Cryptocurrency - A Virtual Investment

CRYPTOCURRENCY - A DIGITAL INVESTMENT

  • A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
  • The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
  • Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies.
  • Many experts believe that blockchain and related technology will disrupt many industries, including finance and law. 
  • Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.   

In simple words we can say that cryptocurrencies are system that allows for secure payments online which are denominated by the terms of virtual "tokens"

A cryptocurrency is a digital asset stored on computerised databases. These digital coins are recorded in digital ledgers using strong cryptography to keep them secure. The ledgers are distributed globally, and each transaction made using cryptocurrencies are codified as blocks. And multiple blocks linking each other forms a blockchain on the distributed ledger. There are estimated to be more than 47 million cryptocurrency users around the world. These cryptocurrencies are created through a process called mining.

    IS IT SAFE TO INVEST IN CRYPTOCURRENCIES

The answer to the question is tricky as it is still an emerging asset class and has not yet gained widespread acceptance like equities, commodities and mutual funds.

Whether investing in cryptocurrencies is safe remains a hotly debated topic in the financial space, with many backing the decentralised digital currency and an equal number of people opposing it.However, from a pure investment point of view, the risks associated with Bitcoin, Ethereum (Ether) or any other cryptocurrency are no different from other traditional assets, except the fact that the virtual coin market faces higher volatility.

Analysts have clearly stated that all cryptocurrencies are risky assets and wild price swings are common in the virtual coin trading space. This is likely to reduce as the asset gains wider mainstream acceptance.

But investors should be clear that the crypto space at the moment involves high risks and rewards. In other words, you need to have a big risk appetite to gain from crypto trading.

At the same time, investors should note that cryptocurrency is far more resilient than it appears.

Nischal Shetty, CEO of popular cryptocurrency exchange WazirX, has highlighted in the past that the asset has survived two major global recessions and has been around for over a decade.

      FUTURE ASPECTS OF CRYPTOCURRENCIES

Cryptocurrency has become a global phenomenom in recent years, although much is still to be learned about this evolving technology. There are many concerns and worries swirling around the technology and its capacity to disrupt traditional financial systems.

Joseph A. Grundfest, professor at the Stanford Law School, recently sat down to discuss how cryptocurrency is currently being used, where mistakes have been made, and what the future holds for this technology. As a former commissioner of the Securities and Exchange Commission and expert on financial systems, Professor Grundfest is in a unique position to comment on the future of cryptocurrency.

Supporters of Bitcoin and other cryptocurrencies claim that these financial platforms are inherently trustless systems - that is, they’re not directly tied to any nation-state, government, or body. They would argue that cryptocurrency is superior to traditional physical currencies because it is not dependent on, for instance, the U.S. federal government.

Grundfest notes that regardless of whether you think that’s a good or bad thing, it’s not entirely accurate. Cryptocurrency aren’t really trustless at all. They are still reliant on the underlying infrastructure powering cryptocurrencies like Bitcoin, much of which is located in China. The Chinese government could theoretically make changes to cryptocurrencies at a fundamental level by imposing its will on the data miners who keep them running.

       IMPACT OF CRYPTOCURRENCIES

Cryptocurrencies have become extremely popular due to the ideals of decentralization they convey, along with potentially outsized gains, but their volatility remains high and these assets carry a greater risk of losses than many traditional assets. For instance, in 2017, Bitcoin prices rose from about $1,000 to a high of more than $19,000 before dropping to around $3,000.Then, Bitcoin again rose through the end of 2020, reaching new highs of around $60,000 before dropping again to $30,000 in the summer of 2021.Other countries have strict capital controls in place to control the flow of money and/or charge high taxes. Cryptocurrencies can be used to circumvent these capital controls and taxes—legal or not—which has led to increased demand on the part of consumers and businesses. For this reason, many countries have started cracking down on the illegal uses of cryptocurrencies for tax evasion or illegal purchases or sales abroad

          CRYPTOCURRENCY- A MYTH OR LEGIT INVESTMENT

Inspite of being such a big gainer, there are continuous efforts by the government to discourage people from dealing in bitcoins or other cryptocurrencies.

In  February 2018, FM announced that bitcoin or such other crypto currencies will not be considered as legal tender in India.

On April 6, 2018, RBI made an announcement that “…any bank or financial institution regulated by RBI will not deal in virtual currencies.”

What led the authorities to take such decision and what is the future of such cryptocurrencies…. Here is my take on it:A digital cash system needs a payment network with accounts, balances, and transaction. To complete any transaction, there are approvals or checks to ensure avoidance of any duplicate transaction etc. In any other digital cash system these transactions are recorded on a centralized server which keeps records, checks and balances.  However, in a decentralized network, you don‘t have this server.  So, you need every single entity of the network to do this job. Every peer in the network needs to have a list with all transactions to check if future transactions are valid. But how can all the entities keep the same record and come to the same conclusion of the transaction?  The solution to this lead to the invention of cryptocurrency. “Cryptography” is used to secure the transactions and to control the creation of additional units of the currency. Confirmation / approval of a transaction is a critical requirement in a crypto currency. This approval can be done only by “Miners”. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain.  For this job, the miners get rewarded with a token of the cryptocurrency, for example with Bitcoins. The innovative technology / cryptography used in all this process is now more familiar as “blockchain technology”. Using blockchain as a digital network, where every single transaction (called a block) is securely linked together makes transactions verifiable, available to everyone and more secure.

Without going into the further technical aspects of the working of the currency, I would just corelate it to the any other digital currency in the wallet (of course- the digital wallet). So to own a bitcoin, the first thing you need is a Bitcoin Wallet. The bitcoins can be traded in many currencies. You can buy a bitcoin by paying the current ongoing price of the bitcoin using your currency. Certainly, there is a KYC process and you need to register your bank for the transaction. But you can buy / sell or trade in this currency like you trade in stock market or carry Forex trades.

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