By Prashant Mallik, CEO, Heru Finance
Technology has created a new asset class called crypto-assets. In India, many crypto exchanges have opened up, so crypto-asset transactions have become more popular recently. Investors, businesses, and consumers are all interested in these technologies because they could be revolutionary.
From CY2020 to CY2021, cryptocurrency investments increased by 15.5x, and a total of $139.33 million have been invested to date. To acknowledge the growth of crypto trading, the Indian government introduced a special tax regime for virtual digital assets (VDAs) in CY2021. In CY2021, it increased from $28.10 million to $438.18 million.
With the VDA provisions, the transfer gets taxed, and there is no deduction except for acquisition costs. Moreover, cryptocurrency investors will also be entitled to a 1% tax deduction at source (TDS) after paying their 30% tax. Despite this, experts think cryptocurrencies should be treated like other asset classes to grow the industry.
As crypto is a rapidly emerging field, some myths surround it. For this reason, we have compiled a few of them in this post.
1. Cryptocurrency is too late to invest
At first, cryptocurrency appeared to be a niche fad. However, over the past few years, the phenomenon has spread rapidly across the globe. More information is available today than in the early days, so you must educate yourself before investing.
Crypto also funds non-fungible tokens, like tokenizations of digital assets. If you’re into cryptocurrencies, NFTs are a great investment option. Although Inflation is a concern, cryptocurrencies are still early enough to invest, as their variety of coins keeps growing.
2. Cryptocurrencies aren’t secure
Since central banks do not issue cryptocurrencies, they are considered illegal. Unlike money in a bank, cryptocurrency isn’t insured by the Federal Deposit Insurance Corporation. Cryptocurrencies are powered by blockchain technology and stored in wallets and exchanges. Since they are not recognized currencies, some see them as dangerous. Cryptography, however, uses cryptographic methods to ensure security.
Cryptocurrency storage and access can be risky, but mitigating them by encrypting, linking blocks, and using consensus mechanisms is possible. The cold storage method is not connected to the internet or a network, protecting your cryptocurrency from hackers and vulnerabilities. You can keep your crypto gains safely if you only transfer them to your ‘hot’ wallet when needed. To put it another way, there are ways to keep your crypto investments secure.
3. Cryptographic transactions are anonymous
Traditionally, major investors have been repelled by bitcoin because of its association with criminality and dark corners of the internet. Cryptocurrencies are often associated with seedy elements of society due to their anonymous nature — users can conduct private transactions that banks and governments cannot see.
In the Colonial Pipeline hack, the authorities recovered ransom payments, proving this is false. Crypto is converted into fiat almost every time, according to CNET. Despite the fact that crypto trades are not directly linked to identities, a paper trail is left behind. Also, public blockchains record transactions permanently, and law enforcement is using more sophisticated technology to track illicit crypto activity.
4. Cryptocurrency harms the environment
An aspect of the digital economy that uses energy, such as cryptocurrency mining, consumes much fuel. To release the cryptocurrency, ‘miners’ use high-powered computers to solve complex problems to prevent hackers from exploiting the system.
Blockchain technology continues to evolve, and many cryptocurrencies have minimized their ecological footprints, with at least 39% of bitcoin mining using renewable energy sources, such as hydro, wind, and solar.
Cambridge University researchers with the Bitcoin Electricity Consumption Index have found that Bitcoin has a marginal environmental footprint. At the same time, Ark Investment Management surveyed in 2021 and saw bitcoin as significantly more efficient than traditional banking and gold mining.
5. Cryptocurrencies Are Scams
It’s common for merchants and retailers to accept cryptocurrency, and governments regulate them. Most cryptocurrencies don’t have programming, code, or artificial intent to steal your money. Scammers have created ways to trick people into giving them their money or cryptocurrency.
Initial coin offerings are unregulated fundraising efforts for cryptocurrency startups, and scams have been reported in several of them. Alternatively, someone might ask you to pay your debts with cryptocurrency by pretending to be a government official or accepting unverified transactions. Be aware and knowledgeable about reducing your risk.
Considering the Indian market is still largely untapped by cryptocurrencies, some background info on the topic might help you decide whether to invest. Consider the pros and cons carefully, learn the myths about cryptocurrencies and learn how they’re taxed and used in India before investing.