Will cryptocurrency market be volatile in 2022? What investors can expect, basic rules to follow

If equity investors had a good year, crypto investors had a terrific 2021. Prices of some crypto coins surged 5,000-7,000%, churning out mindboggling returns for investors.

Even bluechip cryptos like Bitcoin and Ethereum rose 35-40% in 2021. But the trajectory was not a straight line. Bitcoin prices zoomed to touch Rs 51 lakh in April, before falling sharply by more than 50% in May-June when Elon Musk tweeted his concerns about the impact on the environment and China cracked down on crypto trading. As panicky investors rushed to sell, prices of some crypto currencies tumbled 30-40% in hours. Buyers returned in September and Bitcoin price again crossed Rs 54 lakh in November. It has now settled at Rs 39.91 lakh, about 32% higher than what it was at the beginning of the year.

What to expect in 2022

Much will depend on government policies. China, the world's largest crypto market, banned all transactions in September. Analysts say as blockchain technology attains wider usage, this stance will only isolate China from the rest of the world. In India, the government has worked on a legislation to regulate use and trading of cryptocurrencies. The Cryptocurrency and Regulation of Official Digital Currency Bill was to be discussed during the winter session of Parliament but the ruckus over the farm bills prevented its introduction. The Bill "seeks to prohibit all private cryptocurrencies in India. It allows for certain exceptions to promote the underlying technology and its uses".
Basic rules to follow
Though the bill was not discussed in Parliament, the interest among investors has not dampened. However, cryptocurrencies are a new investment class, with very little data for fundamental analysis. Here are some basic rules to keep in mind when entering this high-risk arena.

Invest small amounts: Many crypto coins have surged 5,000-6,000% in the past few months. But don't get carried away by these numbers. As in case of any other investment, one should invest only what one is willing to lose. Even if you have a high risk appetite, don't put more than 10-15% of your overall portfolio in cryptos.

Learn to stomach extreme volatility: This is a high-risk high-reward game and investors must be able to digest high volatility. As the May crash showed, an overnight fall of 70-80% is a possibility. Keep in mind that even a bluechip like Bitcoin is down 25% from its November high of Rs 54 lakh. Enter this market only if you can stomach extreme variations.

Use trustworthy platform: The crypto space is not regulated in India and new outfits are mushrooming every day. Invest through an established and trustworthy platform so that your money does not get stuck if there is a regulatory setback or the promoter company goes under. Investing through an overseas platform may require greater compliance on the tax front.

Don't act on tips: The crypto space suffers from a severe lack of credible data. Investors are dependent largely on unverified information on social media. Self-styled crypto analysts create Whatsapp groups packed with accomplices who vouch for their accuracy. These analysts trap gullible investors, first by charging a fee for the tips and then using them for their pump-and-dump operations.

Focus on blue chips: Like the stock markets, the crypto market also has bluechips, mid-caps and penny coins. Don't get tempted into buying obscure coins just because they are priced very low. Bigger coins may be costlier but are more stable. You can buy in fractions so don't worry about the price. Bitcoin and Ethereum are the bluechips of the crypto space and drive the overall market sentiment.