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Market downturns or regulatory shifts can reduce liquidity, making it harder to buy or sell assets when needed.
United States President Donald Trump on March 2, 2025, announced the creation of a US crypto strategic reserve comprising Bitcoin, Ethereum, XRP, Solana, and Cardano.
This move is being seen as a major step towards legitimising cryptocurrencies and one that could trigger a bull run in this asset class.
Market impact
The announcement led to a surge in trading volumes, with the crypto market recording inflows of nearly Rs 300 billion overnight.
"Such legitimisation of cryptos by the US government could drive mainstream adoption and increase institutional participation," says Balaji Srihari, vice president, CoinSwitch.
He believes that establishing a US strategic reserve could spark a global accumulation race.
Bitcoin and Ethereum are expected to maintain dominance due to their first-mover advantage, security, and institutional backing.
"The inclusion of XRP, Solana and Cardano in the US reserve could significantly boost their adoption," says Raj Karkara, chief operating officer, ZebPay.
Sustaining this momentum will depend on policy support, effective execution, market sentiment, and economic conditions.
Several factors currently favour cryptocurrencies. The launch of Bitcoin exchange-traded funds (ETFs) has been a key driver. "US spot Bitcoin ETFs have driven massive institutional inflows," says Karkara.
Traditional financial institutions are embracing digital assets.
"BlackRock, the world's largest asset manager, now recommends cryptos as part of its model portfolio to clients," says Srihari.
Handling risks
Despite the bullish outlook, investors must assess the risks before increasing their exposure to cryptocurrencies.
Volatility: Cryptocurrencies are highly volatile.
"This is due to their nascent market stage, limited depth, and sentiment-driven trading," says Abhishek Kumar, a Securities and Exchange Board of India registered investment advisor and founder, SahajMoney.
Only investors with a high risk tolerance should consider investing.
Regulatory uncertainty: In India, cryptos exist in a regulatory grey area.
"The key risk arises from the possibility of prohibition through pending legislation. Conflicting oversight from multiple regulators (like the Reserve Bank of India and Sebi), and the possibility of abrupt policy changes and retroactive enforcement of policies add to uncertainty," says Kumar.
Regulatory gaps: Cryptocurrencies operate outside frameworks designed for centralised institutions.
"This creates regulatory gaps where misleading practices and security vulnerabilities can flourish," says Kumar.
Crypto investments also lack traditional consumer protections such as deposit insurance and circuit breakers.
Liquidity risk: Market downturns or regulatory shifts can reduce liquidity, making it harder to buy or sell assets when needed.
Investors should assess their ability to handle extreme price swings before investing.
Kumar advises limiting crypto exposure to 1 to 5 per cent of one's portfolio.
He also recommends a minimum five-year investment horizon. Srihari warns against excessive leverage.
Security considerations
Investors should choose exchanges with strong security measures.
"Look for an exchange that has a history of robust security measures and minimal breaches," says Prashant Mali, cyber law expert and advocate, Bombay high court.
Exchanges should offer multi-factor authentication, store a significant portion of assets offline to prevent hacking, and undergo regular security audits by independent agencies.
Strong know your customer practices are also essential.
"Nowadays, some exchanges offer insurance to protect users against losses due to hacking, which is useful," says Mali.
Tax compliance
Profits from cryptocurrency sales are taxed at a flat 30 per cent (plus applicable surcharge and education cess).
"Only acquisition costs can be deducted. Expenses related to transaction fees, transfer costs, etc, cannot be deducted while computing taxable gains," says Suresh Surana, a Mumbai-based chartered accountant.
Tax deducted at source of 1 per cent applies to crypto transactions, except in specific cases.
Crypto losses cannot be offset against other income or capital gains from other assets, nor carried forward to future financial years.
Tax classification depends on transaction patterns.
"If transactions are infrequent and the crypto is held for the long term, the gains generally qualify as capital gains," says Surana.
Conversely, frequent trading or business activities like mining or arbitrage lead to gains being classified as business income.
Investors must disclose crypto gains or losses in their income-tax returns under 'Schedule VDA (virtual digital assets)'.
Resident taxpayers holding cryptos on foreign exchanges must report them under the Foreign Asset Schedule in the ITR.
Individuals with over Rs 50 lakh income (and not holding VDAs for business) must disclose crypto holdings in 'Schedule AL (Assets and Liabilities)'.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Aslam Hunani/Rediff.com
