Today we will discuss “what is a cryptocurrency“.
To know about this you need to know about the”HISTORY OF MONEY“.
First, we will talk about this then you can understand ” How cryptocurrency works“.
How cryptocurrency works for beginners in India ( what is a cryptocurrency)—
If you want to know “what is a cryptocurrency” you need to understand the history of money. Here it is—
HISTORY OF MONEY ( what is a cryptocurrency )–
If I ask you that what is currency.? Then what will be your answer ?. Ok, let me explain it to you. It is a medium of exchange.
In the earlier days, it was a barter system, where people used to exchange goods and services for other goods and services because there were no notes and coins then.
Like giving potato in exchange for a tomato, or doing work in return for the other. But the system was not that efficient and not everyone wanted the same thing.
Then came currency, notes, and coins which used to be backed by gold, silver, but that system also became obsolete.
Because you can carry too much just because it is heavy metal as well as if the currency needs to be made shorter then also it was not possible.
FIAT CURRENCY (what is a cryptocurrency)––
And now it is a fiat currency that is issued by the government. It is not backed by gold or any other commodity. This is different from commodity or representative money. commodity money is created from gold or silver.
While representative money represents a claim on a particular commodity.
Now the fiat currency is not supported by any physical commodity.
This is rather supported by the faith of its holders and the virtue of the govt declaration. It is mentioned on the note as I promise to pay the bearer a sum of RS 100.
It is also signed by the governor, the govt is the central authority that regulates the circulation and supply of the currency.
Definition of a cryptocurrency–(what is a cryptocurrency)–
A special aspect of fiat currency is that for any type of transaction, we need the bank that verifies them.
For example, you want to send money to America, you will go to the bank which will verify the receiver, sender and charge a fee.
But this is not happening in cryptocurrencies.
It can be sent directly from peer to peer (peer=equal), without any bank or intermediary in between.
It can be divided into two words, crypto meaning hidden(crypto=hidden) and currency meaning medium of exchange.
In simple language, it is a digital form of cash. Meaning it can be saved on your computer or phone. Now the advantages and disadvantages of cryptocurrency are–
*ADVANTAGES OF CRYPTOCURRENCY (what is a cryptocurrency)–
1.It has no controlling central authority with no transaction limits with no financial intermediary.
2.some cryptocurrencies are limited.
3.Like there will always be only 21 billion bitcoins. you cannot print more.
4.Most of them are transparent.
5.Anybody can view that from where did they come and where did they go.
6.All of these revenues are in a public chain called the BLOCKCHAIN.
7.The charges are also low to transfer bitcoin as compared to the fiat currency and consume less time.
For example, if we observe this transaction, someone transferred 161500 bitcoins in April 2020 worth more than $1.1 billion at the time in a single transaction. The transaction settled in 10 minutes, and the fee for processing the transaction was $0.68.
DISADVANTAGES OF CRYPTOCURRENCIES—
You need to know this also in the topic What is a cryptocurrency?.
1.The biggest disadvantage of this is these transactions are irreversible because there is no central authority to check these transactions.
2.These transactions can be used for illegal transactions like buying and selling of drugs E.T.C.
3.It can be risky because it is very volatile.
4.It is stored in your digital wallet, and if you lose your password or private key, then there is no way to retrieve it.
Now let’s talk about blockchain technology, what is it.?
Blockchain is a chain of blocks. Each block is used to store some information. The block stores information of transactions like who is the sender, receiver, number of cryptos.
When one block gets filled, the other starts storing info, and the important thing is the new block points to the previous one.
Now how, every block contains its own and the previous blocks’ reference number and hash. Mean all the blocks are linked, hence the name BLOCKCHAIN.
It is important because if you try to remove or alter one block, the whole chain gets disrupted, that is why it is safe.
If we see, bitcoin was developed 10 years back. The transaction number is in billion but all are valid. Its database has never been hacked and is very useful with multiple uses.
How is it mined and who are these miners ( what is a cryptocurrency )—
Let us take an example, Ramesh wants to send his friend Pritam 10 bitcoins because bitcoin is the most popular cryptocurrency.
When Ramesh starting the transaction, a message is sent to the whole network that Ramesh wants to send 10 bitcoins.
Ramesh signs this message with a password which is called the private key.
Now the current computers in the crypto network will get the notification as all of them have a copy of the current database.
This transaction goes into a waiting room where there are many others like mine waiting for the settlement.
Here is the entry of the bitcoin miner, because miners are computers that are scattered around the world.
Their job is to assemble this transaction and propose them and these are the part of the blocks.
Now thousands of computers are computing to settle the transaction.
And this competition is to solve challenging mathematical puzzles and these miners can propose a new block only when they solve.
And the first one to do so gets the reward in the form of newly minted bitcoins which is 6.25 per valid blocked mine.
But this reward is changed every 4 years or after 210,000 blocks are mined and gets reduced by half each time.
According to the coin market cap, there are more than 6000 cryptos in the world, and every month new ones come in.
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So why do we need so many coins? Blockchain is software used the same but can be programmed for a different purpose.
Consider this analogy, Microsoft and Oracle are two software companies but their products are different.
So every coin has a different agenda, Bitcoin was envisioned to replace traditional money.
So does the existence of so many cryptos damage the scarcity of bitcoin.? The answer is -no.
It’s like a foreign currency does not affect the scarcity of the Rupee, the same way new crypto cannot replace an old one. Now comes the big question-
*Are cryptocurrencies in India legal ( what is a cryptocurrency )—
In 2018, there was an article issued by RBI stating that no bank should provide service to any digital currency.
The supreme court took this order back and then HDFC, ICICI, YES, and SBI resumed their transaction.
Cryptocurrency is not a legal tender in India but the buying and selling of the same are not illegal.
Contrary to the popular notion, cryptocurrencies are not expensive.
Many people think that they wouldn’t be able to afford it and stay away but they don’t know that it can be bought in small fractions too.
There are many exchanges in India, that allow investing in crypto at a small amount of Rs 100. On Jan 20, 2021, the govt announced that they will pass a bill to launch a sovereign digital currency.
The recently revived industry realizes a second threat that they are not the first ones to talk about sovereign currency. now–
How is this digital currency different than a cryptocurrency—
The main difference is that digital currency will be centrally issued and will be backed by the central banks.
Whereas cryptocurrency is not. As earlier discussed cryptos are transparent wherein digital currency is not.
You can not choose the wallet destinations and can not see the transactions in digital currency but has a central authority that can deal with problems or issue.
For example, they can freeze or hold any transactions at the request of any participant or authority.
In 2021, Tesla announced that they bought bitcoin worth $1.5 billion which was a big boost for the coin.
But recently they announced to reject bitcoin due to the environmental issue of an insane amount of energy being used to mine it.
And refused to accept crypto as a form of payment for their electric cars because it came at a big cost to the environment.
Due to this, it slumped by 17%. One more crypto is making news, Dogecoin.
In 2010, a Japanese kindergarten teacher posted their dog’s picture which became a meme.
Jackson Parmer in 2013, who was an Adobe employee tweeted a joke to invest in Dogecoin.
He has tied up with Billy Marcus, an IBM developer to create the crypto. What started as a joke became a phenomenon in the digital world.
By 2014, Dogecoin became the 5th largest cryptocurrency and today it has jumped by 130% times this year.
Should you invest in crypto or not ( what is a cryptocurrency )––
These are very volatile. Since these are risky classes, invest only that much which you are ready to lose.
All of this is for educational purposes and we do not recommend investing in any crypto or stock.
1.What is Cryptocurrency in simple words?
A cryptocurrency is a digital or virtual currency that is secured by cryptography.
That makes it nearly impossible to counterfeit or double spend. To know in detail read the article carefully.
2.Is crypto a good investment?
Cryptocurrency can be a very good investment option if you can take its high risk. You can lose all your money.
But as we discussed before if you can take risks then you can invest in it.
3.How to buy cryptocurrency?
To buy cryptocurrency you will need a wallet that can hold your currency.
You can create an account on an exchange also and then can transfer real money to buy cryptocurrency like bitcoin.
As well as you can use some apps like Coin switch.
4.Can Cryptocurrency be converted to cash?
Selling bitcoin on a crypto exchange is one of the easiest ways to convert bitcoin into cash.
Platforms such as Coin base and Kraken enable bitcoin users to sell digital currency and withdraw money directly from an account.
If you have any other questions on this topic you can comment below.