What is Cryptocurrency?
Cryptocurrency is a digital currency that can be transferred in a decentralized manner using blockchain technology. To understand this concept, one must understand the following terms:
Cryptography: The prefix here “crypta” means vault in Latin. Cryptography is securing information (details of the sender, receiver or the amount) about a transaction. It is only meant to be read by those for whomever it is intended or systematized for.
Decentralized: Generally, if you are asked to send some money to your friend, the standard ways would be through UPI or bank checks. The banks validate accounts of both the sender and the receiver, thereby transferring the amount after deducting some fees. However, with Cryptocurrency, you can transfer without the involvement of any intermediary.
Blockchain: In the simplest terms, it can be called a digital ledger that records transactions in blocks akin to the way transactions are recorded on several pages. Once one block is filled, it is chained to the next block, where the new data is stored in chronological order.
Another crucial point to be understood is the concept of transactions. It either means the transfer of money or refers to contracts (sports, car rents). However, the meaning is not exhaustive. Therefore, it can be stated that blockchains are required for Cryptocurrency, similar to the internet being necessary to send emails or also the necessity of land for farming.
Types of Cryptocurrencies:
As of January 2021, there are more than 4000 types of cryptocurrencies and still growing in numbers. It is a result of the massive wave generated by Bitcoin since its introduction in 2008. In addition, there are a group of coins called altcoins which is any cryptocurrency that is not a Bitcoin. Furthermore, cryptocurrencies with no intrinsic values similar to many IT companies during the Dotcom bubble are issues called shitcoins. One can find many of these shitcoins if they look out for their whitepaper or Twitter/Reddit communities. The most famous Cryptocurrencies are as follows:
It is the first Cryptocurrency, and it can be earned as a reward from a process known as mining. It has the highest market capitalization. The term “Bitcoin” was first explained in the paper “A Peer-to-Peer Electronic Cash System” on 31st October 2008.
It was introduced in 2014 and announced presale for its platform called ether. This event led to the start of the ICO (Initial coin offerings) wave. Ethereum is different from Bitcoin because it can codify and develop more applications or even Cryptocurrency on its platform. Ethereum has the second-highest market cap.
Pros and Cons of Cryptocurrency:
1. Reduction in Transaction Fees: Cryptocurrency will eliminate the need for authorization requirements by the intermediary and currency exchanges that charge a certain amount of fees. Banks will not be required in the system. Therefore, there will be no need to pay the brokerage fees or commissions. It will also prevent the cost of all the paperwork.
2. Anonymity: In the traditional system, the bank and the Government have access to your financial history, where your personal data can be stolen at any point of transaction. This access can lead to identity theft, violation of privacy and increased vulnerability of cybercrimes. However, in the cryptocurrency system, the transaction is from peer to peer, thereby reducing the risk of exposure.
3. Usability: Each Cryptocurrency attempts to serve a particular purpose; for instance, ripple was made for bank usage to be used as a medium between other cryptocurrencies and traditional currencies. Ethereum is based on a platform named ‘ether’ which has its scripting language and can create more cryptocurrencies. The uses of various cryptocurrencies can be read from their whitepaper.
4. Protection From Inflation: Most cryptocurrencies have a limited supply; for example, the supply of Bitcoin is only a 21 million. If the Government increases the money supply, the value of fiat money decreases, but it is not the same for Cryptocurrency.
5. Speed Of Transactions: It has significantly dropped the transaction speed compared with the traditional methods of transferring money.
1. Reluctance From Government and Institutions: More use of Cryptocurrency by the public will decrease the impact of governmental policies and reduce the revenues earned by banks.
2. Illegal Transactions: It has high security and makes it almost impossible to track down a person. Cryptocurrency has been used for illegal activities such as selling drugs on the dark web.
3. Non-environmental Friendly: As we know, there is a limited supply of a cryptocurrency, and these are not printed by any government but have a different source: mining. The mining process uses a computer with very high processing power, which requires a high amount of electricity. Many countries like China use coal to generate electricity leading to increased carbon footprints.
4. Risk of scammers: Hackers might get the private keys to wallets from the exchanges. Although Cryptocurrency is entirely safe, it is not true for the exchanges because, practically, the system is not decentralized.
5. Non-refundable: When a payment is made using checks, there is always an option to cancel the transaction if there is a dispute between the concerned parties. However, in cryptocurrencies, the transaction cannot be retracted once the transaction is made from one person to another. Also, if a person loses their private key to their wallet, they will lose access to the cryptocurrency amount.
Legality of Cryptocurrency
In India, people buy, sell and trade-in Cryptocurrency on recognized exchanges such as WazirX. Therefore, it is not as such illegal. However, it has not been regulated yet, and the Government is exploring this domain to pass specific legislation. The recognized exchanges such as Wazir X hold Cryptocurrency in their wallets on a person’s behalf. However, you could also transfer them to your wallet for more security if you like or desire. Moreover, it is pertinent to mention that Cryptocurrency can not be used as a legal tender akin to stocks. One can hold the stocks in their Demat account, but they cannot purchase goods in exchange for some company stocks.
Investing in Cryptocurrency and How to Buy
Investing in Cryptocurrency is very much similar to investing in stocks. It would be interesting to know the analogous terms, which are as follows
- Stock Brokers such as Zerodha, Upstox: Cryptocurrency exchanges such as WazirX
- Initial Public Offering (IPO): Initial Coin Offering (ICO)
- Underwriting by Investment banks for IPO: Whitepaper published for ICO
To buy any cryptocurrencies, one must select an exchange that permits the trade of the chosen Cryptocurrency. Some famous Indian Exchanges are WazirX, ZebPay, CoinSwitch Kuber and Unocoin. The second step is to connect these exchanges to a payment option using KYC (Know-Your-Customer) that might require some Personal Identification documents. Then, with a good internet connection, one can place orders and sell them. These exchanges hold the coins on a person’s behalf; however, if one wants to keep these more secure, he/she can withdraw them to their online wallets.
After analyzing the pros and cons, it can be said that cryptocurrencies might be beneficial if we overcome the main threats through technological progress. For example, the threats and issues such as the electricity required for mining can be overcome by using renewable resources to generate electricity. Secondly, the Government and intermediaries can accept them and try to find a way to inculcate blockchain technology in their system. Finally, cryptocurrencies will also generate a massive market for cyber-security to prevent any hacks or identity theft emanating from cyber threats.
There is a probability that a time will come when people might question the concepts of transaction fees. The questions such as why should they pay a middle person to transfer money or why an intermediary or the Government should have the details and data of such transactions. Many countries are trying to adapt to this and legalize it. For instance, El Salvador has legalized it because it solves many of their problems; one of them is that only 30% of the people have bank accounts and credit cards, so it increases accessibility and prevents them from ever-increasing inflation of fiat money. In India, the Supreme court overturned the ban on Cryptocurrency in March, 2021. The trends seem to show that the Indian Government is keen on regulating it rather than an outright ban. These examples show there is an overall positive attitude towards adapting Cryptocurrency in the future.