9 things you should know before investing in cryptocurrencies

Cryptocurrencies have gained popularity on the back of the high returns they have given over the period of time. The easy buying and selling procedure at the click of a button has made it a rage especially among youngsters. From small towns to people living in metros all seem to be inquisitive about the prospects of investing in cryptocurrencies. But before you dive deeper into the world of cryptocurrencies here are 9 things you should know about them:

1) Use case: Before investing in a cryptocurrency you should first ask about its use case. You should always ask what is the idea that backs the cryptocurrency, as the inherent value of a cryptocurrency is determined by the value of the use cases associated with it. There are many tokens such as Shiba Inu, which are launched without any idea backing it. Investors should be careful about tokens that do not have any convincing projects and use cases to support their growth.

2) Supply: While the physical money is printed, in many cryptocurrencies like Bitcoin bots are used to mine the cryptocurrency. Bitcoins are limited in supply and currently out of 21 million that will ever be mined only 18.78 million are in circulation. Before investing you should try to understand the demand and supply proposition of these virtual tokens.

3) Legality: Unlike fiat currency which is governed by the regulator, cryptocurrency does not come under the purview of any regulator. Just like gold the prices are primarily determined by the rule of demand and supply. In case of any fraud or crime, there is no grievance redressal mechanism to take up your case.

4) Charges: Before signing up with any exchange, try to do a cost comparison on buying and selling costs. Moreover, associating with transparent and big exchanges is one of the safe ways of keeping yourself away from fly by night operators.

5) Banking services: Before signing up, check with how many banks the exchange is associated with. Check how easy the depositing and withdrawing facilities are so that you do not feel any pressure during the time of buying and selling.

6) High volatility: Before investing in cryptocurrencies you should understand that cryptocurrencies are highly volatile. They go through extreme bouts of volatility and therefore can wipe your money in one go, especially for short term investors. Don’t get swayed by promises of high return. It is advisable to dip your toes first and start with a very small sum of money.

7) Environmental concerns: The latest crackdown in China on mining operations was due to environmental concerns. Bitcoin mining is done through supercomputers and hence mining Bitcoins requires a lot of electrical energy, which is seen as an environmental challenge by many.

8) Fractional buying: Unlike the stock market where you have to buy one complete share, fractional buying is allowed in cryptocurrencies. That means you can easily buy fractions of the digital currency through exchanges with as little as Rs 100.

9) RBI stance: The government has proposed The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, to “create a facilitative framework for an official digital currency issued by the RBI” and “prohibit all private cryptocurrencies in India.” Though the Bill gave an initial impression that there would be a complete ban on private cryptocurrencies different interpretations have been floating around since then concerning the future of cryptocurrencies in India. Reserve Bank of India has time and again made investors cautious and warn them about the risks involved with virtual currencies.