Cryptocurrency is a word defined by cryptography and currency.
Cryptography + currency = Cryptocurrency
Cryptography is the practice of hiding information using a secret key. You can understand it with an example of Lock and Key. You are locking your assets in the almirah and locking it with a key means protecting your items using a secret mechanism. The same thing applies in the case of cryptography. So if we apply cryptography in the case of currency, it is called cryptocurrency.
Cryptocurrency or crypto is a digital currency that uses cryptography for securing transactions. It uses a decentralized system to secure transactions. It doesn’t rely on any bank, nation, or organization for its operation. Cryptocurrency eliminates the risk of being carried or stolen. It is protected by a password.
How does Cryptocurrency Work?
Cryptocurrency uses a special technology called blockchain. Blockchain is a decentralized, distributed ledger technology that is used to make transactions secure and transparent.
Have you ever questioned how a unit of cryptocurrency comes into existence?
So it uses a method called “mining” to create the units of cryptocurrency. Mining uses computer power to solve mathematical problems for generating crypto coins. You can buy cryptocurrencies from your broker and store them in your cryptographic wallets.
If you own cryptocurrency, means you own an intangible object. You are the owner of a key that is used to make transactions with others without informing any third party.
The first cryptocurrency Bitcoin was created in 2009 by an unknown person or group named pseudonym Satoshi Nakamoto. Bitcoin is the most famous and widely used cryptocurrency. It gets a significant boom between 2010-17.
Cryptocurrency VS Traditional Currency
Here are some key differences between Cryptocurrency and Traditional currency:
| Cryptocurrency | Traditional Currency |
|---|---|
| Cryptocurrency is a digital currency meaning it doesn’t exist in physical form. It can be accessed in the form of digital files and tokens | Traditional currency exists in physical form meaning it can be used in transactions physically. |
| Cryptocurrency is decentralized as it is not controlled by any bank or government. | Traditional currency is centralized. It can regulated by banks and governments. |
| Cryptocurrency is more secure than traditional currency as blockchain technology is used to create and sell cryptocurrency making it impossible to trace. | Traditional currency is vulnerable to inflation and loss of value due to governmental actions and monetary policies. |
| Cryptocurrency is a “digital Wallet” that can be accessed anywhere by computer and Mobile device. | Traditional currency can be held in cash and bank or savings accounts. |
| Transaction history in cryptocurrency is encrypted and distributed across decentralized networks, making it very difficult to track, hack, and modify. | Transaction history in traditional currency can be easily trackable. It is a centralized network and, hence can be easily accessed and modified by the government. |
| Cryptocurrency has a variable value as its price can change dramatically over time. It makes it difficult for users to make investments in a volatile market. | Traditional currency has a fixed value determined by the government or central banks. |
Cryptocurrency Example
There are different types of cryptocurrencies present in the market today:
- Bitcoin(BTC)
Bitcoin was the first cryptocurrency developed and launched in 2009 by Satoshi Nakamoto. Bitcoin has a market cap of an estimated $850 billion.
It operates on a decentralized network that uses blockchain technology, that enables end-to-end transactions without any interference from banks and governments. Bitcoin price has seen significant volatility due to various factors like market demand, adoption, regulatory developments, and macroeconomic trends.
- Ethereum
Ethereum is another popular cryptocurrency launched by Vitalik Buterin in 2016. It is designed to support the development of decentralized applications(dApps). One of the most important features of Ethereum is its ability to execute smart contracts, which are self-executing contracts with the terms of the agreement directly written into code.
Ethereum’s major upgrade, Ethereum 2.0 is under development which will increase its scalability, security, and sustainability.
- Tether
Tether is a stablecoin cryptocurrency because it has a fixed value of $1 per coin. Stablecoins means any coin that is connected to the value of specific assets. In the case of tether, it is the US Dollar. Tether works as a bridge when traders shift from one cryptocurrency to another.
- Binance
Binance is the largest cryptocurrency exchange in the world and it has launched its native cryptocurrency called BNB or Binance Coin. BNB has various uses in the Binance ecosystem. It is used to pay trading fees on the Binance platform at a discounted rate.
BNB has expanded its value outside the Binance ecosystem as it is accepted by various merchants and vendors in the form of payment. BNB is also used in decentralized finance(DeFi) applications, gaming platforms, and other aspects outside the crypto space
- Solana(SOL)
Solana is known for its scalability and speed. It is a high-performance blockchain platform specially designed for decentralized applications and crypto-currencies. Solana solves the scalability issues faced by other blockchain networks by providing fast transaction processing with low fees and high throughput.
Solana has gained popularity for its power to handle thousands of transactions per second.
Cryptocurrency in India
India has seen significant development and regulation of cryptocurrency in the last 10 years. Cryptocurrencies like Bitcoin have gained popularity as a great investment. Several cryptocurrency exchanges and platforms emerged in the country due to the increasing demand for digital assets.
In 2018, the Reserve Bank of India(RBI) issued a circular regarding cryptocurrency and prohibited banks from cryptocurrency-related businesses. It created an environment of uncertainty and disruption in the Indian cryptocurrency ecosystem. Despite regulations and bans, the craze of cryptocurrencies continued to grow and many investors actively participated in the global cryptocurrency space.
In 2020, the Supreme Court of India removed the RBI’s ban on cryptocurrency trading. After the removal of the ban, the Indian government has shown a deep interest in blockchain and cryptocurrencies due to its potential. The government is also planning to establish a regulatory framework to protect investors from any unseen situation and fraud.
It will be interesting to see the acceptance and integration of cryptocurrencies in the development of India’s financial infrastructure.
Is cryptocurrency safe?
Certain points need to be considered to check the safety of cryptocurrency:
- Security Features
Cryptocurrency is built on blockchain technology, which adds a high level of security by involving various security mechanisms like hashing to secure transactions. It uses public and private key cryptography which provides a layer of security to transactions as each user’s ownership of cryptocurrency is verified through their unique cryptographic keys.
- Vulnerability and Hacking
We know that blockchain is a safe technology but third-party platforms like cryptocurrency exchanges and wallets are vulnerable to hacking and security breaches. Several incidents have already happened resulting in the stealing of significant amounts of cryptocurrencies.
An investor should conduct good research before selecting any cryptocurrency exchange.
- Regulatory and Legal considerations
Many countries are still confused about cryptocurrencies due to their anonymity and danger. Some countries have already imposed restrictions on using cryptocurrencies, while some countries embracing and regulating them. This uncertainty about regulations and bans can impact the safety of cryptocurrencies. An investor should be fully aware of these rules and regulations.
- Market Volatility
Cryptocurrency has seen massive volatility in the past. There are several factors such as market sentiments, regulatory announcements, technological developments, and macroeconomic trends can lead to rapid change in price. An investor should carefully pick the cryptocurrency according to its risk tolerance. Various tools like stop-loss orders, dollar-cost averaging, and hedging mechanisms can be used to reduce risks.
- Loss of Keys
Public and private keys are used to assess cryptocurrency. If you lose your private key then you will lose access to your cryptocurrency wallet. Several incidents were reported that an investor lost his key and was unable to re-access his account further.
Future of Cryptocurrency
In India, after seeing all aspects it can be said that the economy is not ready for cryptocurrency yet due to various regulations and uncertainties. Indian economy requires an efficient regulatory body that can adapt to digital networks and enhance transparency. Interest in cryptocurrency is growing in India among investors, traders, and technologists.
