The Basics of Cryptocurrency

Article by Ayan Rasul from Finance Wing, GAEE JMI

Cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It’s a peer-to-peer payment system that allows anyone to send and receive money anywhere.

The term “cryptocurrency” refers to the use of encryption to verify transactions. This means that advanced coding is used to store and transmit cryptocurrency data between wallets and public ledgers. Encryption’s goal is to provide security and safety.

But, before we go any further, we must know the three key terms associated with cryptocurrency.

The Big 3 of Cryptocurrency 

Blockchain: A blockchain is a distributed database that is shared by computer network nodes. It is essentially a digital ledger to which authorized users have access, and any information shared is transparent, immediate, and “immutable.” This ledger keeps track of transactions involving a variety of assets, such as money, real estate, and even intellectual property.

Decentralization: Centralized money refers to regular money, which is governed by authorities such as the Reserve Bank of India. Decentralization in the case of cryptocurrencies means that no similar authority can be held accountable for overseeing the rise and fall of a specific cryptocurrency.

Cryptography: Cryptography is a critical tool for protecting information in computer systems. Cryptocurrency is nothing more than a hub for attackers and scammers without cryptography. It is used in cryptocurrency for two main reasons: transaction security and transaction verification.

Types of Cryptocurrencies

Although it is estimated that there are over 18,000 cryptocurrencies in circulation at the time of writing, we will look at the major types of cryptocurrencies below:

Bitcoin 

Bitcoin was the first cryptocurrency and is still the most commonly traded today. It was founded in 2009. Satoshi Nakamoto created the currency, widely assumed to be a pseudonym for an individual or group of people whose precise identity is unknown. Bitcoin is so well-known that its name was once synonymous with cryptocurrency.

Market Cap: Over $846 Billion (March 2022)

Ethereum 

Ether, which was developed in 2015, is the token that is used to facilitate transactions on the Ethereum network. It is the second-largest cryptocurrency in terms of market capitalization after Bitcoin. It is the platform’s native cryptocurrency and a decentralized, open-source blockchain with smart contract functionality.

Market Cap: Over $361 Billion (March 2022)

Tether 

Tether is a stable coin, which is a currency tied to a fiat currency, in this case, the US dollar. Tether’s concept is to combine the advantages of a cryptocurrency (such as the elimination of the need for financial intermediaries) with the stability of a currency issued by a sovereign government (versus the wild price fluctuations inherent with many cryptos).

Market Cap: Over $79 Billion (March 2022)

The Emergence of Cryptocurrencies

The origins of cryptocurrency can be traced back to the 1980s with the development of a “blinding algorithm.” In layman’s terms, it is a technique that allows an agent to provide a service to (i.e., compute a function for) a client in an encoded form while maintaining secure and immutable digital transactions. It is still essential to modern-day digital currency.

In the wake of the 2008 financial crisis, trust in banks, financial institutions, and governments had eroded among European and American populations. As a result, a group of people (currently known under the pseudonym Satoshi Nakamoto) developed the guiding principles for Bitcoin, the first and leading cryptocurrency on the market today. 

Bitcoin was introduced to the world in 2009. On January 12, 2009, Nakamoto and Hal Finney made the first Bitcoin transaction.

Bitcoin was the only cryptocurrency on the market in early 2010. It cost only a few cents at the time. New digital currencies entered the market over the next few years, and their prices rose and fell alongside Bitcoin’s. 

However, beginning in late 2017, cryptocurrency prices rose at an unprecedented rate. The cryptocurrency market started to boom, and we are all aware of the current cryptocurrency trend.

How do Cryptocurrencies work?

To conduct a cryptocurrency transaction, you must exchange currency with a peer by using a cryptocurrency wallet, also known as a digital wallet. A “cryptocurrency wallet” is software that allows you to transfer money from one account to another. To complete a transaction, you’ll need a password, also known as a private key.

The private key works in the same way that a bank account does. You have control over multiple keys as well as all monies supplied to them. Transactions are recorded on a public ledger, which displays transaction totals without revealing the parties’ identities.

Cryptocurrencies are created through a process known as “mining.” This is a complex procedure. In essence, miners must solve mathematical puzzles on specially equipped computer systems in order to be rewarded with bitcoins.

Are Cryptocurrencies secure?

The answer is both a “Yes” and a “No.”

Although the blockchain technology that underpins cryptocurrencies represents a significant advancement in security, some crypto investors have been the victims of multimillion-dollar hacks, fraud, and other attacks.

Cryptocurrencies, specifically the underlying technology, blockchain, inherently have a certain level of security built into their technology due to their distributed ledger technology and ability to decentralize control. 

The term “blockchain” refers to the method by which transactions are recorded into “blocks” and time-stamped. It’s a reasonably complex, technical process, but the end result is a digital ledger of cryptocurrency transactions that hackers find challenging to manipulate.

But it is not a panacea. Even in a blockchain environment, there are still many vulnerabilities that can exist. The attacks we’ve seen vary; some are technological, while others straddle the line between cybersecurity and privacy.”

Several high-dollar hacks have cost cryptocurrency start-ups heavily. Hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.

However, at the end of the day, all investments involve risk. Because cryptocurrencies are highly volatile, it is best to start small and diversify your investments. Simply put, you should not put all of your eggs in one basket.

As a beginner, it is beneficial to rely on expert advice initially and gradually build your own expertise by researching the subject. For this type of research to be successful, you must first understand your country’s historical and current cryptocurrency policies. And, as always, don’t put more money into it than you can afford to lose.

Status of Cryptocurrency in India

Cryptocurrency is in a gray area in India. It is neither legal nor illegal. The cryptocurrency craze has exploded in India since the Supreme Court lifted the ban on digital currencies.

Despite being highly volatile and risky, the high rate of return is enticing many investors to invest in crypto coins. The euphoria is not limited to metropolises but is also piquing the interest of the young population in tier-II and tier-III cities.

The Indian Finance Minister’s announcement in the 2022 Budget of levying a 30% tax on gains on the transfer of virtual digital assets, which includes cryptocurrency, was initially interpreted as an endorsement of cryptocurrencies. It sparked a debate about whether the tax on cryptocurrency indicates that the government recognizes it as a legitimate form of currency.

Meanwhile, the Reserve Bank of India has repeatedly stated its strong opposition to cryptocurrencies, claiming that they pose a serious threat to the country’s macroeconomic and financial stability. It has also cast doubt on the number of investors trading on cryptocurrencies as well as their claimed market value.

The Indian government is reportedly holding extensive consultations with a wide range of stakeholders on cryptocurrency regulation. In addition, the Finance Minister stated that the government is constantly monitoring the crypto sector.

Bottom Line

The cryptocurrency market is thriving, if not in India, then in Western countries, and it is only expected to grow. As the digital economy continues to expand at an exponential rate, cryptocurrencies are certain to play a significant role in what constitutes our future money system.

Whether cryptocurrency is the future of money or not, one thing is certain: investing in it without conducting adequate research is not advised. Investing in cryptocurrencies is not a new phenomenon. 

However, with bitcoin’s recent rise in popularity and value, as well as the low returns on bank accounts, more people are looking for cryptocurrency advice. There are many different types of cryptos available today. Some have proven to be more stable than others while still showing promise for growth.

There are numerous ways to profit from cryptocurrency, including purchasing coins, trading coins, mining coins, etc. The latter requires the most resources and has the potential for higher returns because buying or trading is easier.

Article Summary: A cryptocurrency is a digital or virtual currency that is encrypted, making counterfeiting and double-spending nearly impossible. They are based on blockchain technology— a distributed ledger enforced by a network of computers distributed across the globe. Cryptocurrencies differ because they are not issued by any central authority, making them potentially immune to government intervention or manipulation. The benefits of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not fail at a single point. On the other hand, its disadvantages include price volatility, high energy consumption for mining activities, and use in criminal activities.