Investing in Cryptocurrency in India | Your Ultimate Guide
Crypto can be a lucrative investment, but it comes with significant risks. Learn all about cryptocurrencies, the pros and cons, and investing in crypto. 🇮🇳
What is cryptocurrency?
Cryptocurrency, or crypto for short, is a form of digital currency that is decentralized using blockchain technology and secured using cryptography.
These terms alone can sound like a load of jargon, so let’s break it down further and look at the differences between crypto and fiat currencies, blockchain technologies, how cryptocurrencies work, and the different types of cryptocurrencies.
What’s the difference between cryptocurrency vs. fiat currency?
Fiat currencies - like the Indian Rupee - are physical legal tenders, that are issued, monitored, and regulated by central authorities, including governments and central banks. While it’s been a long time since most fiat currencies were backed by actual physical commodities like gold or silver, the value of fiat currencies is backed by the government.
Cryptocurrencies meanwhile are solely digital, with no physical form. In most instances, there’s also no cash or physical commodity backing said cryptocurrency (excluding stablecoins). No government or central authority controls a cryptocurrency, instead, they’re maintained by a group of people, all participating in maintaining a given blockchain.
What is blockchain technology?
A blockchain is a distributed database, also known as a ledger - it’s a kind of log that keeps track of all the given transactions relating to a cryptocurrency.
Unlike a regular log, where one entity or person is in charge of maintaining that log, the blockchain is decentralized because it's maintained by thousands of nodes (computers) all around the world.
Here's how it works in simplified terms:
Blocks: Every transaction that occurs within the blockchain is grouped together in a container called a "block." Each block contains a bunch of transactions, similar to pages in a ledger.
Linking Blocks: Once a block is filled with transactions, it is linked or chained to the previous block using a special cryptographic code, called a "hash." A hash is like a unique fingerprint for each block, and it contains information from the previous block, which creates a continuous chain of blocks.
Decentralization and Consensus: As mentioned earlier, the blockchain is maintained by a network of computers. When a new transaction is proposed, all the computers in the network compete to validate it. The precise way they do this depends on the consensus mechanism the blockchain is using - proof of work and proof of stake are the two most common consensus algorithms.
Security: Once a block is added to the chain, it is very difficult to alter any information in it. This is because each block's hash is based on the previous block's hash, which forms a secure and tamper-proof connection. If someone tries to change information in a previous block, the hashes of all subsequent blocks would also change, making the alteration evident to everyone in the network.
So, in summary, a blockchain is a decentralized and secure way to record and verify transactions. While it’s mostly used for cryptocurrencies currently, it is tamper-proof and transparent, which makes it suitable for various applications like supply chain management, voting systems, and more.
How do cryptocurrencies work?
Crypto prices are almost always driven by supply and demand. This means for the most part cryptocurrencies do not have an inherent value, instead, the price of crypto is determined by the market. In the simplest terms, the more demand there is for a given cryptocurrency and there lower the supply is, the higher the price and vice versa. Prices being determined by supply and demand isn’t unique to crypto, many other markets with tradeable assets also have prices determined by market forces.
What are the types of cryptocurrency?
There are many different types of cryptocurrencies that we’ll look at, but this starts by understanding the difference between cryptocurrency coins vs. tokens.
Cryptocurrencies that run on their own blockchain as the native coin - like Bitcoin or Ethereum - are generally considered coins.
Meanwhile, crypto tokens are digital assets created on blockchains that already exist. For example, UNI, SHIB, and DAI are all different kinds of tokens that exist on the Ethereum blockchain.
Coins and tokens may serve different purposes, and we can roughly categorize these as:
Payment currencies: Payment currencies are perhaps the most popular type of cryptocurrency. These are cryptocurrencies where the main use case is becoming a means of global mainstream payment - accepted in stores and so on. Examples of payment currencies include Bitcoin, Bitcoin Cash, and Litecoin.
Stablecoins: Stablecoins are a particular type of cryptocurrency that derive value from another currency or asset. These tokens are pegged to the value of another asset, with the most common being the value of the USD. Examples of stablecoins pegged to the US dollar include DAI, USDT, and USDC. Stablecoins all work slightly differently to maintain a stable price - some hold reserves of the currency or asset they’re pegged to, while others use algorithms to maintain a specific value.
Memecoins: Memecoins are coins that build a following through social media, most often Reddit or Twitter. These coins tend to pump in price initially and then drop as investors lose interest. The first meme coin was the now popular Dogecoin, based around the doge meme that began to spread across Tumblr and Reddit in the mid-2000s. Since Dogecoin, there have been thousands of other memecoins including SHIB, PEPE, and FLOKI.
Blockchain economy coins and tokens: Blockchain economies are networks that allow you to create tokens, build dApps, and more all within one blockchain (or compatible blockchains) that essentially work as their own financial ecosystem. Examples of blockchain economies include Ethereum and BNB Chain.
Privacy coins: Although blockchains are usually entirely public ledgers that anyone can view - and indeed, this is part of the big appeal for many investors - there are other blockchains that were created with a focus on privacy. The coins for these blockchains are often known as privacy coins, as transactions, wallet balances and more are often partially or entirely private. Popular examples of privacy coins include ZCash, Monero, and PIVX.
Utility tokens: As the name might suggest, utility tokens are tokens that run on a particular blockchain with a specific use case. Use cases may vary a lot, but some popular examples of utility tokens include BAT and GNT. For example, BAT tokens are on the Ethereum blockchain and they’re used as a means of payment for content creators and publishers using the Brave platform.
Governance tokens: Finally, there are governance tokens. These tokens allow holders to become members of a particular DAO and vote in various proposals for that DAO - though of course the tokens can also be sold and swapped like any other token. Examples of popular governance tokens include UNI, CRV, and MKR.
Is crypto legal?
Yes. Crypto is legal in India and there is no indication from the Indian government that there are any plans to ban crypto. This said, many investors have been alarmed at the hard stance the government has taken when it comes to the taxation of crypto and VDAs.
Is crypto a safe investment?
Wondering if crypto is safe? As crypto is a relatively new kind of technology and investment, many newcomers are unsure whether crypto is a safe asset to invest in.
Comparatively to many other financial investments, crypto may be considered safe from a security standpoint. The underlying blockchain technology provides a very secure and transparent way to record transactions, while the use of cryptographic keys helps protect your assets.
All this said, there are significant risks associated with cryptocurrencies. The market can be very volatile and prices may fluctuate more dramatically than in traditional financial markets. As well as this, the crypto industry is sadly rife with hackers and scammers, so you’ll need to be extra cautious to protect your assets and ensure you store your private keys correctly, and beware of fraudulent schemes or transactions
Why invest in crypto?
As the saying goes, with high risk comes high rewards. Investing in cryptocurrencies can be an appealing option as cryptocurrencies have shown the potential for significant growth and impressive returns on investment - with many early adopters of crypto becoming Bitcoin billionaires and millionaires in recent years.
As well as this, for more traditional investors, crypto represents an opportunity to diversify their portfolio, helping to spread the risk and increase overall returns. As cryptocurrencies operate independently of the traditional financial system, their performance might not always correlate with traditional markets, providing a way to hedge against economic uncertainty.
Of course, as with all investments, the risk of losses is just as high as the chance of gains. You should always DYOR before investing and never invest more than you can afford to lose.
What are the pros and cons of crypto?
| Pros | Cons |
|---|---|
| Decentralization: No central authority governs cryptocurrencies, providing financial freedom and control. | Volatility: Cryptocurrency prices can be highly volatile, leading to potential significant gains or losses. |
| Security: Transactions are secured through cryptographic techniques, reducing the risk of fraud and identity theft. | Lack of Regulation: The lack of proper regulation can lead to scams and fraudulent schemes. |
| Transparency: Blockchain technology ensures transparent and immutable transaction records, promoting trust. | Limited Adoption: Cryptocurrencies are not widely accepted yet, limiting their use in daily transactions. |
| Global Accessibility: Cryptocurrencies are accessible to anyone with an internet connection, bridging the gap for the unbanked. | Technical Complexity: Understanding and managing cryptocurrencies can be challenging for some individuals. |
| Lower Transaction Fees: Cryptocurrency transactions often involve lower fees compared to traditional financial systems. | Irreversible Transactions: Once a transaction is confirmed, it cannot be reversed, potentially leading to irreversible mistakes. |
| Financial Inclusion: Cryptocurrencies can provide financial services to people in regions with limited access to traditional banking. | Energy Consumption: Some cryptocurrencies' mining processes consume significant amounts of energy, raising environmental concerns. |
| Potential Investment Opportunities: Cryptocurrencies have shown substantial growth, offering opportunities for high returns on investments. | Hacking and Scams: The digital nature of cryptocurrencies makes them vulnerable to hacking and phishing attacks. |
How do I invest in crypto?
Wondering how to get started with investing in crypto? It’s pretty simple, you just need to:
Pick a cryptocurrency to invest in
Find a secure crypto exchange
Buy your crypto
Store your crypto securely
Explore our step-by-step guide on how to sell crypto in India, covering the process for the most popular Indian crypto exchanges.
How to store cryptocurrency?
It’s really important to store your crypto securely. This generally means whenever you’re not actively trading your crypto, you should be storing your crypto in a cold, hardware wallet to keep it as safe as possible. Learn more about the most secure and best crypto wallets.
How do you sell crypto?
Want to cash out on your crypto? It’s easy all you need to do is:
Find a trusted crypto exchange
Move your crypto from your wallet to the exchange
Sell your crypto
We have a whole guide to help you learn how to sell crypto step by step on the most popular Indian crypto exchanges.
How to avoid crypto scams
The crypto market has plenty of scams and fraudulent activity you need to know how to avoid. Some of the most common scams to be aware of (and how to avoid them) include:
Fake websites: Scammers often create fake websites replicating crypto exchanges in order to trick users into entering their details. These can look very legitimate, so always double-check the URL of the page you’re using.
Phishing scams: Scammers in phishing scams are after your personal details in order to gain access to your wallet. Most often, they’ll impersonate an exchange or other trusted authority and ask you for your private key. Always be aware of entering your private key anywhere - it’s extremely unlikely an exchange or wallet would ever email or otherwise contact you to ask for this.
Rug pulls: Rug pulls hype a particular token to pump the price and then pull all the investment out by dumping a huge number of tokens at once, causing the price to crash. It’s not illegal, but it’s certainly unethical. In general, the easiest way to avoid rug pulls is to avoid new investments that have been heavily shilled online and always check the whitepaper of any cryptocurrency before investing.
Fake celebrity endorsements: Scammers often pose as a celebrity or claim a given celebrity has endorsed their product to attract potential targets. Elon Musk, in particular, is a popular choice for scammers to use to promote crypto scams. The best way to avoid these kinds of scams is to DYOR. Even ‘legitimate’ cryptocurrencies promoted by actual celebrities have been pumped and dumped before. You should only invest in cryptocurrencies where you understand the purpose, use cases, and risks - and never invest more than you can afford to lose.
Which exchanges can I use to invest in crypto?
There are plenty of secure and safe crypto exchanges in India to pick from, that are fully compliant with the operational regulations from the government. Some of the best Indian crypto exchanges include:
Is crypto taxed?
Yes. Any gains or income from your crypto investments are taxed. Learn more about crypto taxes in India and learn how to use a cryptocurrency tax calculator in India to make it even easier!
Is crypto a currency or an asset in India?
The guidance here is clear - crypto is not viewed as a legal tender or currency like INR. Instead, it's classified as a Virtual Digital Asset and taxed as such, with profits viewed as either capital gains or business income depending on your personal circumstances.
How do you earn crypto?
There are a number of ways to earn cryptocurrency including:
As well as this, you can also earn passive income from crypto using a variety of dApps.
What are the most popular cryptocurrencies?
According to popular crypto price tracker CoinMarketCap, the most popular cryptocurrencies at the time of writing based on the market cap are:
Is crypto the future of finance?
It depends on who you ask. If you ask a crypto enthusiast, chances are they’ll state crypto is absolutely the future of finance, but it’s important to consider a number of perspectives to get a balanced view.
Cryptocurrencies (and blockchain technologies) have introduced new ways for people around the world to transact in a faster and more secure manner, without the need for centralized third parties, like banks. For the millions of ‘unbanked’ people around the world without access to traditional banking, cryptocurrencies are a more inclusive and fair financial ecosystem. In particular, the DeFi space represents a wealth of potential opportunities to earn from investments.
All this said, crypto still faces many challenges ahead of mainstream adoption, including regulatory issues, scalability, energy consumption, and price volatility. While some of these issues are slowly being addressed as networks develop, it’s a long road ahead.
