Invest only what you can afford to lose in crypto, says Nilesh Shah

Nilesh Shah on crypto: Warning investors about the risks associated with cryptocurrencies, Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, advised them to only invest what they can afford to lose. 

“If you are interested in investing trading in crypto, please ensure that your exposure is such that even if it goes away if it disappears, you will be able to take that loss,” said Shah in an exclusive conversation with Republic Business. 

Watch the full interview here: 

“There is no guaranteed settlement, there is no regulator to whom you can go if you are cheated. The transaction costs are enormous,” Shah noted.

Shah said that cryptocurrencies like Bitcoin are not backed by any sovereign guarantee or central authority. Unlike traditional currencies that derive value from government support, crypto operates in a largely unregulated space. He noted, “Crypto is not a set class, it's not currency. Currency is what is backed by the sovereign guarantee of the government. Crypto is not backed by anyone.”

One of the primary concerns raised by Shah was the absence of any standardised method to decide the fair value of cryptocurrencies. He referenced the "greater fool theory" to describe how many investors are hoping to sell their holdings at a higher price to the next buyer. 

“If I have bought crypto at x price today, I believe there will be another person who will buy it at a higher level from me. The day I believe I will only be able to sell at a lower price, the crypto magic will disappear,” he said.

Shah also cast doubt on the long-term sustainability of cryptocurrencies saying that cryptocurrencies are often used by individuals looking to avoid the scrutiny of central banks and regulatory agencies. "It allows you to move money across borders without getting caught by regulators. Will regulators allow this to flourish over a long period of time?" asked Shah.

Shah also said reports suggesting that up to 30 per cent of all Bitcoins mined have disappeared due to hard drive crashes or lost passwords. “The price that you are seeing is only on 70 per cent of the Bitcoin, which now covers 100 per cent of the market cap. If you invest in Bitcoin, please ensure that it is stored properly. Else Bitcoin prices may go up, but you will not make any money like those 30 per cent unfortunate holders of Bitcoin,” he explained.

In closing, Shah advised those still interested in investing in crypto to proceed with caution, ensuring that any exposure is small enough to withstand the potential total loss. “Please ensure that your exposure is such that even if it goes away, if it disappears, you will be able to take that loss,” he advised.