Updated: November 9, 2021 2:47:12 pm
The cryptocurrency industry is growing at a rapid pace with Bitcoin, Dogecoin, Ethereum being the hot buzzwords driving the crypto frenzy these days. Even though the crypto industry is only a decade old, novice investors are drawn to it as they see a quick way to earn profits.
Unlike the stock market, the crypto market does not have any regulation, as a result of which, its value swings up and backs down every day. Given the extreme volatility of these digital coins, here’s everything you need to know before investing in the cryptocurrency market.
What are cryptocurrencies?
Cryptocurrencies are digital assets— that you can use as investments and even for online purchases. It is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
It is worth noting that cryptocurrency does not physically exist, meaning that you can’t pick up a Bitcoin and hold it in your hand. And unlike the Indian Rupee, there is no central authority that maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.
Further, each coin of cryptocurrency consists of a unique line of program or code. This means that it can’t be copied, which makes them easy to track and identify as they’re traded.
How does it work?
Cryptocurrencies are not backed by a central authority such as a government. Instead, they run across a chain of computers. It is exchanged from peer-to-peer on the web without a middleman.
Cryptocurrencies are decentralised—which means no government or bank manages how they’re made, what their value is, or how they will be exchanged. All the crypto transactions are secured by cryptography—meaning that it only allows the sender and intended recipient of a message to view its contents.
Is cryptocurrency similar to Blockchain?
No. Blockchain is the technology that enables the existence of cryptocurrency. A blockchain is a digital ledger of transactions that is distributed across the entire network of computer systems. Think of it like a ledger that shows the entire history of that piece of currency.
To put it simply, it is a system of recording information that makes it impossible to hack the system. Each block in the blockchain contains several transactions, and every time a new transaction occurs on it, a record of that transaction is added to every participant’s ledger.
A blockchain database can store a large quantity of information that can be utilised and accessed by many users at the same time.
But what makes Blockchain unique is that it is not owned by a single person or entity— making it more secure and trustworthy. The idea is that because no one controls the blockchain, they cannot take over and rewrite the records.
How can you store your cryptocurrency?
Cryptocurrency can be stored in something called a ‘wallet’, which can be accessed by using your ‘private key’—the crypto equivalent of a super-secure password— without which the crypto owner cannot access the currency.
A crypto wallet stores the private keys that give the user access to their cryptocurrencies—allowing one to send and receive cryptocurrencies like Bitcoin and Ethereum. It should be noted that your coins are stored on the blockchain, and the private key is required to authorise transfers of those coins to another person’s wallet.
There are different types of crypto wallets available that cater to different requirements in terms of security, reliability, accessibility, etc.
What types of cryptocurrency exist?
Bitcoin is the topmost traded cryptocurrency that everyone knows and talks about, but it’s not the only kind of cryptocurrency out there. There’s Litecoin, Polkadot, Chainlink, Mooncoin, Shiba Inu, Dogecoin, etc. Currently, there are more than 6,000 coins in existence, as per CoinMarket cap.
Bitcoin is the most stable coin. As the first cryptocurrency, Bitcoin traded below one dollar. Over the years, Bitcoin picked up a price momentum and has exceeded the market cap of $1 trillion. Meanwhile, investors should explore their options and choose the asset that could best serve their needs.
How to buy cryptocurrency?
Just like the stock market, the crypto market has exchanges or brokers which are the facilitators. These exchanges often charge a fee or commission for each transaction. Some even give rewards for hitting a milestone, some give them as a joining bonus. This policy may differ with each exchange.
Some of the top crypto exchanges in India are — WazirX, CoinDCX, Coinswitch Kuber and Unocoin—users have to sign up with their KYC credentials, download the app, and buy cryptocurrency. These exchanges also help you to monitor the value of cryptocurrency and buy or sell it.
Crypto exchanges rely on investors for the possession of cryptocurrency. This happens when users deposit crypto to sell and some new users come to the exchange to buy it—thereby, facilitating trading.
Cryptocurrency can be purchased fractionally. For instance, if you’re willing to buy a Bitcoin you don’t need to buy a full Bitcoin (BTC) to own some. You can buy a fraction of a Bitcoin. You can own as little as 0.00000001 BTC. This is the case with all cryptocurrencies.
Can you get cryptocurrency for free?
Yes, you don’t have to buy a cryptocurrency to own one. You can also gain cryptocurrency by solving cryptographic equations through the use of computers. This process involves validating data blocks and adding transaction records to the blockchain.
It is also worth noting that some cryptocurrencies like Bitcoin are finite in supply, meaning that there is a maximum number of coins that will ever be in circulation. Others like Ethereum do not have a maximum cap but limit the number of new coins that can be generated each year.
What can you buy with cryptocurrency?
India is slowly opening up to the idea of accepting it as a legitimate payment method. There are some practical issues with cryptocurrency— as it cannot be exactly used for daily transactions. However, there are ways to use your crypto to facilitate payments.
Unocoin, a Bitcoin trading site, is now allowing its users to buy vouchers from over 90 different brands using Bitcoins. Using these vouchers, you can buy Domino’s pizza, ice cream from Baskin Robbins, beauty and health products from Himalaya, and even home appliances from Prestige.
In the US, retailers like Whole Foods, Nordstrom, Etsy, Expedia, and PayPal are now letting people pay using crypto.
How stable are cryptocurrencies?
In January this year, Bitcoin skyrocketed to $40,000 (roughly ₹ 29.70 lakh). Continuing its bull run, it reached an all-time high of $65,000 (roughly ₹ 48.27 lakh) towards the end of April. Then in May, it plunged and throughout June it remained below $30,000 (roughly ₹ 22.28 lakh). Again the prices have skyrocketed, and at the time of writing this article, the price of Bitcoin is Rs 51 lakhs approx.
This shows that cryptocurrencies are extremely volatile. The cryptocurrency market thrives on speculation. Investors place speculative bets that cause a sudden influx of money or a sudden outgo, leading to high volatility.
Additionally, the crypto market is seen as a way to earn quick profits. Part-timers come with a hope of making quick gains but sometimes when that does not happen, they lose patience and withdraw from it. This recurring involvement and withdrawal contribute to the volatility of digital coins.
Is it a legal tender in India?
At the moment, there is no legislature that covers cryptocurrencies in India. But this doesn’t mean that owning cryptocurrencies is illegal.
Meanwhile, India is yet to table the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which will lay down the regulatory framework for the launch of an “official digital currency”, it was to be introduced in Parliament’s Budget session, but was held up as the government continues discussions with stakeholders. So far, only a few countries have accepted cryptocurrencies as legal tender and the list is expected to remain small.
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