Digital assets, the newly coined term, have piqued the interest of many investors and the general public. While this is still in its early stages, it is evolving rapidly. And one common thing is the desire in everyone’s mind to invest in digital assets as an asset class. Before we even get to that, let me clear 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 cryptocurrencies are all 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 body will govern the CBDC.
India is planning to launch its own digital currency, but it will not function as a cryptocurrency. The Reserve Bank of India will issue a digital currency in the coming fiscal year, according to Finance Minister Nirmala Sitharaman.
Even the US government has issued an executive order to get more clarity to launch its own digital currency. Because of these events, there is a widespread misconception that digital currency will be similar to cryptocurrency. Let me go over this in more detail.
2) Why Cryptocurrency is not the same as a digital currency
Many people mistakenly believe that a digital currency, such as CBDC—that governments around the world are debating—is the same thing as a cryptocurrency. Digital currency only has features that are similar to actual currency. India’s digital currency refers to a digital rupee, and the same is true for the dollar, which can be obtained in a digital form. It can be used to buy products and services.
3) What is the basic distinction?
To start, you must realise the basic difference between digital money and cryptos. With the exception that it does not exist in tangible form, the digital currency has characteristics similar to actual currency. It can be used to purchase goods and services. Your cryptocurrencies, or as I prefer calling them, crypto investments, are not a legal tender in India, which means they cannot be used to buy or sell apparel, smartphones, computers, or any other goods or services. Investing in cryptocurrency can be compared to purchasing gold or other financial products, in which the value is determined by a range of factors. In fact, the government has repeatedly stated that no other form of private digital currency will ever be considered a legal tender in India.
4) Cryptocurrency is classified as an “asset” rather than a “currency”
There is an ongoing discussion about whether cryptocurrency should be classified as a “currency” or an “asset”. Cryptocurrency and crypto-assets are words that are commonly 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?
One should never underestimate the importance of asset allocation and diversification, as these two factors can make or break your wealth creation journey. It sounds simple and obvious, but I still see many investors struggling without a proper asset allocation. Do not invest in cryptocurrency until you understand the technology that underpins it, the risks involved, and the various problems that a particular project is addressing on the blockchain. You do not want to put your money into a meme coin. There was a famous 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?
To begin with, an NFT is not a JPEG image or something you can create with a single right-click of your mouse. It is rather a token created on a blockchain that establishes that ownership only belongs to you and that it is unique. Let me explain further: if you break down the word “non-fungible,” you get something that is not fungible, because anything that is fungible can be easily replaced by an identical item. For example, cash in your wallet is a classic example; can’t you have multiple Rs 2000 notes? Yes, and you can use any one of them to purchase anything in that price range. It is entirely interchangeable. However, the inverse is known as “non-fungible,” which refers to anything that cannot be replaced.
Let us discuss one of the most well-known NFTs, which was created by Twitter founder Jack Dorsey, who sold his first tweet as an NFT for more than $2.9 million. Now, practically anyone can easily take a screenshot of Dorsey’s first tweet for free and save it anywhere. The important thing to remember is that it does not belong to you and cannot be sold. Only the person who purchased Dorsey’s NFT has the right to sell it because he or she owns it. You may also be aware of what happened to that NFT, which was recently put up for auction but received only a $280 bid.
7) Treat NFTs more like an art collection than an investment
I tell people that they used to buy MF Hussain or Piccasso’s paintings more as art, which gives returns, but it was still more of a love and emotion towards the artist or art. Similarly, treat NFT investments as if they were a digital art collection, because if you treat them as an investment, they may prove to be riskier than purchasing cryptocurrencies. The main point of what is the intrinsic value and use case of NFTs similar to crypto will come up again, and because these NFTs are not similar to your stock market or gold investments, only time will tell their true intrinsic value. My advice will be the same as it is for crypto: understand this sector first, chase your financial goals by better understanding your risk profile, and do not invest in anything for quick gain and products that do not fit in to achieve your financial goals.
8) Only invest what you can afford to lose
Why do I say this? Because digital assets is still a new animal in the market, and we have seen how volatile this market can be. In fact, good blue-chip coins have also dropped by nearly 60-70 percent in just one day.
And the 30 percent tax on gains, as well as the inability to offset crypto losses in one coin with gains in other coins is something you should consider before investing. To top it all off, as previously stated, the government has yet to come out with its regulations. That is why I recommend investing no more than two-five percent in cryptocurrency unless you have a thorough understanding of the market and are subject to your risk profile.
The writer is a chartered accountant and mentor to NRP Capitals.
The thoughts and opinions shared here are of the author.
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