ABC of Cryptocurrency
Simplifying the hype about cryptocurrencies
The evolution of currencies has been radical. In the early ages, the barter system was adapted for making transactions but was discontinued due to its various shortcomings. Currency evolved from barter to bartering with set mediums of exchange, coins representing exchangeable goods to coins stamped in precious metal, paper representing coins to money transferred digitally, and now, cryptocurrency.
Almost all of us have heard the term cryptocurrency, but very few know how it works. Well, if you’re like me and all others who have no clue of how crypto works, don’t worry. I’m sure, by the end of this article, you’ll be confident enough in your understanding of cryptocurrency.
What is Cryptocurrency?
Let’s take an example of a puzzle, a complex multi-level puzzle in which you earn points for solving each level. Now think of those points as a currency that you can use to buy goods and services in the cyber world. This is basically what cryptocurrency means; it is a form of digital currency that is secured by cryptography i.e. you have to solve a complex mathematical problem secured by cryptographic algorithms using high processing computers to gain cryptocurrency or be wealthy enough to buy it from those who can solve these problems.
“In other words, cryptocurrency is a medium of exchange, like physical currency but it is digitized and encrypted using encryption algorithms to facilitate the creation of monetary units and verify fund transfers.”
Modern cryptocurrency is the brainchild of Satoshi Nakamoto, an anonymous individual who created the first-ever cryptocurrency, named Bitcoin. He developed it in 2008 to eliminate the need for middlemen like banks and other financial institutions. It gained popularity because people’s trust in the banking system started wavering and their dissatisfaction with the financial institutions grew bigger. Cryptocurrency eliminates these problems by placing the trust of people in mathematics. It created a decentralized system where all the people in the network can see all the transactions while remaining anonymous.
Examples
Today, there are close to 5392 cryptocurrencies being traded worldwide. And guess what their value is — it is approximately $201 billion. I am pretty sure Satoshi did not see that coming, and if he did, what a genius he is! The three main types of cryptocurrencies are Bitcoin, Altcoin which is a derivative of Bitcoin, and tokens which are built specifically for decentralized applications. There are hundreds of Altcoins out there, some of which are Litecoin, Ethereum, and Dogecoin, we’ve all heard of that one, haven’t we!
Yet the most widely talked about cryptocurrency is a no-brainer, Bitcoin. Why did it become so popular, you ask? Well, that’s because it is decentralized, implying that no bank has control over it, and its anonymity enables you to make payments without revealing your identity.
Understanding how Bitcoin works
Two of the many fundamentals of cryptocurrency transactions are miners and blockchain technology. The term ‘miners’ refers to individuals who keep track of transactions and make them secure by verifying the identities of the parties doing the transaction. They do so by updating the digital ledger of a blockchain. The miner is rewarded for his work in cryptocurrency.
Check out this video for a better explanation👇
Cryptocurrencies use blockchain technology to ensure security. A block records information regarding the transaction, for example, the account number of the sender and the receiver, and hash codes, which are unique to the block of information. Each time someone tries to change the information; a new code is generated, and the block is no longer the previous one. A blockchain is a sequence of blocks, which contains all the information about the transactions and each block refers to the previous block, hence forming a chain. A new block is added whenever a new transaction takes place. Every sender, on a cryptocurrency network, has two keys, public and private. A private key, which is only known to the individual, is used by the owner/sender to prove his ownership for security purpose, While a public key, which is available to everyone on the network, acts as the account number of the sender/receiver which is used by others to do transactions. People on the blockchain network verify the validity of the transaction by checking the public key, while miners update the blocks by solving the mathematical process.
Limitations of Cryptocurrencies
If cryptocurrencies sound so alluring, why have they still not become mainstream? That is because they have their own limitations and risks that need to be addressed before they can be accepted as the currency of the world. First, a lot of computational power goes into the mining of cryptocurrency. Not everyone can afford that kind of power. The energy requirements related to mining are tremendous and produce a lot of carbon footprint. Since its affordability is limited to a handful of people, they might turn to unlawful means to carry out mining. Second, these currencies are highly volatile and these fluctuations present market risks to those who have invested in them. Moreover, with the changing laws, no one can be sure what the future holds for investments in cryptocurrencies. Third, these are especially attractive to fraudsters and thieves trying to steal from users of cryptocurrency. There is always the risk of hacking and hijacking digital wallets which would result in huge losses for investors. All things considered, cryptocurrency is a risky endeavor for anyone who is not well-informed about it.
Status of cryptocurrency in India
Bitcoin, the most commonly used cryptocurrency, is growing popular in the Indian market, but the government is wary of it. There is a lack of clarity over the status of cryptocurrencies in India. In 2018, the Reserve Bank of India asked all banks in India to withdraw support from those dealing in cryptocurrencies. After a two-year-long battle, the Supreme Court allowed people in India to trade in cryptocurrency. Many welcomed this decision as the number of searches related to crypto grew tremendously. It proved that people in the country wanted to trade and invest in cryptocurrency. Today several companies exist in the country that trade in cryptocurrencies like WazirX, BuyUcoin, etc.
Due to the unregulated nature of cryptocurrency, the RBI is cautious of its widespread use, due to the risks it presents to the investors. It has led them to devise a regulatory framework that would protect the investors and curb all illegal activities. Recently, RBI announced that they would issue a ban on all private cryptocurrencies in India and launch its digital currency. During the budget presentation for the session 2021–22, the Finance Minister quoted an inter-ministerial committee suggestion to ban private cryptocurrencies in India, except for any virtual currencies issued by the state. For the time being, people are free to use and trade in cryptocurrencies.
“The future of Money is Digital Currency.” ~ Bill Gates
