A type of digital currency known as cryptocurrency is not controlled by a single organisation, such as a bank or the government. It is founded on a unique technology known as blockchain, which records every transaction carried out using that coin. This technology guarantees that the transactions are safe and difficult to alter. Another crucial component of cryptocurrencies that helps safeguard and maintain the privacy of transactions is cryptography. Therefore, understanding blockchain, decentralisation, and cryptography are essential to understanding cryptocurrencies.
How Does Cryptocurrency Work?
In simple terms, cryptocurrency works through something called blockchain. Think of blockchain as a special digital book that keeps track of transactions involving different things like money, houses, or ideas.
Those with access to it are authorised to share this digital book with others. Every time a transaction occurs, it is immediately and publicly recorded in the book. The crucial point is that whatever that is written down in the book cannot be altered or tampered with, not even by someone in authority. Like a permanent record, it remains there indefinitely.
Benefits Of Cryptocurrency
- Decentralization: Unlike regular money controlled by authorities like the Reserve Bank, cryptocurrency is not overseen by a single authority. This means no one entity is responsible for its value, which has advantages over centralized money.
- Trust and Transparency: With cryptocurrency, users can access the same unchangeable information. The network is run by shared ownership and decision-making, thus there is no need to rely on a single governing body. It resembles a democracy where everyone has a voice.
- Security through Cryptography: Cryptocurrency uses encryption techniques called cryptography to secure data and protect it from unauthorized access. This ensures privacy and immutability of transactions. Cryptography plays a vital role in enabling the claims made by blockchain, such as privacy and security.
The “blinding algorithm,” a secure and immutable digital transaction mechanism, was created in the 1980s and is credited with giving cryptocurrency technology its start. This algorithm is still a key component of contemporary digital currency.
Bitcoin, the original and most well-known cryptocurrency, was created in 2008 by a group of people known as Satoshi Nakamoto. It took some time for major shops to embrace it as a payment method even though it was created in 2009. In 2012, WordPress was the first to do this.
The cornerstone of cryptocurrencies, blockchain technology, is used in a variety of sectors, including banking and insurance. Cryptocurrency market size is expected to reach $4.94 billion by 2030, growing at a compound annual growth rate of 12.8% since 2021. The primary factors driving this expansion are the need to increase the efficiency of payment systems, the rise in international remittances, and the increased demand for data security.
How Does Cryptocurrency Work?
Traditional money that is governed by the government or central authorities functions differently from cryptocurrency. There are many other types of coins used to symbolise it, with Bitcoin being the most well-known. It runs autonomously from the financial system.
- Mining: The creation of cryptocurrency, which only exists in digital form, is accomplished through a process known as “mining.” Mining is a difficult process that requires employing specialised computer systems to solve mathematical puzzles. Miners who successfully solve these puzzles are rewarded with bitcoins as a form of payment. One bitcoin could theoretically be mined in roughly 10 minutes, but in practise it typically takes about 30 days.
- Buying, selling, and storing: Today, users can purchase cryptocurrencies from central exchanges, brokers, or directly from other currency owners. Exchanges or platforms like Coinbase make it easy to buy or sell cryptocurrencies. Once purchased, cryptocurrencies can be stored in digital wallets. You can classify these wallets as “hot” or “cold.” Hot wallets are online-connected, making transactions simple but also making them more susceptible to fraud and theft. On the other side, cold storage is safer but less practical for conducting transactions.
- Transacting or investing: Cryptocurrencies like Bitcoin may be readily transferred from one digital wallet to another using just a smartphone once you’ve acquired them.Once you have them, you have a few options:
- You can use them to buy goods or services.
- You can trade them, similar to how you would trade stocks or other assets.
- You can exchange them for cash.
The easiest approach to utilise Bitcoin for purchases is to use it like a debit card and do all of your transactions online. These debit cards allow you to make cash withdrawals exactly like you would at an ATM. You can also exchange cryptocurrencies for cash by utilising your bank account or conducting peer-to-peer transactions.
Types of Cryptocurrencies
There are many different types of cryptocurrencies available today, with the number estimated to be around 10,000 in 2022. Some of the major cryptocurrencies include:
- Bitcoin: Bitcoin is the first widely accepted form of cryptocurrency in the world. It became so popular that people often used the term “bitcoin” to refer to any cryptocurrency. However, it’s important to note that bitcoins have become quite expensive. In 2021, the cost of one Bitcoin was $68,000. The good news is that you don’t always have to buy a whole bitcoin; you can purchase smaller fractions of it.
- Altcoin: Any kind of digital money other than bitcoin is referred to as “altcoin.” Ethereum, one of the cryptocurrencies with the quickest market growth, is one of the most well-known altcoins. Other altcoins that are currently in circulation include Luckyblock, Shiba Inu, and Terra.
Crypto tokens can often be confusing to understand compared to crypto coins. While they may seem similar at first, there are several key differences between the two:
- Mining: Coins can be mined, meaning new coins are created through a computational process. On the other hand, tokens cannot be mined.
- Blockchain Linkage: Coins are typically associated with specific blockchains, while tokens may not be linked to any particular blockchain.
- Utility: Coins and tokens also differ in terms of the products or services they enable users to purchase. Their utility varies depending on the specific coin or token in question.
Now, let’s discuss whether investing in cryptocurrency is a good idea. There are both advantages and disadvantages to consider. Here are the top three reasons in favor of and against cryptocurrencies.
Cryptocurrencies offer several advantages. Here are some of the key benefits:
- Privacy and Security: Cryptocurrencies provide user anonymity and ensure high levels of security through the use of blockchain technology and cryptography. This means that users can conduct transactions with confidence, knowing that their personal information is protected.
- Decentralization, Immutability, and Transparency: Cryptocurrencies operate on a decentralized system where ownership is shared among participants. This ensures that data is available to all authorized members and cannot be easily altered or tampered with. The transparency of the blockchain also allows for greater accountability and trust.
- Hedge Against Inflation: Cryptocurrencies can serve as a valuable investment during times of inflation. Similar to gold, cryptocurrencies have a limited supply due to mining caps. This scarcity can make them a potential hedge against inflation, as their value may increase over time.
- Lack of Understanding: Cryptocurrencies are still a relatively new concept, and many people may not fully grasp how they work. The long-term sustainability of cryptocurrencies is still uncertain, which can create hesitation and uncertainty among potential investors.
- High Risk: Investing in cryptocurrencies can be risky due to their highly volatile and speculative nature. The value of cryptocurrencies can experience sharp fluctuations, leading to potential losses for investors. Additionally, the lack of inherent or underlying value for digital currencies can make their valuation unpredictable.
- Legal and Regulatory Uncertainty: Cryptocurrencies face legal and regulatory challenges in many countries. Some countries have banned or restricted their usage, which can create obstacles and uncertainties for cryptocurrency investors. The legality of cryptocurrencies in countries like India, for example, is still a matter of debate.
- Scalability Issues: The technology behind cryptocurrencies, such as blockchain, faces scalability challenges. The sluggish nature of the blockchain can lead to transactional delays, making cryptocurrency payments less efficient compared to traditional electronic payment methods.
Regarding the situation of cryptocurrency in India, it has been a topic of uncertainty. While the 2022 Union Budget announcement initially seemed like an endorsement of cryptocurrencies through the taxation of gains on digital assets, it doesn’t necessarily mean the government recognizes them as legitimate currency. Speculations have arisen about a potential ban on private cryptocurrencies in favor of the Reserve Bank of India’s own digital currency. The ultimate outcome remains to be seen, as previous bans on cryptocurrencies in India have been overturned in the past.
In summary, investing in cryptocurrency requires careful consideration and research. While it has gained popularity and attracted many investors, it is not advisable to invest without proper understanding. Here are some key points to keep in mind:
- Conduct thorough research: Before investing in cryptocurrencies, it is crucial to gather sufficient knowledge about the market, different cryptocurrencies, and their potential risks and benefits.
- Start with leading cryptocurrencies: It is recommended to begin with well-established cryptocurrencies like bitcoin, as they tend to have higher liquidity and are more widely accepted. Newer cryptocurrencies may have limited liquidity, making it challenging to sell them when desired.
- Use authorized platforms: To ensure safety and security, it is important to use authorized and reputable platforms for buying or trading cryptocurrencies, especially when starting out. Beware of scamsters and fraudulent schemes.
- Understand the risks: Investing in cryptocurrencies carries a high level of risk, and there is a possibility of losing money. If you are not comfortable with the risk involved, it is better to refrain from investing.
- Consider diversification: Cryptocurrency markets are highly volatile, so it is wise to start with small investments and diversify your portfolio. Spreading your investments across different cryptocurrencies can help mitigate risks.
- Seek expert advice: As a beginner, relying on expert advice can be beneficial. Gradually develop your own expertise by researching and learning about cryptocurrencies. Understand your country’s policies and regulations regarding cryptocurrency.
- Invest within your means: Only invest an amount you can afford to lose. Cryptocurrency investments can be unpredictable, so it is important to set realistic expectations and not overextend financially.
Remember, investing in cryptocurrency is a personal decision, and it is essential to carefully evaluate the risks and rewards before making any investment choices.