- Cryptocurrencies are still new and the market for these digital currencies is very volatile
- Cryptocurrencies are secured by cryptography which makes it nearly impossible to counterfeit
- Cryptocurrency mining involves a massive amount of computing power and complicated algorithms
Bitcoin, blockchain, and cryptocurrencies burst onto the world stage in 2008, when the online posting of a pseudonymous white paper provided a vision of a new way to transfer value over the internet. In the decade-plus since the crypto-asset market has gone through all the classic phases of a disruptive technology: massive bull markets and crushing pullbacks, periods of euphoria and moments of despair, FOMO (fear of missing out), fear, and everything in between.
As the cryptomarket enters its second decade, cryptoasset markets are rallying toward new all-time highs and many of the world’s largest investors and financial institutions are getting involved. Most cryptocurrencies operate without the need for a central authority like a bank or government and operate instead through a distributed ledger to spread power among their community.
As with any investment, it is important to understand exactly what it is. That becomes necessary when it comes to a speculative and still evolving asset like crypto.
What is Cryptocurrency?
A type of currency that is digital and decentralised. Cryptocurrency can be used to buy and sell things or as a long-term store of value. However, several countries don't allow cryptocurrency to be used to buy goods and services.
"Cryptocurrencies are basically digital assets. It is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend," Hitesh Malviya, founder of ItsBlockchain, said.
Digital currency can be bought and sold using the hundreds of online exchanges that are available to investors. Investors have made huge sums by throwing their cash behind new digital currencies, but their volatile nature means savers can just as easily lose their money.
Why is Cryptocurrency popular?
With cryptocurrency, there is a new way of transacting and storing value. Many believe that it is markedly better than traditional fiat and gold. Decentralisation of financial operations through cryptocurrencies has several efficiencies over the traditional financial system. It cuts out almost overhead costs. Besides, the transactions costs are less expensive and can be sent and received internationally.
With fiat currencies (government-issued currency that is not backed by a commodity such as gold and derives its value solely from the trust that people place on it), nations can print and restrict the printing of money. Therefore, the value can fluctuate. For those living in countries with hyperinflation and unstable economies, cryptocurrencies could be an alternative for storing value than fiat currency.
However, in the case of cryptocurrencies, there is a defined monetary policy that cannot be changed by anyone, regardless of who they are.
Cryptocurrencies are intended to be used for payments, transmitting value (akin to digital money) across a decentralised network of users. Many altcoins (i.e., not Bitcoin or sometimes Ether as well) are classified in this way, and may sometimes be called value tokens. Given below is the list of popular digital currencies by the total dollar value of the coins in existence:
|Cardano (ADA)||Binance Coin (BNB)|
|Polkadot (DOT)||USD (USDC)|
How do cryptocurrencies work?
Cryptocurrency works a lot like PayPal or a credit card, except you exchange digital assets for goods and services instead of US dollars. To make a transaction with cryptocurrency, you must exchange currency with a peer using a digital wallet known as a cryptocurrency wallet.
A digital currency wallet is software that allows you to transfer funds from one account to another. To complete a transaction, you need access to a password, known as a private key. The private key is much like a bank account. You can own multiple keys and own all the funds sent to those keys. Transactions are recorded on a public ledger, which shows the transaction totals without revealing the identities of the parties involved.
"Cryptocurrency mining is the process required to verify transactions. It involves a massive amount of computing power and complicated algorithms, but those who are successful at solving problems through mining can earn reward coins, tokens, or transaction fees," Malviya said.
He explained that when it comes to cryptocurrencies, one of the biggest challenges for investors is not getting caught up in the hype. Cryptocurrencies have emerged as an asset class that provides a chance to invest and earn substantial returns. The asset class has garnered massive popularity in recent years. To start crypto trading, one needs to set up an account. To begin with, an individual can invest as little as Rs 100.
Risks of cryptocurrencies?
Cryptocurrencies are still relatively new and the market for these digital currencies is very volatile. Since cryptocurrencies don't need banks or any other third party to regulate them; they tend to be uninsured and are hard to convert into a form of tangible currency (such as US dollars or euros.)
In addition, since cryptocurrencies are technology-based intangible assets, they can be hacked like any other intangible technology asset. Finally, since you store your cryptocurrencies in a digital wallet, if you lose your wallet (or access to it or to wallet backups), you have lost your entire cryptocurrency investment.
Digital currency is also susceptible to certain forms of hacking, which is why it’s important to keep your cryptocurrency accounts extremely secure. If someone gets ahold of your crypto wallet address and password, they can take your crypto and you likely won’t have any way to recoup losses.
Before investing in a cryptocurrency, be sure that you understand how it works, where it can be used and how to exchange it. Just like a person wouldn't carry crores of rupees around in a paper bag, don't choose an unknown or lesser-known wallet.