Guide on how to invest in Cryptocurrency
Cryptocurrencies have found a way as a vital part of India’s current investing scenario. With the hope of gaining quick and high returns, investors are flocking towards cryptocurrencies by allocating a portion of their capital towards them. The high returns in the past have made cryptocurrency an attractive investment instrument for Indians, especially youths.
India has become the highest holder of cryptocurrencies in the world, with over 100 million investors. It is surprising to know that cryptocurrencies have investors larger than the whole equity market, and that is when they have been operational for only around ten years. Since there are thousands of cryptocurrencies presently operational in India, they can allow you to make huge profits.
This blog will prove to be the everything guide to investing in cryptocurrency and let you understand how you can invest and use various cryptocurrencies in India.
What are Cryptocurrencies?
Money, but virtual; that’s the main idea behind cryptocurrencies. Cryptocurrencies are defined as the digital version of money that is created and held as virtual coins or tokens. Similar to digital payments using the Indian rupee, you can use cryptocurrencies to buy and sell items. However, the person or the business must be willing to accept the cryptocurrency you are offering against the products or services they are selling.
Although cryptocurrencies sound similar to digital payments, they differ because of their technology and the asset they rely on. Furthermore, unlike the Indian rupee, where you can physically take out the cash if wanted, cryptocurrencies have no physical presence. Meaning there is no way you can do physical transactions using cryptocurrencies.
There are thousands of cryptocurrencies available in the market where the investor can buy and use them to either trade or buy and sell items. Some examples of cryptocurrencies are Bitcoins, Ripple, DogeCoin, Ethereum, Litecoin etc.
How do Cryptocurrencies work?
Regular transactions rely on trusted third-party institutions like banks or financial institutions to process electronic payments. These transactions, however vital, come with their limitations. To overcome these restraints, an electronic payment system evolved based on cryptography, minus the existence of a third party.
Almost all the cryptocurrencies are made as a ‘peer-to-cash’ network, meaning that they cut off the middleman such as banks and regulatory bodies in the process of making payments. Using cryptocurrencies, you can pay directly to the other party as long as it is willing to accept the payment in the form of the cryptocurrency you hold. These cryptocurrencies are always virtual and have no physical form. Unlike cash, there is no chance of getting a physical delivery of a cryptocurrency as they are created only to be used through the internet.
All cryptocurrencies are created and managed using a technology called Blockchain which is a digital ledger. Every transaction is authorised and authenticated by the owner. Using blockchain, people or the creators record every transaction between a set of two parties in the cryptocurrency system. It allows for a secure, transparent and trackable system that is open to all and ensures smooth cryptocurrency transactions.
Among numerous cryptocurrencies available in the market, the safest and most valuable is Bitcoin.
What is Bitcoin?
Bitcoin or BTC is a type of cryptocurrency or digital currency launched in 2008 by a group that went by the pseudonym of Satoshi Nakamoto. It has no physical form, and the transactions are verified by online nodes and recorded in a ledger called the blockchain. Bitcoins rely on a set of private and public keys that help protect the payer and the payee. A public key is similar to an email address, and the private key functions as an email password. These keys protect access to one's Bitcoin and should be well guarded like an email password.
How to Invest in Cryptocurrencies such as Bitcoin?
In India, cryptocurrency was banned by the Reserve Bank of India in 2018. However, after the Supreme Court set aside the ban, the cryptocurrency market in India skyrocketed. The demand was seen as an opportunity by businesses and startups who launched various crypto platforms to enable investors to buy and sell cryptocurrency effectively. For anyone looking to invest in cryptocurrency, consider the following steps:
- Make an account on a crypto platform or exchange by completing the KYC process and proving your identity.
- Once you are on board, make a crypto wallet where the platform will store all the coins or tokens you buy.
- Connect the digital wallet of the crypto platform to your bank account. This will help you put money in your wallet to buy and withdraw the money when you sell.
- Once you have put money into your digital wallet, you can place an order to buy any cryptocurrency that is listed on the platform. The money will be debited automatically from your wallet, depending on the order value.
- After the transaction, your wallet will show all the coins and tokens you have purchased. You can sell them anytime you want and take out the money from the wallet and credit it into your connected bank account.
Types of Cryptocurrency wallets
There are mainly two types of cryptocurrency wallets: Software wallets and Hardware wallets.
- Software Wallets: Software wallets are based on a browser extension or desktop programs that allow crypto investors to invest, send, receive and store the cryptocurrency. These are sometimes referred to as ‘hot’ wallets as the funds are kept online without any specific private key, making them vulnerable to cyberattacks. Software wallets are specific to a particular currency and do not support trading in multiple currencies. Almost all the crypto platforms in India work on the principle of software wallets.
- Hardware Wallets: These are external physical devices that can store cryptocurrency for safe use anytime and anywhere. Investors who buy cryptocurrencies store them in hardware wallets which they plug into their desktop when they want to access. Hardware wallets are considered safer than software wallets as they have a private key that only the investor can access. You can use hardware wallets based on a web-based interface, a company created application or a separate software wallet.
Strategies for investing in Bitcoin
Investing in Bitcoin is highly speculative owing to its high volatility. However, based on past price patterns, investors can evaluate and analyse Bitcoin and take positions accordingly. You can invest a large amount (considering your risk appetite) for the short term and sell if the price appreciates in the near future. On the other hand, if you want to invest for the long term, you can invest a comparatively smaller amount and hold it for several years. Furthermore, you can create a mixed strategy where you allocate a portion of the capital for the short term, the remaining for the long term and adjust your invested amount going forward.
Cryptocurrencies are still a controversial subject in India. There are no rules and regulations surrounding the framework, which has led to numerous cyberattacks and scams. However, with the new-age crypto platforms, it has become relatively easy and safer to invest in cryptocurrencies and make profits. However, it is highly advised that you follow caution and invest an amount you are comfortable with.
Frequently Asked Questions Expand All
To invest in cryptocurrency, download the app of a good crypto wallet, make an account, connect your bank account and start investing after putting money into your digital wallet.
Yes, you can invest any amount you want in Bitcoin. However, there may be some restrictions on the trading amount depending on which cryptocurrency wallet you are using.
In India, you can invest as low as Rs 100 in cryptocurrency. There is no limit or cap on the maximum investment amount in cryptocurrency.