Digital assets, the newly coined term, have caught the interest of many investors and the general public. Although it is still in its infancy, it is evolving rapidly. And a common thing is the desire in everyone’s head to invest in digital assets as an asset class. Before we even get into that, let me clear up some common misconceptions about digital assets to help you make an informed decision.
1) Is it true that virtual digital assets, central bank digital currencies (CBDC) and cryptocurrencies are the same thing?
No. Non-fungible tokens (NFTs), cryptocurrencies and other virtual assets are examples of digital assets on the blockchain. Virtual digital assets are non-physical or tangible digital assets. In comparison, CBDC is not a cryptocurrency or anything related to the cryptocurrency space. A government agency will lead the CBDC.
India plans to launch its own digital currency, but it will not function as a cryptocurrency. According to Finance Minister Nirmala Sitharaman, the Reserve Bank of India will issue a digital currency in the coming financial year.
Even the US government has issued an executive order to clarify the launch of its own digital currency. Due to these events, there is a widespread misconception that digital currencies will be similar to cryptocurrency. Let me elaborate on this.
2) Why cryptocurrency is not the same as a digital currency
Many people mistakenly believe that a digital currency such as the CBDC – which is being debated by governments around the world – is the same as a cryptocurrency. Digital currency only has similar functionality to real currency. The digital currency of India refers to a digital rupee, and the same goes for the dollar, which can be obtained in digital form. It can be used to buy products and services.
3) What is the basic distinction?
To get started, you need to understand the basic difference between digital currencies and cryptos. Other than not existing in tangible form, digital currency has similar characteristics to real currency. It can be used to buy goods and services. Your cryptocurrencies, or as I prefer to call them crypto investments, are not legal tender in India, meaning they cannot be used to buy or sell clothes, smartphones, computers or any other goods or services. Investing in cryptocurrency can be compared to buying gold or other financial products, the value of which is determined by a series of factors. In fact, the government has repeatedly stated that no other form of private digital currency will ever be considered legal tender in India.
4) Cryptocurrency is classified as an “asset” rather than a “currency”
There is an ongoing debate about whether cryptocurrency should be classified as a “currency” or an “asset”. Cryptocurrency and crypto assets are words that are often used synonymously. It is not a currency, but it can be considered a commodity or an investment.
5) Can you invest in digital assets? And how much should you invest?
The importance of asset allocation and diversification should never be underestimated, as these two factors can make or break your wealth building journey. It sounds simple and obvious, but I still see many investors struggling without proper asset allocation. Don’t invest in cryptocurrency until you understand the technology behind it, the associated risks, and the various issues a particular blockchain project addresses. You don’t want to put your money in a meme coin. There was a well-known saying that crypto can send you to the moon. But I keep telling people that while crypto can send you to the moon, who will bring you back?
6) What is NFT?
For starters, an NFT is not a JPEG image or something you can create with a simple right click of your mouse. Rather, it is a token created on a blockchain that establishes that ownership belongs only to you and is unique. Let me explain further: if you break down the word “non-functioning” you get something that isn’t replaceable, because anything replaceable can easily be replaced with an identical item. For example, cash in your wallet is a classic example; you cannot have multiple tickets of Rs 2000? Yes, and you can use them all to buy anything in that price range. It is completely interchangeable. However, the reverse is known as “non-fungible,” which refers to anything that cannot be replaced.
Let’s talk about one of the most famous NFTs, which was created by Twitter founder Jack Dorsey, who sold his first tweet as an NFT for over $2.9 million. Now just about anyone can easily screenshot Dorsey’s first tweet for free and save it anywhere. The most important thing to remember is that it is not yours and cannot be sold. Only the person who bought Dorsey’s NFT has the right to sell it because he or she owns it. You may also know what happened to this NFT, which was auctioned recently but only received a bid of $280.
7) Treat NFTs more like an art collection than an investment
I tell people that they used to buy the paintings of MF Hussain or Piccasso more like art, and it pays off, but it was still more love and emotion towards the artist or the artist. Also, treat NFT investments as if they were a collection of digital art because if you treat them as an investment, they can be riskier than buying cryptocurrencies. The main point of the net asset value and use of crypto-like NFTs will return, and since these NFTs are not comparable to your stock market or gold investments, only time will tell their true intrinsic value. My advice will be the same as for crypto: understand this sector first, pursue your financial goals by better understanding your risk profile, and don’t invest in anything for a quick profit and products that don’t match reaching your financial goals.
8) Only invest what you can afford to lose
Why am I saying this? Because digital assets are still a new animal in the market, and we’ve seen how volatile this market can be. In fact, good blue chip coins also fell nearly 60-70% in one day.
And the 30% tax on gains, as well as the inability to offset crypto losses in one coin with gains in other coins, is something to consider before investing. To top it off, as mentioned before, the government has yet to publish its regulations. That’s why I recommend investing no more than two to five percent in cryptocurrency unless you have a deep understanding of the market and are subject to your risk profile.
The author is a chartered accountant and mentor of NRP Capitals.
The thoughts and opinions shared here are those of the author.
Discover our subscription discounts at the end of the season with an absolutely free Moneycontrol pro subscription. Use code EOSO2021. Click here for more details.