Bitcoins have been a buzz lately. In the past few months with the BTC zooming from USD ~68839 in Oct ’24 to a peak of USD ~104494 in Dec ‘ 24 in a matter of few weeks mostly owing to the impending Trump Presidency. But should you jump into the bandwagon & invest in bitcoin ? Here are some of the factors to consider before you jump into it :
Bitcoin – Its legal status in India?
Bitcoin is basically one of the many virtual digital currencies which are available for investors to trade in. It is not currently accepted as a legal currency in India however it is possible to own and trade on exchanges. One needs to keep in mind that bitcoins are not centrally administered or regulated by any specific body like the RBI, which administers physical currency in India. Further, bitcoin, as a medium of payment, has neither been authorized nor regulated by any central authority in India as a result of which no set rules, regulations or guidelines have been laid down for resolving disputes that could arise while dealing with bitcoins.
Past ghosts : The wazirX Fiasco & our regulators stance on the same:
The cyberattack on wazirX that took place around June last year eroded investor wealth to the tune of 230 Million dollars and left them with no legal recourse. Almost 9 months into the incident, & the stolen funds are yet to be tracked & the perpetrators yet to identified & punished. In the meantime, the investors have been left perplexed with most of them questioning if , how and when their money will be returned. Amidst this fiasco, RBI & SEBI remains silent, considering the fact the investors were warned time & again that trading in crypto come with its set of risks & that these currencies are not yet regulated in our country.
Taxation rules surrounding bitcoin transactions :
• Income from transfer of virtual digital assets (VDA) such as crypto, NFTs will be taxed at 30%.
• No deduction, except the cost of acquisition, will be allowed while reporting income from transfer of digital assets. Infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition.
• The TDS is applicable to the total sale amount whether profits are made or not and has to be filed in the Income Tax Return (ITR) to get refunds.
• It is also not possible to offset losses from one type of VDA to another. For example, losses from trading in Ethereum can’t be used to offset gains from trading in Bitcoin.
• Needless to say, Loss from digital assets cannot be set-off against any other income.
Further, gifting of digital assets will attract tax in the hands of receiver.
Pertinent question really remains that are the returns in bitcoin really worth all the hype & risk ?
While bitcoin or crypto currencies in general derive their value purely from speculation without any physical asset to back it up, mutual funds are a fully regulated investment product investing into listed companies. In depth research available online, transparent investing policies & strict regulatory norms ideally should make mutual funds the first choice of investments. However, since crypto is emerging as a popular alternative investment in todays world, we made some comparisons between bitcoins returns vs returns from some aggressive small cap mutual fund.
In last four years bitcoin has grown three times from the 30000 levels to 100000 levels. However one need to note that most of this growth has come from the last few months in 2024 (owing to expectations around more crypto friendly policies in the US)
Following chart tracks the growth of cryptos in the last few years. Volitility in bitcoin prices can be seen in the above charts. A closer look indicates that most of the expotential growth has come in the past 4-5 months where the bitcoin grew from sub 70000 levels to to ~ 100000 levels. One can also note that period from June / July 22 to Feb 2024 (period of around Months) the values have been stagnant in the mid 40000s with high downside volatility.
In comparison the nifty small cap chart looks much more smoother upward facing curve with most small cap funds recording annualized returns of more than 30% + in the last four years which translates into 4X growth in around 4 to 4.5 Years. For example quant small cap reflected an annualized growth of ~ 35% in the past 4 years, Nippon India small cap grew at an annualized rate of ~33% in the same time horizon. Nifty smallcap 250 TRI grew at an annualized rate of 27.86% for the past 4 years.
These numbers compel us to reflect whether it’s a wise decision to invest in crypto currencies given the range of volatility it is subjected to and the regulatory confusion it lives in vis a vis a time tested investment product like mutual fund.