Cryptocurrency can be defined as a digital currency in which transactions are verified and records maintained by a decentralized system using a special coding system called cryptography, rather than by a centralized authority like Government authority / Central Bank. The word crypto means “secret “and currency refers to a medium of exchange for the purchase of goods and services.
Breaking Cryptocurrency into simpler pieces
To understand the complex elements mentioned in the definition let's travel back to the journey and evolution of money. Ages ago our forefathers used the technique of the Barter system to exchange goods and services. For example, if Mr. Rajesh wants 1kg of wheat from Mr. Shyam he would trade it for 1Kg of Rice. Here goods were exchanged in return for goods and both of them lived a simplified life. The issue started arising when a person wanted 1Litre of milk or any other substance instead of wheat or Rice. This necessity leads to the introduction of the exchange of metals like silver or gold in return for goods and services. However, due to the physical attributes and value of gold, this system also started causing hindrances in trade. The gold coins were difficult to be carried, it was a hectic activity to always mint small gold coins for easier trade, etc. This brought to the next era of revolution wherein the gold was surrendered to the Government in return for currency.This system prevailed for a longer period. However, the government started realizing that since the quantity/source of gold is limited if they want to expand the economy, spend and invest in the growth of the country they will require more reserves of Gold, this necessity brought to the fourth revolution whereby the Governor or the governing authority promises to pay the bearer a certain sum of money as promised by him in the note. This can be read in all prevailing currency notes. After using physical currency notes for long decades we have finally reached a generation where we use digital modes of payment like UPI, credit cards, etc to make payments. The physical money is not present and can’t be visually seen in this whole digital system. It's recorded in the ledger. Like if you pay 500rs and purchase a product from Flipkart, your bank will record a debit, and Flipkart's bank account will record a credit.
Now let’s take the above scenario to explain the cryptocurrency. Cryptocurrency works like a UPI. Like if you are a bitcoin owner you will have a specific bitcoin address and a password. You can sell it to another bitcoin address in any quantity as you like. The best revolutionary element of cryptocurrency is cryptography. Whenever a person trades in Cryptocurrency it is just not recorded in one computer, it is recorded by millions of computers in real-time in a systematic coded manner. Nobody can edit, delete or erase the transactions. It’s permanent and coded and locked forever.
What is Blockchain technology? Who is a miner and what is mining?
Cryptocurrency uses blockchain technology to record transactions in a public ledger. This public ledger is maintained in millions of computers. It is referred to as peer to peer network. Every block contains transactions and every transaction is interlinked and is formed like a chain. This is an incredible feature because in case if anyone tries to hamper the data, he will not just have to edit or forge transactions on one computer he will have to do it in 1 million computers which are technically not possible. If a hacker tries to mislead or do any fraudulent activities it will be immediately traced down as 99% of computers will have recorded the correct data. The fact that one entry is verified multiple times and is present in millions of computers makes this system more reliable and trustworthy. This activity of recording and validating every transaction is called Mining and the people who are taking responsibility for maintaining this public ledger are called Miners. The Miners are rewarded in terms of Bitcoins or the coins which they are mining as part of their efforts. All the transactions are recorded with full transparency, accuracy and done in real-time within seconds of a trade by the system. Now all of you may wonder if all have access to the data then where is privacy? As said above the cryptocurrency uses cryptography which is a coded form of recording the transaction so all the transactions are coded but transparent and can’t be edited only viewed.
Advantages of Cryptocurrency:
1. A fully decentralized form of currency, as it is not at all dependant on any government”s decision, any power, any individual it is completely owned by people. People have complete knowledge of to whom, how many coins are traded unlike in banks where customers have no idea of what the banks are doing with their funds.
2. Completely transparent, secure, and accurate transactions protected by Blockchain facility
3. Easy to trade via apps like Coin DCX, Wazir X, Crypto.com, etc
4. No processing or transaction Fee involved.
5. Completely Digital and is used by a few countries in exchange for currency.
The dark side of Cryptocurrency:
1. In India Cryptocurrency is not accepted as a legal tender of money but the Supreme Court has allowed trading, investing, holding in cryptocurrency since the year 2020.
2. Highly Volatile.
3. Highly Speculative. For Eg. When Elon Musk announced that Tesla will now accept Bitcoin as a currency its rate shot up at 60,000$ whereas when he took that back it fell sharply to 30,000$ in May 2020.
4. It is an unregulated market. Since there is no policing or regularizing it’s an attraction for unethical and illegal activities.
5. The process of mining uses a lot of electricity as the transactions are verified again and again which makes this less eco-friendly due to which it is not encouraged.
Future Possibilities:
Cryptocurrency just not only includes bitcoin but several other coins are also being developed which are going to be more eco friendly and in comparison to the electricity being used by Banks across the world it consumes less energy.
Whether or not to invest in Cryptocurrency.
1. If you are an early investor then clearly “No” because it is an unregulated market the price variations are very volatile and not a good option.
2. In case you want to do optimistic gambling you can invest a certain amount (of money that you are comfortable losing. ( Not more than 5% of your investment portfolio)
3. This avenue cannot be considered as a practical or strategic investment hence it's better to invest small portions periodically as it is much of gambling don’t fall prey to the terms like going to the moon or investing in expectation of huge benefits always remember that there is no regulatory authority and all rewards come at huge risk.
(Edited By Nishat Aftabi)