CA Rachana Ranade spells out the importance of doing fundamental analysis of crypto tokens before investing

“Just like you do the fundamental analysis of a stock, you should do the same for a crypto token,” said CA Rachana Ranade at the recently concluded ET Prime Crypto 101 Special, where she highlighted the need for investors to understand the underlying value of a crypto token as well as the problem it solves before considering investing in it.

A chartered accountant and teacher turned financial influencer (finfluencer) with over 3.6 million subscribers on YouTube, Rachana has a flair for explaining complex financial products and jargons in a fun, easy-to-understand manner.

She did the same during the hour-long virtual ‘Crypto 101’ session on ET Prime where she demystified various aspects of crypto investing through simple, everyday analogies and fun anecdotes, while also breaking out into a Bollywood song to make a point about key financial lessons to keep in mind.

Watch the full video here.

The focus on crypto markets has intensified in the past week amidst heightened market volatility and risk sell-off, with the global market capitalization of all crypto tokens declining to over $1.3 trillion.

Experts attribute the broad selloff to global concerns over inflation, rising interest rates, and geopolitical issues, which are weighing on market sentiment. They also believe the correction in crypto markets is mirroring that in the traditional financial markets, weighed down by rising fears of a possible recession and pressure on oil prices.

“A buzz was created around crypto after certain tokens shot up and people started investing due to the fear of missing out. However, that is never the right approach to investing in any asset class and the first step should be to gain knowledge. Once you have some amount of knowledge, it is great to start investing with a small amount,” Ranade said.
That small amount to be used to make your initial investments could be in the form of a ‘party fund,’ where you set aside money that would otherwise be spent in just one dinner party with a few friends, she said, adding that investors should be “...learning and then earning, rather than investing only for the fear of missing out.”

For this reason, doing a fundamental analysis of a crypto token before investing in it is just as important as it is for investing in stocks, Ranade said.

“There are coins that do not have any inherent value and follow pump and dump schemes. Investors must analyze where a crypto token derives its value from,” she added.

To understand the underlying value of any crypto token, investors should analyze the problem it solves, its core use case, and the logic behind why that crypto token was created, before taking the decision to invest in one, Ranade recommended.
Watch the full video here.

Drawing comparisons between traditional financial markets and crypto markets, Ranade said investors should also make time to go through the white paper of a crypto token to understand it better.

The white paper of each crypto token is equivalent to the draft red herring prospectus of a public company and contains important details about that particular crypto token, Ranade explained.

“If you are a beginner in equity investing, the first advice you get is to invest in blue chips and those stocks which are comparatively big. The same logic I apply for cryptos as well; in tokens which have large market capitalisation. So the obvious choice would be something which is there in the top 10 tokens,” she said.
Ranade also explained the five point criteria for an asset to be classified as a virtual digital asset while answering questions about blockchain technology and non-fungible tokens.

Highlighting the difference between crypto investing and crypto trading, Ranade detailed why she believes crypto trading may not be suitable for every investor.
She also spoke about the evolution of the regulatory environment for the digital asset and answered questions related to taxation of the asset. The government’s announcement of a tax liability on crypto assets signals its recognition of crypto as an asset class and as such, is unlikely to be banned in India, said Ranade.

“What the government is doing to bring this asset under the regulatory net is a welcome move and a strong regulatory framework will evolve over time… and is in the best interest of the investors,” Ranade added.

Watch the full ‘Crypto 101’ session with CA Rachana Ranade on demand on ET Prime. Link here.

Disclaimer: “Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.”