The cryptocurrency industry is booming as bitcoin, dogecoin, ethereum are the hot buzzwords driving the crypto craze these days. Even though the crypto industry is only a decade old, novice investors are drawn to it as they look for a quick way to make a profit.
Unlike the stock market, there is no regulation in the crypto market, as a result of which, its value moves up and down every day. Given the extreme volatility of these digital coins, here is 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 cryptographically secure, making it nearly impossible to counterfeit or double spend.
It’s worth noting that the cryptocurrency doesn’t exist physically, meaning 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 the cryptocurrency. Instead, these functions are widely distributed among users of the cryptocurrency via the Internet.
Furthermore, each coin of cryptocurrency has a unique line of program or code. This means it cannot be copied, making them easy to track and identify as they are traded.
How does this work?
Cryptocurrencies are not backed by a central authority such as the government. Instead, they run across a series of computers. It is exchanged peer-to-peer on the web without any middlemen.
Cryptocurrencies are decentralized – meaning that no one government or bank manages how they are made, what they are worth, or how they will be exchanged. All crypto transactions are cryptographically secure – meaning that it allows only the sender and intended recipient to view its contents.
Is cryptocurrency the same as blockchain?
No, Blockchain is the technology that enables the existence of cryptocurrencies. A blockchain is a digital ledger of transactions that is distributed across a network of computer systems. Think of it like a ledger that shows the entire history of that currency.
Simply put, it is a system of recording information which makes it impossible to hack the system. Each block of the blockchain contains multiple transactions, and each time a new transaction occurs, a record of that transaction is added to each participant’s ledger.
A blockchain database can store large amounts of information that can be accessed and used by multiple 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 since no one controls the blockchain, they cannot take or rewrite records.
How can you store your cryptocurrency?
Cryptocurrency can be stored in something called a ‘wallet’, which can be accessed 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 key that gives the user access to their cryptocurrencies – allowing one to send and receive cryptocurrencies such as bitcoin and ethereum. It should be noted that your coins are stored on the blockchain, and transferring those coins to another person’s wallet requires the private key.
There are different types of crypto wallets available that meet different needs in terms of security, reliability, accessibility, etc.
What types of cryptocurrencies exist?
Bitcoin is the most traded cryptocurrency that everyone knows and talks about, but it is not the only type of cryptocurrency. There are Litecoin, Polkadot, Chainlink, Mooncoin, Shiba Inu, Dogecoin etc. According to Coinmarketcap, there are currently over 6,000 coins in existence.
Bitcoin is the most stable coin. As the first cryptocurrency, bitcoin was trading below a dollar. Over the years, bitcoin has gained price momentum and surpassed the $1 trillion market cap. Meanwhile, investors should explore their options and choose an asset that can meet their needs.
How to buy cryptocurrency?
Just like the stock market, the crypto market has exchanges or brokers who are facilitators. These exchanges often charge a fee or commission for each transaction. Some even offer rewards for hitting milestones, some as a joining bonus. This policy may vary with each exchange.
Some of the top crypto exchanges in India are – WazirX, CoinDCX, CoinSwitch Kuber and Unocoin – users need to sign up with their KYC credentials, download the app and buy cryptocurrency. These exchanges also help you monitor the value of cryptocurrency and buy or sell it.
Crypto exchanges rely on investors for possession of the cryptocurrency. This happens when users deposit crypto to sell and some new users come to the exchange to buy it – facilitating trading.
Cryptocurrency can be partially bought. For example, if you are willing to buy one bitcoin you do not need to buy full bitcoins (BTC) to buy some bitcoins. You can buy a fraction of bitcoin. You can own at least 0.0000000001 BTC. The same is the case with all cryptocurrencies.
Can you get cryptocurrency for free?
Yes, you do not need to buy cryptocurrencies. You can also obtain cryptocurrency by solving cryptographic equations through the use of a computer. This process involves validating a data block and adding transaction records to the blockchain.
It is also worth noting that some cryptocurrencies like bitcoin are limited in supply, which means there is a maximum number of coins that will ever be in circulation. Others like Ethereum do not have a maximum limit, but do 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 valid payment method. There are some practical issues with cryptocurrency – as it absolutely cannot be used for daily transactions. However, there are ways to use your crypto to facilitate payments.
Bitcoin trading site Unocoin is now allowing its users to purchase vouchers from over 90 different brands using bitcoin. 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 such as Whole Foods, Nordstrom, Etsy, Expedia and PayPal are now letting people pay using crypto.
How stable are cryptocurrencies?
Bitcoin rose to $40,000 (around ₹ 29.70 lakh) in January this year. Continuing its bull run, it reached an all-time high of $65,000 (approximately ₹48.27 lakh) by the end of April. Then in May, it fell and remained below $30,000 (approximately ₹ 22.28 lakh) throughout June. Again the prices have skyrocketed, and at the time of writing this article, bitcoin is worth around Rs 51 lakh.
This shows that cryptocurrencies are extremely volatile. The cryptocurrency market thrives on speculation. Investors place speculative bets that cause a sudden inflow or sudden outflow of funds, leading to high volatility.
Additionally, the crypto market is seen as a way to make quick profits. Part time people come with the hope of making quick profit but sometimes when it doesn’t happen, they lose patience and hold back from it. This recurring participation and withdrawal contributes to the volatility of the digital coins.
Is it a legal tender in India?
At the moment, there is no legislature covering cryptocurrencies in India. But that doesn’t mean that owning cryptocurrencies is illegal.
Meanwhile, India is yet to present 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”, which was to be introduced in the budget session of Parliament, but It was organized. As the government continues the discussion with the stakeholders. So far, only a few countries have accepted cryptocurrencies as legal tender and the list is expected to remain short.
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