Vihaan, a clothing store owner in Hubballi, wanted to buy a luxury bungalow. However, he lacked the money to fulfill his dream.
Impressed by the crazy profits that his friends were making with cryptocurrencies, he also decided to invest in this new digital asset to reach his goal faster. However, one morning he woke up to find that he had lost Rs 10 lakh in the cryptocurrency market.
Vihaan tried to mitigate his losses by investing in other cryptocurrencies, but his losses only increased. The crypto fever that had gripped him subsided.
Vihan is not alone. Many people like him hope to make money from investing in cryptocurrencies.
Thanks to the novelty of the concept, he quickly attracted everyone’s attention. There is so much hype around this concept that one of the most frequently asked Google questions in the financial industry is whether to invest in cryptocurrencies instead of stocks.
According to Forbes, “Cryptocurrency is a decentralized digital currency based on blockchain technology and protected by cryptography.”
Blockchain, a digital ledger, records transactions related to assets.
Access is shared among its users and the information it contains is transparent, instant, and immutable since not even an administrator can modify it.
Now that you know what cryptocurrencies are, it’s time to learn more about the negative dimensions.
The cryptocurrency wave has taken the world by storm, capturing institutional and retail investors alike. But with the growing interest of those pumping money into the industry, so does the interest of hackers, fraudsters, and other types of cybercriminals.
The list of these scams is long and endless. Illegal wallets recorded $14 billion worth of funds in 2021 alone. Crypto fraud can be as simple as phishing and fake websites or more complex like NFT mat pulls (non-fungible tokens). They are particularly difficult to detect, and sometimes stolen funds are nearly impossible to trace.
What is Rs 10 today may rise to Rs 100 tomorrow and drop to Rs 0 exactly one day later. This is a mirage, not real money. The crypto market had multiple historical ups and downs throughout the year, resulting in significant gains and losses for many investors.
There is no doubt that the cryptocurrency market is very volatile.
As reported on CNBC in February 2020, cryptocurrencies are essentially worthless and produce nothing. They don’t reproduce, they can’t send you a check, and they can’t do anything. You expect someone to come along and pay you more money later, but then the problem shifts to that person.
In terms of value: zero. To deposit! Red alert, investor.
Income from the transfer of virtual digital assets is taxed at 30% in India, that’s high isn’t it? Higher and riskier than other investment options available. Although a high tax does not make cryptocurrencies legal, there have been many unconfirmed reports of a ban on private cryptocurrencies in India. In fact, just yesterday in Parliament, the government clarified that losses from trading one virtual digital asset (VDA) cannot be offset by profits from another VDA. Along with the high tax rate, this clarification is another attempt to dissuade people from trading cryptocurrencies.
Experienced investors need to know exactly what they are investing in. It is crucial to weigh the risks and rewards of investing and what leads to successful investments. If investors like Vihaan don’t have that kind of information, they can’t calculate. In this case, it is not an investment, but a bet.
Investing in cryptocurrency is not really bad. However, given its various dimensions, cryptocurrency can be a risky investment and one should only consider investing if one is financially equipped or is willing to lose money given the volatility. There has to be a reasonably successful investor like Warren Buffett don’t favor crypto.
If cryptocurrency isn’t an option, how would someone like Vihaan, who has reasonable risk tolerance, modest disposable income, and a high standard of living, plan to make money through investing?
Of all the differences between stocks and cryptocurrencies, the most important is that a stock is an equity stake in a company and is backed by the assets and cash flows of the company. In most cases, a cryptocurrency is not backed by anything.
Simply put, a quality investment is nothing more than an investment in stocks of companies that are fundamentally very sound. They are large franchises with long-term sustainable business models. It has a track record of credible long-term profitability with strong and predictable cash flows and a high and reasonable return on investment. Its growth potential and its economic gap are strong. With honest and competent management, they focus on healthy profit margins and strong balance sheets.
Using these qualitative metrics, the following quantitative metrics are used to create a quality portfolio of 14 companies (stocks) known for their excellent long-term returns:
Market capitalization greater than ₹1,000 crores (market capitalization = number of outstanding shares multiplied by the market price per share).
The business must exist for at least 10 years.
The business must have consistently generated a profit margin of at least 10% and a return on capital employed (ROCE) of at least 14% over the past ten years.
Although cryptocurrencies are slowly becoming one of the most accepted digital currencies in the world, we cannot say what their future will be. You cannot look at it all day and expect something from it: it is illusion and speculation. Sure, it has its share of efficiency and transparency, but it also comes with a lot of risk and volatility.
“Quality never goes out of style. It is still in style, just as it has been for the last 200 years or will be in 20 years. It is better for investors like Vihaan to consider quality portfolios than the mirage-like crypto market.