India seems to have a love-hate relationship with Cryptocurrencies. Every single day, there seems to be new speculation of regulation that will determine the fate of crypto in our country. Some folks in the government are for the new technology, some are strongly opposed. And as investors, that leaves us with our hands in our pockets wondering what on earth we should do. Should we invest? Should we continue to wait for more news about what will happen? How do we even analyze a crypto as a possible investment? All of that and more, to come in this episode. In this episode, we spoke to Anurag Bhatnagar, who’s the co-founder of ShiftAltCap, which as an investment management firm based in India.
Armaan Khendry: From ticker-tape. This is where's my money. India seems to have a love, hate relationship with cryptocurrencies. Every single day, there seems to be some sort of new speculation on the regulation that will determine the fate of crypto in our country. Some folks in the government are for the new technology, but some are strongly opposed.
And as investors that leaves us with our hands in our pockets, wondering what on earth we should do next? Should we invest? Should we continue to wait for more news about what will happen? How do we even analyze whether a cryptocurrency is a good investment for us? All of that, and more to come in this episode.
In this episode, we spoke to Anurag Bhatnagar. Who's the co-founder of ShiftAltCap, which is an investment management firm and to begin with, we spoke about the current scale of cryptocurrency in India. PS: it's much bigger than you'd think.
Anurag Bhatnagar: So. Let me start with the good news first. India has the largest number of crypto users and registered users in the world on the last count in September 2021, the number had crossed 10 crore users. The second highest number of users was in the US at one fourth of that 2.7 cross. And there's obviously something which has taken Indians by surprise and Indians have taken cryptocurrency by surprise, both. Because they see this as not just asset. They see it as a new form of financial system coming up across the world, which is borderless, which is not controlled by any intermediary, which maintains your anonymity and flexibility and freedom, that has really attracted a lot of people. Of course, the kind of returns they have been seeing over the last a year and a half has also acted as a very big catalyst.
Despite all of the advantages that Anurag just mentioned, the Indian government and the RBI have had a love, hate relationship with cryptocurrency. And here's why.
The stability of the economy comes out of the ability of the central bank to regulate the supply of money. When you have cryptocurrency, the supply can technically be unlimited because of which, it could lead to inflation hyperinflation. It could lead to dilution of the power of the state, which is why RBI in 2018 band it..
Then in March 2020, Supreme court reversed this decision. And they said, look, you can buy a crypto as an asset, just like you buy a car or you buy shares, but it is not a legal tender, which basically means that you cannot use crypto to buy and sell goods. You cannot use it to pay for goods or services. For example, if you want to buy a pizza, you can't pay for it using crypto just like you can't pay for a car by giving some shares or by giving some bonds. So it's not a legal tender. However, it is legally allowed as an asset.
The RBI initially banned cryptocurrencies because of fears of inflation. Some cryptocurrencies do not have caps, which means they don't have a limit on how many coins that could exist in circulation. So in theory, if the supply of the coin is endless, and if there isn't enough demand to equal that supply, the value per coin will continue to diminish. And that in turn would lead to Hyperinflations . And regulating the supply of money to prevent instances of hyperinflation is a major part of the RBI's job.
So you can understand they're skeptics. But despite these fears, the initial ban was reversed, except for one caveat that cryptocurrencies would only be allowed as an investment vehicle as opposed to legal tender, which basically means you can't pay for anything using that currency. Now beyond the supply of money, there is one more fear that the government has about cryptocurrencies.
Crypto is the ideal method to do hawala and government suspects, it is possibly happening. People are not able to figure it out. Then government also fears that it could be used for terrorism, or it could be used to run drugs or guns. And that is a risk, which is a risk to the country, to the nation. For example, let's say you are sitting in the US and i am sitting in India, and I have to send some money to you. I'll send it through the banking routes, which basically means that I'll give it to the bank here. The bank will transfer the money to your bank and your bank will pay a credit to your account. It goes through this official banking route where your bank and my bank, will ensure the money is tracked, traced, and recorded.
It can be, checked on later for verification, for taxation purposes, for reporting and all that. But in a cryptocurrency, I can send the money to you bypassing the banks that supports a lot of hawala. But what is hawala? Hawala, is basically I give money to a hawala operator in India and his counterpart in the US gives you dollars.
The Indian, how it operator and the American hawala operator. And they do a netting off every day or every week or every some period. Now this bypasses banking laws, this bypasses formal channels, and it could be a threat. It could be a risk. A lot of hawala is happening in India and the government wants to bring it down, reduce it at some point of time stop it because that is the informal economy that is untracked, and that is unchecked. So there are factors which are driving the adoptions are also risks inherent in the system. So government wants to bring about some kind of regulation. One part of the government saves it should be banned. Another part of the government says let's be pragmatic about it. Let's try and do something. Build regulations, which enable this industry, which basically is a new technology. Let us not kill it. Let us ensure that it is enabled to grow and a law which basically takes care of both sides is expected to come in the winter session of this parliament.
Armaan Khendry: The amazing thing about the underlying technology behind cryptocurrencies, which is blockchain, is that it's decentralized, which means there is no one central body that controls transaction, which means it can't be tampered with, for corruption.
Ownership is easily tracked and is completely immutable, but because of the very thing that makes the technology so incredible. Also, makes it very tough for the government to put in the necessary checks and balances that are required to stabilize an economy. Recently, there's been a lot of talk about new regulations while we can't know for sure what will happen here are the current updates.
Anurag Bhatnagar: Let's talk about what different stakeholders are saying. So the inter ministerial committee, which was headed by the secretary economic affairs, wants only that RBIs crypto should be allowed and all other crypto should be banned. That is one extreme standard, which is also what RBI was thinking.
The other extreme stand is that of which some of the players are asking, saying that look just like the US allows you to also allow crypto to be not just a legal asset, but also legal tender. In between there are all shades of grey. I think what the government is looking for is regulations. To prevent misuse for terrorism , for money-laundering to bring regulation some somewhat around it. And also ensuring that investor protection is brought about. For example, if I were to send money to you and I want to reverse a transaction, I can ask my bank to reverse a transaction because there's a bank sitting in between, but in crypto, once I send money to you, let's say your bank account is 1, 2, 3.
And by mistake, I type two. Now the money will go to two and three account holder. I don't know who he is. He doesn't know who I am and I cannot reverse that transaction. So there will be a lot of investor protection coming in terms of dignity, advertisements, that mis-sell. So the way I look at it, my perspective is that it'll be a balanced regulation, balanced law, which enables crypto as an asset, but I seriously doubt if the government will allow like a legal tender, at least not at this stage anyways, I'm second guessing what the law actually comes out, I don't know, but this is what I think it should.
Armaan Khendry: We can't be sure of what's going to happen, but given the current scale of crypto in India, it seems farfetched that the government would actually ban it even as an asset.
But again, we can't know for sure, but just for fun, let's assume it will stay legal as an investment vehicle. And let's explore how to yield returns from it. As a highly experienced investor himself, we asked Anurag whether he would invest in cryptocurrency or not.
Anurag Bhatnagar: So let's look at what the market is doing in April, 2020, one month after the Supreme court overturned the ban by RBI, the total crypto market in India was about 900 million dollars. 14 months later in May, 2021, it grew seven times to $6.6 billion. Now that basically shows that there's very clear demand for it. People are looking at it as an investment and all the same period of time. We see the, if you correlate to the rates going up, we see that, the crypto rates have really gone up delivering very strong returns, but also equally volatile people have lost money. People have also made money. As an investor I would definitely put some money in crypto. Why because I see that number one, it is definitely an asset, which is a high-risk high return asset.
I would look at putting 5% to 10% of my portfolio into crypto. Why that percentage, because worst case scenario, if I lose the entire 10% it is roughly equal to one year's earning on the remaining 90% portfolio. So let's say my portfolio is a hundred and I put a 10 into crypto and 90 remains in my other assets, which are generating, let's say 10 to 12%. So that 12% is roughly around 10, 12% of nine to 10 rupees. That ten if I lose it, I still don't lose my original capital i recover it within one year. But if that ten grows and shows me a return of let's say a hundred percent, if the 10 goes to 20, the impact on my overall portfolio could be significant pulling up of the overall portfolio return on investment.
So the idea is that it's a high-risk high-return investment. We should put some money into it, but not beyond a small percentage because as we both know people hate to lose money.
Armaan Khendry: Now that we know how much of our portfolio to allocate into cryptocurrency investments, how on earth do we begin to decide which cryptocurrencies to invest in?
There are literally thousands of options in the world of stocks. You can use mechanisms like their balance sheet, PE ratios, discounted cash flows, and a ton of other metrics to evaluate whether you should invest into a company. But when it comes to cryptocurrencies, what metrics should be analyzed before we make a decision?
Anurag Bhatnagar: Let's break it down into pieces as to when I invest in a new asset class, what do I see? I look at the past historical record, I will look at what is the market cap? Is it largely traded? What is the daily turnover. And is it liquid and, some experts, for example, say that liquid crypto would mean at least a hundred thousand units being traded every day. If the daily data volumes are so low, that you are not able to sell, then that asset should be stayed away from, it is like a real estate. When you want to sell, you are unable to find buyers or you are unable to find the right price. So I would give the example of the stock market. You would find that, the blue-chip stocks are traded quite heavily generally, and you will find that if you want to sell it, it'll easily sell.
But if you look at some of the penny stocks or you look at some of the small cap or mid cap stock, you would find that they are not heavily traded. Why? Because very small portion of the company's capital is listed. SEBI says that minimum 25% has to be listed. But if the company has not listened more than 25% and you want to sell those shares, you may not even find buyers.
Similarly in the crypto space. When you want to sell, you should be able to find buyers who can help you sell your asset. Then we should look at what exchanges have traded. One is regulated or unregulated. What platform is it linked to? Is a standalone or is it linked to a platform like Ether is linked to Ethereum or we should look at what wallet is it stored on Robin hood, for example, mandates that, uh, if you buy a crypto through Robin hood, you have to save on Robin hood wallet, but there are other exchanges which say that you can store it on a separate wallet. Now, if you store money on a wallet and if the wallet, is not secure enough, you could lose the money. So I would recommend Coinswitch Kuber as the one exchange.
Why? Because it is the exchange of exchanges. What was happening earlier was that there were crypto exchanges all over the world and they were, having differential prices. So for the same Bitcoin, you could find different prices on different exchanges. That price volatility has been reduced to a significant measure by Coinswitch Kuber. And the fact that it is very easy to use user features are much, much better. Then finally, once these basics are determined and I'll go back and look at some more deeper aspects, like, what is the authenticity? What is the community and ecosystem behind it? What is the user adoption? I would look at, for example, where on the S-curve are the users. So are they at the very initial stage? Are they at a stage where it is taking off or that it's taken off? And there's a reason why Bitcoin has 60% market share. According to underdog, there are three major metrics that you need to be looking at before making an investment decision into a cryptocurrency.
Armaan Khendry: The first is liquidity. Is there enough trading of this particular asset on a daily basis? This will allow you to understand whether you can sell the asset whenever you see fit. The second is buy your currencies from a trusted exchange. Finally evaluate how mature the cryptocurrency is in the market.
If it's been successfully growing for awhile and survived the test of time, the chances of it continuing to be successful, are all the more higher. So to conclude, we don't know what regulation will be put in place, but all signs seem to point toward it being allowed as an investment vehicle. Now remember invest responsibly it's high risk, but also potentially high reward.
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