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Digital assets, the new term, have attracted the interest of many investors and the general public. Although it is only in its infancy, it is developing rapidly. The common thing is the desire in everyone’s mind to invest in digital assets as an asset class. Before we get to that, let me dispel some common misconceptions about digital assets to help you make an informed decision.
1) Is it true that virtual digital assets, central bank digital currency (CBDC), and cryptocurrency 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 intangible or tangible digital assets. In comparison, CBDC is not a cryptocurrency or anything related to the cryptocurrency space. The CBDC will be managed by a government body.
India plans to launch its own digital currency, but it will not operate as a cryptocurrency. The Reserve Bank of India will issue a digital currency in the next fiscal year, according to Finance Minister Nirmala Sitharaman.
Even the US government has issued an executive order to get more clarity about the launch of its own digital currency. Because of these events, there is a widespread misconception that digital currency will be similar to cryptocurrency. Let me address this in more detail.
2) Why is cryptocurrency different from digital currency
Many people mistakenly believe that a digital currency, such as CBDC – which governments around the world are discussing – is the same as cryptocurrency. Only digital currency has similar functions to real currency. The Indian digital currency refers to the digital rupee, and the same is true for the dollar, which can be obtained in digital form. It can be used to purchase products and services.
3) What is the basic distinction?
To get started, you need to understand the basic difference between digital currency and crypto. Except for its lack of tangible form, digital currency has similar properties to real currency. It can be used to purchase goods and services. Your cryptocurrencies, or as I prefer to call them, cryptocurrency investments, are not legal tender in India, which means they cannot be used to buy or sell clothes, smartphones, computers or any other good or service. Investing in cryptocurrencies 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 be considered legal tender in India.
4) Cryptocurrency is classified as an “asset” and not 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 commonly used as synonyms. It is not a currency, but it can be considered a commodity or an investment.
5) Can you invest in digital assets? 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 fortune-building journey. It sounds simple and straightforward, but I still see many investors struggling without adequately allocating assets. Do not invest in cryptocurrencies until you understand the technology behind it, the risks involved, and the various issues that a particular blockchain project addresses. You don’t want to put your money into a meme coin. There was an old saying that cryptocurrency could send you to the moon. But I keep telling people that even though cryptocurrency can send you to the moon, who will take you back?
6) What is NFT?
For starters, an NFT is not a JPEG image or anything that you can create with a simple mouse click. Instead, it is a token generated on the blockchain that proves that ownership belongs to you only and is unique. Let me explain further: if you split the word “non-replaceable”, you get something that is not replaceable, because anything can be easily replaced by an identical element. For example, cash in your wallet is a classic example; Can’t get multiple tickets 2000 rupees? Yes, and you can use any of them to buy anything in this price range. It is fully interchangeable. However, the opposite is known as “non-replaceable”, which refers to anything that cannot be replaced.
Let’s discuss one of the most famous NFTs, created by Twitter founder Jack Dorsey, who first sold a tweet as an NFT for more than $2.9 million. Now almost anyone can easily take a screenshot of their first Dorsey tweet and save it anywhere. The 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 they own it. You may also know what happened to NFT, which was recently put up for auction but only received a bid of $280.
7) Treat NFTs as an art collection rather than an investment
I tell people they used to buy MF Hussain or Piccasso paintings like art, and it paid off, but it was still more loving and affectionate towards the artist or artist. Similarly, treat NFT investments as if they were a set of digital art, because if you treat it as an investment, it can be riskier than buying cryptocurrencies. The main point will be the intrinsic value and use case of cryptocurrency-like NFTs, and since these NFTs are not similar to stock market or gold investments, only time will tell about their true intrinsic value. My advice would be the same for cryptocurrencies: Understand this sector first, pursue your financial goals with a better understanding of your risk profile, and don’t invest in anything for quick wins and products that don’t match your financial goals.
8) Invest only what you can afford to lose
Why do I say this? Because digital assets are still a new animal in the market, and we have seen how volatile this market can be. In fact, good coins also fell by 60-70% in one day.
A 30% tax on gains, as well as the inability to offset cryptocurrency losses in one currency with gains in others is something to consider before investing. To achieve this, as mentioned earlier, the government has not yet published its regulations. This is why I recommend investing no more than two to five percent in cryptocurrency unless you have a thorough understanding of the market and are subject to your own risk profile.
The author is a Chartered Accountant and Mentor at NRP Capitals.
The ideas and opinions shared here are those of the author.
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