Should you do cryptocurrency SIP? Systematic Investment Plan Bitcoin, Ethereum, Dogecoin

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Investing in cryptocurrency is a high-risk activity. Several experts would advise you to invest or trade in crypto with the money you won’t regret losing. Not just from the volatility point of view, in terms of regulations also there is not much clarity. In India, RBI has been warning investors against holding cryptocurrencies. Yet, people continue to invest and in fact, the crypto community in India is bullish on the future.

Even after considering all the risks involved, if a person decides to invest in cryptocurrencies, he can do that in many ways. One of them is SIP, currently being offered by some exchanges in India. A person can do SIP independently also by buying crypto for a fixed amount daily or monthly basis and storing it in his/her own preferred wallet or in hardware wallet. However, one question does come to mind, as to whether one should do SIPs in cryptocurrencies or not?

Many financial experts believe that after considering all the risks and volatility, SIP may be a preferred route for building wealth through cryptocurrencies for first-time investors.

Dr. Vinay Asthana, Associate Professor at Alliance School of Business, told FE Online, “The key advantage of a systematic investment plan (SIP) is that the problem of timing the market is rendered irrelevant. This makes SIP an effective strategy in the face of market volatility. Moreover, if markets are efficient, timing the market is likely to be a difficult and often futile exercise.

SIP makes sense for long-term investors of traditional assets like stocks and mutual funds. When it comes to cryptocurrencies, Dr Asthana said crypto assets are several times more volatile than traditional asset classes. This constitutes a strong argument supporting SIP for crypto assets.

However, Dr Asthana pointed out several factors that weaken the argument favouring SIP in crypto:

• Although evidence is mixed, the crypto markets are not as efficient as stock markets.
• Over the short history, crypto-assets have generated the highest returns among all asset classes. But, is it sustainable? This is a question that has polarized the world. For some, it is a revolution comparable to the internet revolution; for others, it is nothing more than a bubble. While the technology is unstoppable, the investment implications are far from clear.
• Investment implications are further confounded by the fact that the valuation of crypto assets differs from traditional assets in fundamental ways.
• On top of this, the possibility of adverse regulatory changes remains a serious risk factor.

“Considering these facts, SIP in crypto assets appears to be a sensible strategy but it should be taken up in a limited way because several fundamental issues regarding crypto-assets remain unsettled,” said Dr Asthana.

Archit Gupta, Founder and CEO, Clear, said, “Cryptocurrencies are not legal tender in India. There are significant uncertainties about cryptocurrencies as RBI has time and again warned investors against holding them. Moreover, cryptocurrencies are highly volatile, with drastic fluctuation in prices within days. You should exercise extreme caution before investing your life savings in cryptocurrencies.”

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Gupta, however, said that if you seek to invest in cryptocurrencies SIP, may be the preferred route as you spread your investments and average out your purchase costs over time.

“Many platforms allow you to start SIPs in cryptocurrencies with just Rs 100-Rs 500 per instalment. Moreover, many investors opt for the daily SIP over the weekly or monthly option as the price of cryptocurrencies may fluctuate heavily within a timeline of one month. You may consider investing in cryptocurrencies through SIP if you are a first-time investor who seeks to invest small amounts. However, platforms may offer the SIP facility only for the leading cryptocurrencies,”  he said.

Control impulsive investment

Cryptocurrencies are one of the most volatile instruments available for investment. Many times investors are driven by their impulses. However, this may be dangerous. SIP may help control this impulsive investment.

“Due to large fluctuations in their prices, it becomes crucial to strategize the entry and exit points of these investments. In this context, an investment technique like SIP which reduces exposure to market volatility risk of the investor is extremely helpful. SIP will also help in avoiding impulsive investment in cryptos. Apart from SIP, other risk-mitigating strategies which are getting popular for investing in cryptocurrencies include investing in a basket of cryptocurrencies or opting for index funds,” Prof Purushottam Anand, Assistant Professor at IFIM Law School, said.

“There are also index funds that only have exposure to the top 10 or top 20 cryptocurrencies. However, since most of these investment products /platforms are not regulated in India, investors must carefully analyse and research any such schemes before investing. It may also be helpful to consult a financial advisor before investing,” Prof Anand added.

(Disclaimer: The suggestions/recommendations around cryptocurrencies in this story are by the respective commentator. Financial Express Online does not bear any responsibility for their advice. Please consult your financial advisor before dealing/investing in cryptocurrencies.)