlike stock markets, which require you to wait until the next day to trade.

7. Do not disregard the tax be prepared for high volatility

Don't forget about the tax that must be paid on crypto trading profits. “Even if cryptocurrencies are not explicitly mentioned in the Income Tax Act, income in any form from any source is taxable, unless expressly excluded by law,” says Archit Gupta, CEO of the tax portal Cleartax. Because the RBI does not consider cryptocurrency to be a currency, it must be treated as an investment. “There is no legal precedent, but it can be assumed that cryptos will be treated as an investment,” says Deloitte India partner Homi Mistry.    

This means that short-term gains are added to income and taxed at standard rates, whereas long-term gains are taxed at 20% after indexation. According to Mistry, “much depends on the volume and frequency of trading, which can result in the income being treated as business income.”