Rewards and Risks of Investing in Cryptocurrency

(Bangalore) – Cryptocurrency, the digital currency that allows users to make transactions without intermediaries, has seen widespread adoption and controversy. In India and globally, the advantages and disadvantages of cryptocurrency continue to shape discussions in financial and government circles, even as the Indian government pilots its own digital currency. Cryptocurrencies are decentralized digital assets not approved or regulated by central authorities, making them unique but often legally ambiguous.

Cryptocurrency’s main appeal lies in its security and independence. Cryptographic technology, such as public-private key encryption, secures these digital currencies, allowing for safe online transactions without banks or other financial institutions. This technology is underpinned by complex cryptographic systems and decentralized networks, such as blockchain, which manage and record transactions across various nodes or computers.

Despite these advantages, cryptocurrencies remain unregulated in India, with no sovereign guarantee. This lack of regulation raises questions about their stability and legality. Blockchain technology secures cryptocurrency transactions by creating a public ledger that cannot be altered once data is added. Blockchain’s decentralized system means no single failure point exists, a feature that enhances its reliability and appeal.

The advantages of cryptocurrency have attracted many investors and users worldwide. For one, cryptocurrency is seen as an inflation-resistant asset due to its capped supply. For example, Bitcoin, with a maximum limit of 21 million coins, could increase in value as demand grows, potentially providing a hedge against inflation. Furthermore, cryptocurrencies enable rapid, global transactions; a crypto transaction, unlike traditional banking methods, takes minutes rather than hours or days, even for international transfers.

Cost efficiency is another advantage. Transactions using cryptocurrency often come with minimal fees, as there is no third-party involvement. This makes it more affordable, especially for cross-border transactions that typically incur high bank fees. Cryptocurrency also operates independently of governments and central banks, appealing to users who prefer a decentralized financial system free from government intervention.

Cryptocurrencies have also proven to be useful in diversifying investment portfolios. Because their price movements are less correlated with traditional markets like stocks or bonds, some investors consider them a valuable diversification tool. However, the volatility of cryptocurrency prices can increase overall portfolio risk if heavily weighted toward digital assets.

Accessibility is a significant benefit of cryptocurrency. Investors need only an internet-connected device to start, with no need for extensive background checks or identification, unlike traditional financial systems. Blockchain technology further secures transactions, relying on decentralized verification that is difficult to hack, providing additional peace of mind to investors who prioritize security.

However, cryptocurrency is not without its drawbacks. While cryptocurrency offers a level of anonymity, transactions are pseudonymous rather than entirely private, meaning that government agencies can potentially trace digital trails. This has led to some concerns about privacy and government interference. Additionally, blockchain networks are at risk of a “51% attack,” where a single entity controlling more than half of the network’s power could potentially alter the blockchain.

Environmental concerns are another downside, as cryptocurrencies relying on proof-of-work mechanisms require substantial computing power, leading to high energy consumption. For example, mining Bitcoin can consume as much energy as some small countries, prompting governments to consider regulations to reduce the environmental impact of these systems. Also, cryptocurrency transactions generally have no recourse for mistakes, meaning that accidental transfers are often irretrievable.

The legality of cryptocurrency in India remains a gray area. Although cryptocurrency transactions are not prohibited, there are no clear regulatory guidelines, and the government has yet to officially approve these digital assets. India’s Finance Minister introduced taxes on digital assets in 2022, which marked the first official acknowledgment of cryptocurrency by the government. However, the Reserve Bank of India has not yet issued a formal position, and cryptocurrencies remain largely unregulated.

India’s tax policy on cryptocurrencies has created additional complications for investors. As per the 2022 tax framework, cryptocurrency earnings are subject to a 30% tax, with no deductions allowed for transaction costs. In addition, a 1% tax deducted at source (TDS) applies to all transactions exceeding a certain threshold. Gifts and transfers of cryptocurrency are also taxable. Moreover, losses incurred from cryptocurrency investments cannot be used to offset other income, further complicating tax calculations for investors.

Table: Advantages and Disadvantages of Cryptocurrency in 2024

Cryptocurrency exchanges remain popular despite these challenges, allowing investors to buy, sell, and trade digital assets using various national currencies. However, it is important to note that cryptocurrency transactions are primarily used for cross-border transfers rather than retail purchases in India.

For Indian investors, understanding the risks and rewards of cryptocurrency is essential before committing funds. Cryptocurrency offers benefits like faster transactions and inflation protection but comes with potential downsides, including tax complexities and regulatory uncertainties.