What Is Cryptocurrency And How Does It Work: Cryptocurrency is a decentralized digital currency based on blockchain technology and protected by cryptography. To understand cryptocurrencies, it is first necessary to understand three terms – blockchain, decentralization and cryptography.
In simple terms, in the context of cryptocurrencies, a blockchain is a digital ledger whose access rights are assigned to authorized users. The ledger records transactions related to a range of assets, such as money, houses and even intellectual property.
Access is shared among its users, and all shared information is transparent, instant and “immutable”. Immutable means that blockchain records exist forever and cannot be changed or tampered with – not even by administrators. Centralized currency refers to the conventional currency that we use, held by authorities such as the Reserve Bank of India. The decentralization of cryptocurrencies means that there is no comparable authority responsible for overseeing the rise and fall of a particular cryptocurrency. This has many advantages over centralized currencies.
Some of these benefits include:
Currency holders do not need to “trust” any single government agency, as everyone on the network has access to the same information, which cannot be changed.
Data is only accessible to network users and is highly secure. Shared ownership also means that all users confirm the accuracy of the data, meaning there is little room for data mismanagement or miscommunication. Think of it as a democracy.
Security, which is a fundamental part of blockchain.
Cryptography is a method of protecting data from unauthorized access through the use of encryption techniques. Most of blockchain’s claims, such as privacy and immutability, are achieved through cryptography.
The roots of cryptography go back to the 1980s with the invention of the so-called “blind algorithm”. The algorithm is about secure and immutable digital transactions. It remains the foundation of modern digital currencies.
In 2008, a group of people (currently known as Satoshi Nakamoto) established the guiding principles of Bitcoin, the first and leading cryptocurrency on the market today. In 2009, Bitcoin was born. But starting with WordPress in 2012, it was years before leading merchants officially recognized it as a payment method.
Today, the underlying blockchain technology is used in banks, insurance companies and other sectors of the economy. The cryptocurrency market has been growing at a compound annual growth rate of 12.8% since 2021 and is expected to reach $4.94 billion by 2030, thanks to the need to improve the efficiency of today’s payment systems, the increase in global remittances, and concerns about data security. Increase in demand.
How Does Cryptocurrency Work?
Cryptocurrencies are not controlled by governments or central regulators. As a concept, cryptocurrencies operate outside of the banking system using different brands or types of coins – Bitcoin being a major player.
1. Mining
Cryptocurrencies (which are entirely digital) are generated through a process called “mining”. This is a complex process. Basically, miners have to solve certain mathematical puzzles with specially equipped computer systems in order to earn bitcoins in return.
In an ideal world, it would take only 10 minutes for a person to mine a bitcoin, but in reality the process is estimated to take 30 days.
2. Buying, selling, and storing
Users today can buy or sell cryptocurrencies from centralized exchanges, brokers, and individual currency holders. Exchanges or platforms like Coinbase are the easiest way to buy and sell cryptocurrencies.
Once purchased, cryptocurrencies can be stored in digital wallets. Digital wallets can be “hot” or “cold”. Hot means the wallet is connected to the internet, making transactions easier but vulnerable to theft and fraud. Refrigeration, on the other hand, is safer but makes processing more difficult.
3. Transacting or investing
With just a smartphone, you can easily transfer cryptocurrencies like Bitcoin from one digital wallet to another. Once you have them, you have the following options:
a) use them to purchase goods or services
b) trade with them
c) Exchange for cash
When making purchases with Bitcoin, the easiest way is through a debit card type transaction. You can use these debit cards to withdraw cash just like you would use an ATM machine. It is also possible to convert cryptocurrencies into cash through bank accounts or peer-to-peer transactions.
Types of Cryptocurrencies
There are tens of thousands of cryptocurrencies available today and it is expected to reach 10,000 by 2022. Major cryptocurrencies include the following:
bitcoin
Bitcoin is the world’s first widely accepted form of cryptocurrency. Bitcoin is so popular that there was a time when its name was synonymous with cryptocurrency. But potential investors need to know that bitcoin has become very expensive. In 2021, the price of one bitcoin is $68,000. But the good news is that you don’t always have to buy whole coins, you can buy smaller ones.
Altcoin
Altcoin is the term used for any alternative digital currency to Bitcoin. The most popular in this ecosystem is Ethereum – one of the fastest growing cryptocurrencies in the market. There are many other altcoins in the market today such as Luckyblock, Shiba Inu, and Terra.
Crypto token
The concept of cryptocurrencies and tokens can confuse many people. At first glance, coins and tokens look the same. However, there are many differences between the two
Coins can be mined, but tokens cannot be mined.
Coins are linked to a blockchain whereas tokens are not.
In terms of utility, they differ in the types of products or services that users are allowed to purchase.
Should You Invest In Cryptocurrency?
Trading cryptocurrencies has many advantages as well as many disadvantages. Here are the top three reasons for and against cryptocurrencies.
Pros:
They are private and secure: Cryptocurrency-backed blockchain technology ensures user anonymity. It also ensures a high level of security through the cryptography we discussed earlier.
They are decentralized, immutable and transparent: the entire system operates under shared ownership, data is available to all legitimate members and is tamper-proof.
They are a hedge against inflation: Cryptocurrencies are a great investment in times of inflation. For example, investors often compare cryptocurrencies to gold. One of the reasons is that, like gold, they have limited availability as there is a cap on mining any type of cryptocurrency.
Cons:
They are not universally understood: they are a relatively new concept, and the long-term sustainability of cryptocurrencies remains to be seen.
Scalability is an issue: This is a complex issue that has more to do with the technical aspects of blockchain. Simply put, the inertia of the blockchain makes it susceptible to transaction delays. This tends to make crypto payments inefficient compared to modern electronic payment technologies.
They are prone to high risks: Of course, cryptocurrencies present as many opportunities as risks. Their highly volatile and speculative nature makes them prone to sharp downward spirals. Investing in cryptocurrencies can be risky for a number of reasons.
A major holding factor may be that digital currencies appear to have no intrinsic or underlying value. There is a supply and demand equation used to determine the value of cryptocurrencies like Bitcoin.
Furthermore, it’s easy to see how simple speculation on the internet can lead to significant increases or decreases in the value of these coins.
The fact that cryptocurrencies are banned or restricted in many countries also poses a significant risk. Their legality is disputed in countries such as India.
Cryptocurrency in India
The fate of cryptocurrencies in India is largely undecided ahead of the 2022 Union Budget.
In the budget, India’s finance minister announced a 30 percent tax on profits from the transfer of virtual digital assets, including cryptocurrencies, initially seen as an endorsement in favor of cryptocurrencies. It has sparked debate over whether taxing cryptocurrencies is a sign that governments have recognized it as a legal form of money.
However, this is not the case and there is also speculation that private cryptocurrencies will be banned following the launch of the RBI’s own official digital currency. In February 2022, RBI deputy governor T Rabi Sankar publicly expressed a similar view when he suggested that India ban cryptocurrencies. Whether this will be similar to the government’s ban on cryptocurrencies in 2018 (which was overturned by India’s Supreme Court in 2020) remains to be seen.
Summary
Whether or not cryptocurrencies are the future of money, one thing is clear: it is not advisable for anyone to invest in it without doing proper research. Investing in cryptocurrencies is not a new phenomenon. But with the recent surge in popularity and value, coupled with declining returns on bank deposits, more and more people are turning to cryptocurrency advice.
If you decide to invest in cryptocurrencies, make sure you start with a leading one such as Bitcoin, as newer cryptocurrencies may not have enough liquidity (you may not be able to sell them if you want to). The market is full of scammers. Therefore, it is very important to use an authorized platform to buy or trade cryptocurrencies, especially at the beginning.
Investing in cryptocurrencies is a risky venture. You must realize that you will most likely lose money. If you’re uncomfortable with risk, it’s best to stay away from it. You can profit from cryptocurrencies in many ways – buy coins, trade coins, mine coins, etc.
The latter require the most resources, but also have the potential to earn higher rewards while being easier to buy or trade.
Cryptocurrencies are also very volatile, so it is advisable to start small and diversify. In short, don’t put all your eggs in one basket. As a beginner, it helps if you initially rely on expert advice and gradually expand your own expertise by researching the topic. For this type of research to be successful, it is also important to understand your country’s history and current politics when it comes to cryptocurrencies. As always, don’t invest more than you can afford to lose.