Crypto Simplified: India Edition

Hello everyone,

Welcome to the sixth edition of Finshots Explores Crypto.

Our previous article discussed Web3, various cryptocurrencies (beyond Bitcoin and Ethereum), and the extensive possibilities within the crypto space. Hopefully, you now understand the fundamentals of blockchain and its transformative impact on traditional financial systems.

However, understanding is only the beginning. What’s the next step? Because let’s face it, you didn’t delve into crypto just to observe from afar, right? The key question is: How can you effectively buy, sell, and trade cryptocurrencies within India? That’s the focus of our discussion today.

We understand that venturing into crypto investments can appear intimidating. It might seem overly complex, excessively risky, filled with alarming stories of overnight investment losses. Yet, the reality is, once you grasp a few essential principles and adopt the appropriate approach, it becomes another asset class, similar to stocks or real estate, each with its unique set of guidelines. To simplify the process, we’ll concentrate on three core aspects: the mechanics of crypto buying and selling, methods for evaluating crypto assets, and the relevant tax and legal ramifications.

So, let’s start from the beginning.

Before diving into the “how,” let’s first establish the “where”—specifically, where does cryptocurrency stand within India’s legal and financial framework?

In short, crypto isn’t classified as illegal, but neither is it considered money or ‘legal tender’. You cannot purchase goods at a local store using Bitcoin, but you are permitted to trade it and invest in it like any other asset. The Indian government classifies cryptocurrencies as “Virtual Digital Assets” (VDAs), a technical term that implies you can own them, subject to significant taxation. Despite regulatory ambiguities, India is a global leader in crypto adoption. Indeed, for the second consecutive year in 2024, India has secured the top spot globally for cryptocurrency adoption. This is indeed an impressive feat.

Now that the foundation is set, let’s discuss the practical steps to acquiring crypto.

If you equate cryptocurrencies to stocks, the concept becomes clearer. Similar to needing a Demat account for stock trading, you require a crypto exchange account to trade digital assets.

Here’s a breakdown of the process, which can be completed in a few minutes with a few clicks:

#1 – Select a Reputable Exchange: This is a crucial step since exchanges are frequent targets for hacks, fraud, and sudden closures. History teaches us that no exchange is immune to failure. Therefore, choose prudently. Prioritize robust security measures (2FA, withdrawal whitelists, proof of reserves), high trading volumes (since liquidity translates to better pricing), KYC verification (ensuring legitimacy), and straightforward withdrawal processes, which indicate how easily you can access your funds. You can also thoroughly review the exchange’s terms and conditions.

#2 – Fund Your Account: This is a straightforward step where you deposit Indian Rupees (INR) into your exchange account through UPI, bank transfers, or payment gateways. An alternative method involves purchasing stablecoins directly via peer-to-peer (P2P) trading. Stablecoins bridge the gap between fiat currency and crypto, facilitating smoother trading without INR conversion delays. Thus, instead of waiting for INR deposits to clear, you can procure stablecoins like USD Tether (USDT) from verified sellers on the exchange by transferring INR via UPI. The exchange acts as an intermediary, releasing funds only upon confirmation.

#3 – Execute Your First Crypto Trade: Now that you possess INR or USDT in your account, it’s time to trade. Looking for Bitcoin? Buy BTC/USDT. Prefer Ethereum? Opt for ETH/USDT. Considering altcoins? Conduct thorough research. Simply enter the cryptocurrency’s name, similar to searching for a stock on a trading platform, and select the cryptocurrency paired with Tether. Before transacting, consider the coin’s liquidity, volatility, and credibility. A useful tip: begin with small amounts to familiarize yourself with the process. Also, use limit orders rather than market buys to potentially avoid unfavorable pricing.

After completing your purchase, document your credentials, including login details, private and public keys, and the amount of crypto assets held in your wallet.

#4 – Transfer to a Secure Wallet: If you’ve been closely following our previous articles, you know that keeping your crypto on an exchange means it’s not truly yours. Hacks, unexpected bankruptcies, and withdrawal freezes are all potential risks. The only true way to own your crypto is to move it to a private wallet (cold/dark/hard wallet). So…

• Hot wallets (software-based) = convenient, but less secure.
• Cold wallets (hardware-based) = optimal for long-term storage. Offline, secure, and inaccessible.

Remember the key principle: “Not your keys, not your coins.” If you lack control over your private keys, someone else possesses it. That is a risk worth avoiding. Thus, after buying your first crypto, remember your keys and record them securely. While discussing wallets, it is important to clarify this aspect, as it directly pertains to crypto ownership. Moving your crypto to a cold wallet restores control. This enhances your digital footprint’s privacy and renders the transaction untraceable on two fronts: your identity and your assets remain concealed. Essentially, crypto stored in an exchange’s wallet is not entirely under your control.

However, acquiring crypto is only the beginning. What comes next?

Let’s examine trading, investing, and how to approach crypto strategically to avoid common beginner mistakes.

First, some warnings. Crypto trading diverges from stock trading. It operates under its own unique rules. There are no opening or closing bells, nor circuit breakers to moderate volatility. The market operates continuously, and prices can fluctuate drastically within seconds.

Secondly, understand that not all cryptocurrencies are created equal. Some boast high liquidity and widespread adoption, simplifying trading, while others are volatile, poorly ranked, and built on shaky foundations. Before investing, consider the crypto’s liquidity, its real-world applications, its market ranking, and its adoption rate. A higher market capitalization and ranking typically suggest greater stability.

Then consider asset allocation, which answers the key question: How much of my portfolio should be allocated to crypto? As cryptocurrencies lack an extensive track record, they can be volatile and risky. Ask yourself: Am I investing heavily in any particular crypto? Why? What percentage of my portfolio should be in crypto?

Conducting this research before trading ensures your decisions are strategy-driven, not based on fear of missing out (FOMO).

Once you grasp these essentials, clarify your investment goals. Are you aiming to hold crypto as a long-term investment, or do you intend to trade and profit from short-term market fluctuations?

Here’s a breakdown:

Crypto trading, like stock trading, revolves around short-term movements and market timing. Traders capitalize on volatility, employing technical analysis, price patterns, and momentum to buy low and sell high. Thus, consider the following:

• Trading pairs: BTC/USDT, ETH/USDT, and other major pairings.
• Liquidity: How easily can you buy/sell these crypto pairings?
• Market Cap: Cryptocurrencies with larger market caps tend to be less volatile.
• Technical Analysis: Studying price patterns to make short-term trades.

The most common trading approach is the spot market: Buy, sell, repeat. However, for amplified gains (or losses), crypto Futures & Options (F&O) trading is also available. Similar to stocks, traders can leverage positions, hedge risks, and speculate on price swings using various F&O strategies. These are often called CFDs (Contracts for Difference), which enable you to speculate on price movements without owning the underlying asset.

Investing, in contrast, is a long-term strategy. It’s about believing in the underlying fundamentals of a cryptocurrency and its technology and remaining committed through market fluctuations. Select a few robust cryptos, stick with them, and disregard market noise. Some investors pursue crypto Exchange-Traded Funds (ETFs). Many opt for Dollar-Cost Averaging (DCA), which involves investing a fixed amount regularly, irrespective of price (like a Systematic Investment Plan). Rather than focusing on daily price swings, DCA mitigates volatility and establishes a strong portfolio over time. Just like in stocks, investment strategies are crucial. Have a well-defined plan and be sure about your investment thesis. Understand why you’re buying, when you plan to sell, and how you’ll protect your assets.

Whether trading or investing, risk management is paramount. In trading, this encompasses stop-loss orders, position sizing, and portfolio rebalancing to minimize losses. In investing, it entails diversification, which means spreading investments across different cryptos to mitigate overexposure.

Then there are taxes, which can significantly impact profits. Whether trading or investing in cryptos, taxes can either bolster or erode your returns.

Let’s examine the last piece: crypto taxation.

In India, tax regulations impose a substantial burden on crypto profits. A flat 30% tax applies to gains, without deductions, exemptions, or offsets against other income or expenses. Additionally, a 1% tax is deducted at source (TDS) on every Virtual Digital Asset transaction exceeding ₹50,000. Crypto taxation in India can be viewed as stringent. Serious traders and investors might consider consulting a tax expert to ensure compliance and prevent unexpected issues.

While taxes are a concern, regulations introduce another level of complexity. Key stakeholders shape India’s crypto landscape:

• The Reserve Bank of India (RBI) — concerned about financial stability and crypto’s broader impact on the economy.
• The Ministry of Finance — responsible for establishing tax policies and curbing money laundering risks.
• The Securities and Exchange Board of India (SEBI) — while not a direct regulator, it has offered suggestions, particularly the regulation of crypto-linked financial products.

The regulatory landscape has been a moving target. In 2018, the RBI prohibited banks from engaging with crypto exchanges, virtually preventing Indians from buying or selling crypto legally. The Supreme Court overturned this decision in 2020, but the uncertainty lingered. Then came the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, a proposal aimed at restricting private cryptocurrencies while advancing a Central Bank Digital Currency (CBDC). The status today? The bill is still pending. Therefore, India appears to be attempting to control crypto, rather than outright banning it.

Some refer to crypto as a casino, while others view it as the future of finance. The reality probably resides somewhere in between.

Bitcoin’s impressive ascent demonstrates that crypto is not simply hype. It’s a movement, a novel perspective on money, value, and decentralization. However, for every success story like Bitcoin, there exists a graveyard of worthless altcoins and market crashes, illustrating the prevalence of scams and speculation.

This begs the question: Is it worth it?

That hinges on you. If you comprehend the landscape, acknowledge the risks, and approach it with a plan (not just blind greed), crypto can be an asset rather than a gamble. Develop a strategy, diversify your portfolio, manage risks, and never invest funds you cannot afford to lose. If this feels overwhelming, perhaps it’s best to learn before diving in.

On that note, we’ll conclude this story.

In our next edition, we will explore: “Is crypto trading actually worthwhile, or does the true potential of crypto lie elsewhere?”

See you next week!

Until then…

Please share this article on WhatsApp, LinkedIn and X.

📢Finshots College Weekly Programme is now on Whatsapp Channels! Click here to join the Finshots Student Community and get your weekly financial fix.

A Staggering 75% of Indians Lack Life Insurance Coverage!

Don’t simply follow the crowd—take charge and set a new standard.

A comprehensive term life insurance policy offers a vital safety net for those you care about most, ensuring their financial security, even in your absence.

Schedule a FREE consultation with Ditto to discover more about term life insurance and identify the most suitable policy for you and your family.