A rare combination of persistent inflation and persistent growth that defies serious increases in interest rates by central banks has led to a sell-off in US gilts, leading to high yields in the US that push up the dollar and encourage capital flight from the rest of the world to the US. Stock prices are hostage to rising global uncertainty over war: apart from the Ukraine war that has been on since February 2022, the Israel-Hamas war, which started after Hamas’s terror attack on 7 October that killed some 1,400 people in Israel, now runs the risk of plunging the entire region into chaos, depending on the severity of Israeli reprisals that have already taken a toll of some 4,500 Palestinian lives and could get worse if Iran-backed Hezbollah decides to launch a full-fledged attack on Israel from Lebanon.

High interest rates, uncertainty about the price of oil and the combined impact this could have on global growth have rendered commodities, including gold, unreliable havens for capital leaving bonds and stocks. This appears to have made cryptocurrencies attractive, once again to investors.

Now, add the bid by the world’s biggest fund manager, BlackRock, to launch an exchange-traded fund for spot cryptocurrency in the US. While markets regulator SEC had turned down Grayscale Investments’ application to launch a cryptocurrency ETF, a three-judge panel of the DC Court of Appeals had overturned the regulator’s decision, citing arbitrariness. Now, a clearing house operated by Nasdaq, Depository Trust and Clearing Corp, has put a BlackRock-sponsored cryptocurrency ETF on a list, even if it is yet to get regulatory clearance. This has lifted the mood of crypto investors.

It has been reported that crypto exchanges, including the largest of the lot, Binance, has seen assets flow out of them and into wallets, signalling reduced nervousness on the part of investors and reduced urgency to sell on the exchanges.

How should Indian investors in cryptocurrency respond to this change? Is this an opportunity to sell off one’s holdings, pay tax to the government of India and exit what has become a relatively high-risk asset? Or should an investor, who has not yet dabbled in cryptos, see the rise in crypto values as a signal to start investing in a global asset? The answer depends entirely on the investor’s risk appetite.

In India, the central bank has maintained, so far, a steadfast opposition to privately sponsored cryptocurrency. To its credit, the RBI has launched its own e-Rupee, which would be of immense use in settling trades seamlessly, enabling frictionless cross-border inflows and outflows of capital. However, its opposition to privately sponsored cryptocurrencies plays a role in preventing the regulation of the asset in India, adding to the risk as to how to resolves disputes or seek justice in case of fraud.

However, India is also party to the decision of the G20 finance ministers and central bank governors, taken at a meeting of these worthies at Marrakesh, Morocco on October 13, to adopt a roadmap for regulation of crypto assets. This would greatly reduce the risk of outright bans, but increase the risk of any adverse impact of the regulation that is finally instituted on the currency in which investments have been made.

Indian investors in crypto would need to have their eyes peeled for crypto schemes that might seem strong on the surface but prove shaky in practice, such as the linked Terra and Luna coins. Terra had been touted as a stablecoin project, the stability of its value guaranteed by an algorithmic link to the value of the Luna, variations in which led to variations in the exchange rate between Terra and Luna. In the Crypto winter of 2022, both came crashing down.

While it is good to have access to an asset class that is not directly impacted by monetary policy changes or engineered commodity price swings such as in the case of oil, investors should understand that the crypto asset class also comes with its own clutch of risks, and that individual currencies carry their own idiosyncratic risk.

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