Over the past year, gold prices gained just over 5%. During the same time, the 30-share S&P BSE Sensex rose 7%. Since January 2022, gold has been down 5%, while the Sensex is also down by 8.2%.
When share prices fall, gold is a natural hedge. You tend to buy more tangible assets when there is panic in financial markets. Historically, gold prices do better when equity prices go down. There’s a lot of research on the correlation, and you can look it up online.
Over the past year, though, the two have been moving in tandem. A reason for that could be bitcoins and related crypto assets. A lot of you have jumped the crypto assets bandwagon. Media reports indicate an estimated 1.5 to 2 crore people in India own some crypto asset.
New-age fintech brokerages are enabling ownership of such investments. The Union Budget announced in February 2022 imposed a heavy transactional tax on crypto assets. Since January 2022, the price of Bitcoin has slumped 35%. It is down 16% for the trailing twelve months. Ether is down 6.6%, while Dogecoin is down 70% during the same period.
With such volatility in the prices of significant crypto assets, the number 1.5 to 2 crore needs a perspective. There are about 8.9 crore demat accounts in the stock market. According to the data from the Association of Mutual Funds in India, the number of mutual fund folios is 10.4 crore as of April 2022. A significant number of you are holding a portfolio with crypto assets and balancing your investments accordingly.
Why you should worry
Last week, the Reserve Bank of India governor Shaktikanta Das warned against the ‘dollarisation’ of India’s financial markets due to rising ownership of crypto assets. There are billions of dollars invested in them. The RBI governor explained to a Parliamentary panel last week that since crypto assets are denominated in dollars, it reduces RBI’s hold over a significant part of the financial markets. The Indian government exercises control over the currency through the RBI. If crypto-currencies or assets are tradeable and dollar-denominated, the RBI cannot monitor the money supply in the financial system. A vital function of the RBI is to control inflation. As a result, a proliferation of unregulated crypto assets denominated in the US dollar poses a risk to the Indian financial system.
While all of that is a reason to worry, you have to ensure that your finances are not at risk. If you get sudden wealth due to your crypto investments, you must try to fortify your finances impregnable. You must put all the money into a monthly income savings plan or government bonds. You can generate a second income for yourself with the help of those profits and secure your finances for life.
However, if you are a late entrant into the crypto world and wonder about the sudden selloff, you may want to pare your losses. In terms of regulations, things could get complicated. Crypto assets primarily challenge the sovereignty of states. If people accept crypto assets as currency, that undermines the RBI (and the government), who are the sole issuers of any money in India. They will not cede control over money in any manner. As an investor, expect as many roadblocks as possible.
What should you do
There is very little sense in owning an asset worth a lot but cannot be traded freely. You need to rethink asset allocation and ensure that you do not bet too much on crypto assets. If you have made money by selling crypto assets, you should use it to secure your financial future. You can create a fund that generates an income perpetually. We have often talked about learning about investing in the column. That applies to any asset class you own. You need to observe patterns and learn about risks associated with every asset class. You need to put an effort into reading about them. That is because there is no such thing as ‘easy’ money.
10 crore
According to the data from the Association of Mutual Funds in India, the number of mutual fund folios stands at 10.4 crore as of April 2022.
(The author is editor-in-chief at www.moneyminute.in)