How to Trade Cryptocurrency in India?

Crypto trading is buying and selling cryptocurrencies like Bitcoin to profit from their price fluctuations in the market. Let’s understand how to trade cryptocurrency in India.

Although the first cryptocurrency was launched way back in 2010, it was only a few years ago when Indian traders became aware of virtual assets.

Since recognising this digital currency’s potential, various exchanges offering crypto trading and investment options have been established, and the number of crypto holders has risen significantly. According to data released by a global crypto exchange in 2022, there were over 115 million crypto users in India.

Trading in crypto offers immense potential compared to the traditional stock and bond markets. If you are considering starting your crypto trading journey, this article is for you. 

Guide on How to Trade Cryptocurrency

Here are the steps involved in trading cryptocurrency.

Step 1: Choosing the Right Trading Platform

There are many trading platforms available for cryptocurrencies today. When choosing a platform, consider factors like security features, transaction fees, the variety of cryptocurrencies available for trading, user interface, customer support, and others. 

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Step 2. Setting Up Your Trading Account

Once you have chosen a platform, you will need to set up a trading account. This usually involves sharing a few of your personal details and going through a verification process. Make sure to set up two-factor authentication for added security. Once your account is ready, you can park funds into it. Most platforms accept deposits in both cryptocurrencies and fiat currencies.

Step 3. Developing a Trading Strategy

Your plan should be based on financial goals, risk tolerance, and market analysis. You could opt for day trading (buying and selling within a single day), swing trading (buying and selling over days or weeks), or long-term investing. Use technical analysis tools like indicators and charts to help formulate your strategy.

Step 4. Making Your First Trade

Once you have deposited funds and developed a strategy, you can make your first trade. Single out the cryptocurrency you prefer to trade, decide on buying or selling and mention the desired amount. Before validating the trade, cross-check all the details. After the trade execution, monitor the market and adjust your strategy as needed.

Step 5: Regular Review and Adjustment

Review your trading strategy and performance regularly. The cryptocurrency market is infamous for its extreme volatility and rapid changes. Be prepared to adjust your plan based on market trends. Also, regularly review your profit and loss to understand how your trades perform.

Step 6: Risk Management

Risk management is crucial in cryptocurrency trading. Limit your trade to what you can manage to lose. Employ stop-loss orders to cap potential losses. Spread your investments across various cryptocurrencies to diversify your portfolio.

Factors Affecting Crypto Prices During Trading

Like any other investments, crypto prices are driven by the following factors. 

Supply and Demand

The laws of supply and demand primarily drive cryptocurrency prices. When cryptocurrency is in high demand, while its supply is reduced, the price tends to rise. For example, Bitcoin at a time can be the most 21 million coins. The price increases as more people want to buy Bitcoin while its supply is capped.

Regulatory News and Events

If a major economy like the United States announces a regulatory framework legitimising cryptocurrencies, it could surge demand, driving up prices. Such news reduces uncertainty and increases trust in cryptocurrencies, attracting more investors.

Conversely, if a country with significant crypto investors, like South Korea, announces a crackdown on cryptocurrency trading, it could lead to panic selling. This scenario would increase supply in the market, outstripping demand and causing prices to plummet.

It is important to note that the impact of regulatory news can vary based on the specifics of the news and the overall market sentiment.

Technological Changes and Updates

Changes in the technology or updates in the protocol of a cryptocurrency can influence its price. For example, when Bitcoin underwent a ‘halving’ event (where the reward for mining new blocks was halved), it increased Bitcoin’s price because of the reduced supply of new coins.

Macroeconomic Factors

Macroeconomics studies large-scale economic factors affecting a country or global economy, such as GDP growth, inflation rates, unemployment, and fiscal policies. These factors influence overall economic performance and trends, impacting various sectors, including cryptocurrencies.

For instance, if a major economy like the United States announces a significant increase in interest rates because of high inflation, investors might shift funds from volatile assets like cryptocurrencies to more stable investments offering higher returns, causing a decline in crypto prices.

Basic Rules for Crypto Trading

Keep the following pointers in mind while trading in crypto. 

Understand the Market

Make sure you comprehend the cryptocurrency market before you begin trading. This includes understanding the factors influencing price movements, such as market sentiment, supply and demand, and regulatory news. For example, when Bitcoin halving occurred in 2020, it reduced the rate at which new Bitcoins were created, leading to increased demand and a subsequent price rise.

Start Small

For beginners, it is recommended to begin with a small, manageable investment. This way, you can familiarise yourself with the market dynamics without risking much of your capital.

Diversify Your Portfolio

Diversification plays a vital role in mitigating investment risk. Instead of investing all your money in one cryptocurrency, consider investing across several cryptocurrencies. You may spread your investment across Bitcoin, Ethereum, and Litecoin.

Keep Your Cryptocurrency Secure

Security is foremost in crypto trading. Always use hardware wallets or other secure means to store your cryptocurrencies.

Stay Updated

Knowing the trending news and developments in the crypto world allows you to make better trading decisions and respond swiftly to market changes. Being updated helps you understand trends, regulations, and events that might impact your investments.

Don’t Follow the Hype

Getting swept up in the hype is easy when a particular cryptocurrency performs well. However, making trading decisions based on careful analysis rather than hype is essential. For example, during the Dogecoin hype in early 2021, many bought in at high prices only to see the value drop significantly afterwards.

Learn Technical Analysis

Technical analysis studies statistical patterns in trading data. It focuses on price changes and volume. Understanding this can help predict future price movements. For example, if Bitcoin’s price breaks above a resistance level on high volume, this is a bullish signal that suggests further price increases.

Have a Clear Trading Plan:

Before trading, have a well-defined plan detailing your goals, risk limits, and trade entry and exit conditions. For example, you may set a rule that you will only enter a trade if a cryptocurrency’s price is above its 200-day moving average.

Manage Your Emotions

Trading can be emotional, especially when you are facing a loss. It is necessary to remain calm and stay with your trading plan. For example, if your Bitcoin holdings decrease in value, rather than panic selling, consider whether the fundamentals of your investment strategy still hold.

Taxation on Crypto Trading

The tax obligations on cryptocurrency are governed by section 115BBH of the Income Tax Act. Here are the details:

• Flat Tax Rate: Profits from trading, selling, or spending cryptocurrency are taxable at a flat rate of 30%. This applies whether you have disposed of cryptocurrency (sold or traded it for another cryptocurrency) or earned crypto (received through airdrop or staking rewards).

• Tax Deducted at Source (TDS): A 1% TDS applies on the sale of crypto assets exceeding Rs 50,000 (Rs 10,000 in some instances) in a single financial year.

Legal Status of Cryptocurrency in India

The Reserve Bank of India (RBI), the Ministry of Finance, and the Securities and Exchange Board of India (SEBI) play crucial roles as cryptocurrency regulators in India. However, cryptocurrencies are not legally recognised as tender. You cannot use them in everyday transactions within the country.

The proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 further complicates this landscape. Though its fate remains uncertain, the bill may ban private cryptocurrencies, creating additional uncertainty.

Despite these regulatory challenges, there are positive indications. The Indian government has acknowledged the potential of blockchain technology, as seen in initiatives like the Telangana Web3 Sandbox. This suggests a future where regulated crypto markets could integrate into India’s financial framework.

Conclusion

Trading in cryptocurrency offers the potential for high returns because of its volatility. It provides 24/7 market access, global participation, and low entry barriers. Cryptocurrencies are also seen as a hedge against traditional market downturns.  However, the risks are significant. The market is highly volatile, leading to potentially large losses. Regulatory uncertainties exist worldwide, and there is a risk of hacking into digital wallets and exchanges. It is important to only invest what you can afford to lose, do thorough research, and consider seeking advice from financial advisors. Remember, high reward often comes with high risk.

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Frequently Asked Questions

Q. What are the risks of trading cryptocurrencies?

The worth of cryptocurrencies can oscillate dramatically in short periods, which can cause potential losses. Regulatory changes or bans in various countries can also affect market accessibility and legality. These virtual asset exchanges are also prone to cyber-attacks and operational risks like technical failures.

Q. What are the risks of trading cryptocurrencies?

When trading cryptocurrencies, use strong passwords, enable two-factor authentication (2FA) on your accounts, and verify website URLs to avoid phishing scams. Store your cryptocurrencies in secure wallets, like hardware wallets, rather than leaving them on exchanges. 

Q. Are there any peer-to-peer (P2P) platforms for trading cryptocurrency in India?

Yes, there are peer-to-peer (P2P) platforms in India where parties to trade can deal in cryptocurrencies directly with each other. These platforms connect buyers and sellers, supporting transactions without involving traditional exchanges. This method often includes escrow services to ensure safe exchanges of cryptocurrencies like Bitcoin and others.

Q. What is a cryptocurrency pair?

A cryptocurrency pair is a trading combination showing the relative value between the two cryptocurrencies. It shows how much of one cryptocurrency is needed to buy another. For example, the BTC/USD pair shows how many of US dollars (USD) are required to buy one Bitcoin (BTC), helping traders decide based on price movements.

Q. What is the difference between a cryptocurrency exchange and a brokerage?

An exchange allows users to buy, sell, and trade cryptocurrencies directly with other users. It acts as a platform where buyers and sellers meet to execute trades. In contrast, a brokerage facilitates cryptocurrency trading by acting as an intermediary between the buyer and the exchange, often offering additional services like advice and customer support.