Can you comprehend the alphanumeric string?

It’s the encrypted equivalent of the word ‘Bitcoin’ — the cryptocurrency that traded at $46,578 (₹35 lakh) per unit on December 20, translating into a global market cap of $881 billion. That’s 3.36 times the GDP of Pakistan, 2.72 times of Bangladesh and 10 times of Sri Lanka. Having started at $1 in 2009 at launch, Bitcoin remains by far the most expensive crypto in history. If an investor had invested $100 in Bitcoin in 2009, the investment would be worth $4.67 million today (equivalent of ₹35 crore)!

It’s this non-linear compounding that has spawned a 24-hour-open crypto bazaar teeming with over 15,700 currencies and a cumulative market cap of $2.37 trillion. It includes coins and tokens trading in cents and even smaller fractions.

Among all these, the top 10 cryptos that have cornered the attention of investors include Bitcoin, Ethereum, Cardano, Dogecoin, Litecoin, Bitcoin Cash, Filecoin, Ethereum Classic, Monero and Helium, accounting for $1.45-trillion market cap (See: The Top 100). India’s home-grown crypto exchanges together offer a basket of 500 currencies to choose from, according to Crebaco, a crypto research and analytics firm. Crypto investing began in India in 2013 when Bengaluru-based Unocoin became the first crypto exchange in the country.

Since 2013, cumulative investments made by Indians in cryptos stood at around $1 billion as of March 2020, and today it is worth close to $8 billion (₹60,000 crore), according to Crebaco. However, a clutch of leading exchanges in the country, including WazirX, ZebPay, CoinDCX, CoinSwitch Kuber and others, published an advertisement in a leading pink daily complying with the Blockchain and Cryptocurrency Committee of India’s self-regulatory code of conduct under the Internet and Mobile Association of India, stating that tens of millions of Indians have invested $80 billion (₹6 lakh crore) in crypto. Sidharth Sogani, founder and CEO, Crebaco, however, believes the number is inflated. “It has to be volume and not the value invested as the average investment of Indians is too low,” he adds.

Even as governments and central banks are still coming to terms with the enormity of digital assets, their returns have proved to be more than just an inflation beater. The year-to-date return of Bitcoin is 60.40%, head and shoulders above other asset classes, including real estate and gold (See: More than an inflation hedge).

In fact, the yellow metal — the traditional hedge against inflation — has lost its sheen during the year, delivering a negative 8% return. With central banks unleashing liquidity by slashing interest rates to near zero, money should have flown into gold. But it did not. Since the global financial crisis in 2008, central banks have pumped in over $25 trillion into the global economy with over $9 trillion in the pandemic period alone. But gold failed to sizzle as cryptos stole the show.

According to Morgan Stanley, gold’s market capitalisation has, historically, hovered around 5-15% of global GDP, rising to 10-15% post economic crises when demand for safe haven assets tends to increase and re-inflationary policies are employed. If Bitcoin, states the report, were to capture 50% of gold’s demand that is driven by its use as a store of value, its market cap could reach $6 trillion by 2025 — that’s over 2.5x the current market value.

And it’s not without reason. “In this inflationary period, Bitcoin has outperformed gold. Bitcoin and other digital currencies are widely regarded as a shield against inflation mainly because of its limited supply, which is not influenced by its price,” says Nigel Green, chief executive and founder of deVere Group, an independent financial advisory firm.

For instance, only 21 million units of Bitcoin are programmed to ever exist, unlike other digital currencies and tokens whose supply could increase based on demand and supply. Not surprising, it accounts for a chunk of the crypto market cap.

Beyond Bitcoin, the crypto basket has enough and more to offer — some promising, some duds.

The Big Basket

The crypto universe is classified into 26 categories such as store-of-value tokens such as Bitcoin, Litecoin and the likes, yield-farming tokens such as Aave, decentralised finance and non-fungible tokens. Then there are Stablecoins which derive their value from traditional assets. For example, USDT derives its value from the US dollar, while gold GLC is tied to the value of gold. There are cryptocurrencies, such as Siacoin, created to finance special projects aimed at solving real-world problems such as Cloud storage.

But what Indians now seem to love is meme coins, which can be inspired by anything, from original to whacky. Dogecoin, the first meme coin inspired by a popular meme based on the Japanese Shiba Inu dog, began trading in 2020. While there are over 250 meme coins, Sogani cautions investors to stay away from these since they offer no real value. “Most meme coins have no use case and, at best, investors can restrict its exposure to 1-5% of the overall crypto portfolio,” he says.

What would also be interesting to see is what kind of protection investors would be granted under the law as crypto scammers stole a record $7.7 billion in 2021 from users through a scam termed “rug pulls,” wherein developers abandon cryptocurrency projects and flee with users’ funds. Like what happened recently with a meme coin Squid, whose price surged from $0.01235 to $2860 before falling to zero as crypto owners vanished with over $3 million of retail investors’ money. Though Tesla CEO Elon Musk has been the biggest influencer of Dogecoin, stating that it can be potentially promising, its volatility has been unnerving.

Sogani believes that’s where crypto regulations will come in handy as it will force Indian exchanges to be more cognisant of the risks from such currencies. “Right now exchanges have no legal obligation,” says Sogani. However, for informed and bespoke investors, players such as Crebaco offer services where currencies are rated similar to credit ratings. For instance, while Bitcoin, Ethereum and Litecoin are AAA rated, Solano, Cardano and other eight currencies are AA rated. The rest are either A, BBB, or not rated. (See: The Grade)

What will help investors is also when cryptos get institutionalised.

What once was a widespread frenzy among retail investors is becoming a den for the stodgy boys of finance. As of the first week of December, total asset under management of crypto fund providers stood at $73.04 billion with Grayscale, the biggest digital asset manager, holding $50.99 billion, CoinShares with $5.88 billion and 3iQ of Canada with $2.65 billion in assets.

Green believes institutionalisation will only increase in the coming years. “The ‘inflation shield’ will bring to the crypto market growing investments from major institutional investors, and with them capital, expertise and reputational pull. This will further drive up prices,” he says.

However, Nikhil Kamath, founder of hedge fund True Beacon, believes there are still no fundamentals driving cryptos, compared to the $7-trillion-a-day forex market. “It’s a wild ride. And the big difference out there is that fiat currencies are still backed by governments unlike cryptos.”

Also, for an asset class to gain acceptability it has to be seen adding value to a portfolio and that’s where cryptos have a lot to prove. According to Christian Mueller-Glissmann, strategist at Goldman Sachs, a small allocation to Bitcoin in a standard 60/40 portfolio since 2014 would have resulted in a strong outperformance, owing both to higher risk-adjusted returns for Bitcoin compared to the S&P 500 and US 10-year bonds, and relatively low correlations between Bitcoin and other assets. But here comes the rider — the analyst mentions that the outperformance was largely owing to a handful of idiosyncratic Bitcoin rallies, making it too soon to conclude how much value it adds to a balanced portfolio.

A look at the accompanying listing of the Top 100 cryptos shows why faith won’t come easy. Only the brave will venture into investing looking at the wide and wild returns, especially by the ones outside the top 10. “This kind of volatility will only attract traders and first-time investors who think they can double their investments within a short span of time,” feels Kamath.

While currently there are exchanges offering Indians the opportunity to invest in cryptos, it’s a field day out there with some start-ups milking investors out of their ignorance. In the absence of any regulations, there are no standard fees or charges. What’s more, even the rates of cryptos could vary from one player to another.

In an earlier interaction with Fortune India in August, Ashish Singhal, co-founder of CoinSwitch Kuber, had revealed that the company offers a differential-pricing approach depending on the investment ticket size. “An investor doing a ₹1 lakh trade gets a different price from one investing ₹100,” Singhal had said. In short, CoinSwitch gives its users a fixed rate with no fluctuation and they have to “simply click buy” at the pegged rate. So, the person investing a fractional amount will still end up buying at the highest end of the price band. Not to mention the commission and fees that he ends up paying which is anyway not revealed to the buyer. Also, according to Sogani, Indian exchange prices are, on an average, 5% higher than international prices. Considering that crypto volatility is five times higher than that of gold, it makes it all the more risky. In fact, in the run-up to the December US Fed meeting, cryptos turned highly volatile amid a selling bout. “The recent selloff was triggered by a wider risk-off sentiment that also impacted global stock markets as a running hot inflation is encouraging central banks to tighten monetary policies, putting at risk the liquidity that benefitted several asset classes,” explains Green.

Edward Moya, analyst at Oanda, which offers currency data, forex exchange rate services, among others, believes that since it was the third consecutive year as the top-performing asset class, cryptos were ripe for selloff. “It has been a rough few weeks for cryptos as profit-taking emerged, some massive hacks took place, and high-frequency trading systems and algos went aggressive with momentum selling,” he says.

But in the year to come, Moya believes cryptos will first take a cue from the Fed on whether or not they made a policy mistake “If Fed completely got its inflation reading wrong and has to deliver an accelerated rate hiking cycle, it could lead to panic selling of risky assets, which would include a massive crypto plunge. If the Fed is able to deliver a couple of rate hikes while inflation starts to edge lower, cryptos should have another strong year,” he says.

Interestingly, Bitcoin’s dominance has been on the wane — from more than 80% share of the overall market cap it is now down to less than 50%. Solana is a new currency on the block that Green believes will do well in CY22. “It will outperform both Bitcoin and Ethereum again next year due to its superior high transaction speed — processing over 2,500 transactions per second vs 15 for Ethereum — at a lower cost without compromising on decentralisation,” mentions Green. Moya feels though Bitcoin might underperform Altcoins next year, it will still likely outperform gold.

For now, as Sogani says, investors are better off investing in cryptos based on their real world applications rather than getting mesmerised by low unit prices. For investors seeking that extra bit of alpha in their portfolios, flip over to have a glimpse of what the Top 100 crypto playbook looks like.

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