Investing in cryptocurrency is a high risk activity. Several experts would advise you to invest or trade cryptos with the money you won’t regret losing. Not just in terms of volatility, in terms of regulation as well, there isn’t a lot of clarity. In India, RBI has warned investors against holding cryptocurrencies. Yet people continue to invest and, in fact, the crypto community in India is optimistic about the future.
Even after considering all the risks involved, if a person decides to invest in cryptocurrencies, there are several ways they can do so. One of them is SIP, which is currently offered by some exchanges in India. A person can also do SIP independently by buying cryptos for a fixed daily or monthly amount and storing them in their own preferred wallet or in a hardware wallet. However, a question comes to my mind, whether one should do SIPs in cryptocurrencies or not?
Many financial experts believe that after taking into account all the risks and volatility, SIP can be a prime avenue for building wealth through cryptocurrencies for new investors.
Dr Vinay Asthana, associate professor at the Alliance School of Business, told FE Online: “The main advantage of a systematic investment plan (SIP) is that the problem of market timing is no longer relevant. This makes SIP an effective strategy in the face of market volatility. Additionally, if the markets are efficient, market timing is likely to be a difficult and often futile exercise.
SIP makes sense for long-term investors in traditional assets like stocks and mutual funds. When it comes to cryptocurrencies, Dr Asthana said crypto assets are several times more volatile than traditional asset classes. This is a strong argument in favor of SIP for crypto assets.
However, Dr Asthana pointed out several factors that weaken the argument for SIP in crypto:
- Although the evidence is mixed, the crypto markets are not as efficient as the stock markets.
- Over the course of the short history, cryptoassets have generated the highest returns of any asset class. But is it sustainable? It is a question that has polarized the world. For some, it is a revolution comparable to the Internet revolution; for others, it is nothing more than a bubble. While the technology is unstoppable, the investment implications are far from clear.
- The investment implications are further complicated by the fact that the valuation of crypto assets differs from traditional assets in fundamental ways.
- In addition, the possibility of unfavorable regulatory changes remains a serious risk factor.
“Given these facts, SIP in crypto assets appears to be a sound strategy, but it should be adopted in a limited fashion as several fundamental issues regarding crypto assets remain unresolved,” Dr Asthana said.
Archit Gupta, Founder and CEO of Clear, said: “Cryptocurrencies are not legal tender in India. There are significant uncertainties surrounding cryptocurrencies, as RBI has repeatedly warned investors against holding them. Additionally, cryptocurrencies are very volatile, with drastic price fluctuations within days. You should exercise extreme caution before investing your savings in cryptocurrencies.
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Gupta, however, said that if you are looking to invest in cryptocurrencies, SIP may be the preferred route when you spread your investments and average your purchase costs over time.
“Many platforms allow you to start SIPs in cryptocurrencies with only Rs 100-Rs 500 per deposit. Additionally, many investors opt for the daily SIP rather than the weekly or monthly option, as the price of cryptocurrencies can fluctuate sharply within a month. You may want to consider investing in cryptocurrencies through SIP if you are a first-time investor looking to invest small amounts. However, the platforms can offer the SIP function only for major cryptocurrencies, ”he said.
Control impulse investments
Cryptocurrencies are one of the most volatile instruments available for investing. Investors are often guided by their impulses. However, it can be dangerous. SIP can help control this impulse investment.
“Because of the large fluctuations in their prices, it becomes crucial to strategize for the entry and exit points of these investments. In this context, an investment technique like SIP that reduces the investor’s exposure to the risk of market volatility is extremely useful. SIP will also help avoid impulse investments in cryptos. Besides SIP, other risk mitigation strategies that are becoming popular for investing in cryptocurrencies include investing in a basket of cryptocurrencies or opting for index funds, ”said Prof. Purushottam Anand, professor. assistant at IFIM Law School.
“There are also index funds that are only exposed to the top 10 or 20 cryptocurrencies. However, since most of these investment products / platforms are unregulated in India, investors should carefully analyze and research such programs before investing. It may also be useful to consult a financial advisor before investing, ”added Professor Anand.
(Disclaimer: Cryptocurrency suggestions / recommendations in this story are from the respective commentator. Financial Express Online takes no responsibility for their advice. Please consult your financial advisor before trading / investing in cryptocurrencies.)