Digital assets, the newly invented term, have attracted the interest of many investors and the public. Although it is only in its infancy, it is developing 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 up 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 the same?
None. 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. By comparison, the CBDC is not a cryptocurrency or anything related to the cryptocurrency space. A government body will lead the CBDC.
India plans to launch its own digital currency but it will not act as a cryptocurrency. The Reserve Bank of India will issue a digital currency in the next fiscal year, according to Finance Minister Nirmala Sitharaman.
Even the US government issued an executive order to get more clarity on the launch of its own digital currency. Because of these events, there is a widespread misconception that digital currency will look like cryptocurrency. Let me address 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 the CBDC – which governments around the world are discussing – is the same as a cryptocurrency. Digital currency has only similar functionality as real currency. India’s digital currency refers to a digital rupee, and so does the dollar, which is available in digital form. It can be used to buy products and services.
3) What is the basic distinction?
To get started, you need to understand the fundamental difference between digital currency and cryptocurrencies. Apart from the fact that it does not exist in tangible form, digital currency has similar characteristics to real currency. It can be used to buy goods and services. Your cryptocurrencies, or as I prefer to call them, cryptocurrencies are not legal tender in India, which means they can not be used to buy or sell clothes, smartphones, computers or other goods or services. Investing in cryptocurrency can be compared to buying gold or other financial products whose value is determined by a number of factors. In fact, the government has repeatedly stated that no other form of private digital currency will ever be considered as 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 commonly used as synonyms. 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?
The importance of asset allocation and diversification should never be underestimated as these two factors can make or break your wealth building 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 behind it, the risks involved and the various issues that a particular blockchain project addresses. You do not want to put your money in a meme coin. There was a famous saying that crypto can send you to the moon. But I keep telling people that even though crypto can send you to the moon, who will bring you back?
6) What is NFT?
First, an NFT is not a JPEG image or anything you can create with a single right-click of the mouse. Rather, it is a token created on a blockchain that states that ownership belongs only to you and is unique. Let me explain in more detail: if you break down the word “non-fungible”, you get something that is not interchangeable, because everything interchangeable can easily be replaced with an identical object. For example, cash in the wallet is a classic example; Can’t get more tickets for Rs 2000? Yes, and you can use any of them to buy anything in that price range. It is fully replaceable. However, the reverse is known as “non-fungible”, which refers to anything that cannot be replaced.
Let’s discuss one of the most well-known NFTs, created by Twitter founder Jack Dorsey, who sold his first tweet as an NFT for over $ 2.9 million. Now pretty much 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 is not yours and cannot be sold. Only the person who bought Dorsey’s NFT has the right to sell it because he or she owns it. You may also know what happened to this NFT, which recently went up for auction but only received a bid of $ 280.
7) Treat NFTs more as an art collection than an investment
I tell people that they used to buy paintings by MF Hussain or Piccasso more as art, which pays off, but it was still more love and feelings towards the artist or artist. Also, treat NFT investments as if they were a collection of digital art, because if you treat them as an investment, they can be more risky than buying cryptocurrencies. The main point of the intrinsic value and use of crypto-like NFTs will return, and since these NFTs do not resemble your stock market or gold investments, only time will tell their true intrinsic value. My advice would be the same as for crypto: first understand this sector, pursue your financial goals by better understanding your risk profile, and do not invest in anything for a quick gain and products that do not match the achievement of your financial goals.
8) Invest only what you can afford to lose
Why do I say this? Because digital assets are still a new beast in the market and we have seen how volatile this market can be. In fact, good blue chip coins also dropped almost 60-70% in a single day.
And 30% tax on gains as well as the inability to offset crypto losses in one coin with gains on other coins is something you should consider before investing. To top it off, the government, as previously mentioned, has not yet published its rules. This is why I recommend that you do not invest more than two to five percent in cryptocurrency unless you have a thorough understanding of the market and are subject to your risk profile.
The author is a Certified Public Accountant and Mentor for NRP Capitals.
The thoughts and opinions shared here are those of the author.
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