As the cryptocurrency market continues to evolve, investors are faced with a crucial question—how should they structure their portfolios?

With Bitcoin often considered "digital gold," Ethereum powering the decentralized finance (DeFi) ecosystem, and a growing list of altcoins offering high-risk, high-reward opportunities, the choices are vast.

In an insightful conversation with Kshitij Anand of ETMarkets, Avinash Shekhar, Co-Founder & CEO, Pi42 breaks down how different types of investors—long-term holders, speculators, and those seeking diversified strategies—are allocating their crypto investments.

He also highlights the risks involved and key factors to consider when navigating this dynamic market. Edited Excerpts -

There are two kinds of investors or traders who are extensively exploring the crypto market. One set consists of investors who understand that crypto is an innovation of our generation—similar to how the internet infrastructure was built.

These investors see crypto as a long-term growth engine and have been investing for a very long time. They typically focus on assets like Bitcoin, Ethereum, and Solana, with a long-term investment approach.

The second set of investors is more speculative. Crypto markets are historically volatile and operate 24/7, making them attractive to technical traders. These traders engage in scalping and technical trading, not only in Bitcoin and Ethereum but also in a broad spectrum of altcoins.

If you look at recent market trends, over the past one to one-and-a-half years, institutional investors have started heavily investing in crypto. For instance, MicroStrategy made significant investments, and the approval of Bitcoin spot ETFs has attracted around $36 billion in investments.

I believe institutional investors will now drive growth, which may lead to a decrease in crypto market volatility over the long term. Although crypto remains significantly more volatile than traditional markets, I expect a downward trend in volatility over time.

Despite India’s unfavorable regulatory environment, around 40 million Indians have traded or invested in crypto in the past few years. Going forward, I anticipate increased regulatory clarity, which will have a positive impact on crypto investments.

If you compare crypto with the equity, gold, or real estate markets, one key advantage is that crypto markets are highly liquid. Gold, especially in jewelry form, and real estate are not liquid assets, whereas the stock market is.

Another distinction is that, as we discussed earlier, crypto is truly the technology of our time. While the risks are higher, the potential rewards are also significant. There is a particular group of investors who want to invest in new technology and take higher risks in exchange for potentially higher returns.

Additionally, Bitcoin, in particular, is often compared to gold and is sometimes referred to as "digital gold." However, it offers significant advantages over physical gold—it can be transferred in any fraction, at any time, to anyone. Its transferability and ease of use are much greater than gold, and it cannot be faked.

While crypto shares some similarities with traditional assets, it is a completely new class of investment.

Investing in crypto is essentially investing in future technology with enormous upside potential, albeit with associated risks. Any new technology carries the possibility of failure or challenges.

The crypto market is also not a monolith—it includes established assets like Bitcoin, Ethereum, and Solana, as well as emerging projects utilizing artificial intelligence and blockchain technology.

While Bitcoin's potential rewards are moderate to high with relatively lower risks, newer technologies offer higher potential rewards but also higher risks.

It’s actually both. Some investors view crypto as a high-growth alternative to gold. These investors typically take a long-term approach, investing in assets like Bitcoin and Ethereum and holding them for extended periods.

On the other hand, there are traders who speculate in crypto markets. If you analyze market volumes, most of the activity is driven by traders, who play a crucial role in price discovery.

These traders, or speculators, are interested in short-term market movements. As we discussed previously, technical analysis tends to work well in crypto markets, making them attractive for short-term speculation.

Now, we are also seeing the emergence of a third category of investors—those investing in crypto backed by real-world assets. This approach combines the traditional Web2 space with the decentralized Web3 ecosystem, bringing together the best of both worlds.

For example, a property in Singapore could be tokenized, allowing investors to own a fraction of it through tokens. This means they indirectly own part of the building and can participate in any value appreciation.

These types of use cases are expanding, where blockchain technology and crypto serve as a medium for transacting in real-world businesses.

First of all, a large number of the new coins being introduced require careful scrutiny. Investors must be extremely cautious about whether a project is genuine or just a pump-and-dump scheme. It is essential for people to do their own research rather than blindly following tips and investing.

That being said, when it comes to genuine projects—those with a dedicated team working to make a difference in the ecosystem—traditional investors, particularly long-term investors looking to diversify their portfolios, tend to lean more toward Bitcoin and Ethereum.

Meanwhile, traders and speculators who aim to make short-term gains are more inclined toward Altcoins. However, it’s not always an either-or approach.

Some investors maintain a mix, allocating, for example, 60% to Bitcoin and Ethereum and 40% to Altcoins. These two groups represent different ends of the investor spectrum.

The first thing to understand is that crypto remains a highly volatile asset, especially Altcoins, which experience extreme fluctuations. It is often said that volatility is a trader’s friend, but that is only true if you manage your money properly.

For instance, when making an investment in crypto, you should allocate only a certain percentage of your investable wealth to it—definitely not 100%. It is advisable to start with a small portion, such as 5% to 10%. Even within this allocation, do not put everything into a single asset.

If you plan to trade in Altcoins or engage in day trading, allocate only 2-3% or at most 5% of your crypto portfolio to a single trade. This way, even if you lose that money, you still retain 95% of your capital. Diversification is crucial, even within crypto, unless you are solely investing in Bitcoin.

Second, always use stop losses. Given the high volatility, many traders set both a take-profit level and a stop-loss level when entering a trade. This is because prices can spike and then drop quickly.

Setting both take-profit and stop-loss levels helps manage trades more effectively and prevents major losses. The key principle is to avoid losing all your capital in a single trade.

If you have a long-term perspective and plan to invest over time, the traditional strategy of dollar-cost averaging (DCA) is applicable. For example, if you have ₹5,00,000 to invest in Bitcoin, do not invest it all in a single day. Instead, spread it out—perhaps ₹50,000 or ₹1,00,000 per month—based on your risk profile. This approach helps mitigate the impact of market volatility and provides a more structured investment strategy, even in the crypto market.

It’s a mix. Individual investors continue to largely invest directly. A survey indicated that about 60% of individuals invest directly, which may be a function of the opportunities available. If you look at ETFs and similar instruments, they are not widely accessible—only a few countries, such as the U.S., offer them.

If those opportunities become more widespread, the percentage of individuals investing directly may decrease.

As of now, around 60-65% of individuals invest directly. However, once proper regulations are in place and people feel more comfortable, they may start investing through ETFs.

ETFs, in particular, can be beneficial because, for a regular retail investor, managing crypto custody is not easy. Most people keep their crypto on exchanges, which are vulnerable to hacking. In this context, ETFs become a safer choice.

Kshitij Anand: You mentioned that cryptocurrencies remain volatile. While that’s still the case, what are the key concerns investors have when diversifying into this space?
Avinash Shekhar: The primary concern is volatility, although we see it gradually decreasing over time. So, while volatility remains a factor, its impact is lessening as the market matures.

The second major concern, particularly in the Indian context, is taxation. Crypto is punitively taxed in India, unlike in most other countries, which discourages investors from entering the space.

The third concern relates to regulations. While crypto is fully legal in India, there is still confusion among the general public. Many people mistakenly believe it is illegal. Unless there are clear, positive regulations where the government encourages rather than discourages this new technology, adoption will remain slow.

In my view, investing is just one aspect of crypto—it’s not even the most important one. The real value lies in innovation, where people build new technologies and create solutions in the Web3 space. However, due to a lack of regulatory clarity, innovation is either not happening or is being driven outside India.

The real challenge is supporting entrepreneurs, engineers, and innovators who want to build in the Web3 space but are unsure about the legal framework. They need clear guidelines on whether their work is allowed, what regulations apply, and how they can proceed. That, in my view, is far more important than just the investment aspect.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)