Cryptocurrency will soon pervade our day-to-day transactions. Already, there are innumerable services that accept cryptocurrency along with the mainstream currency. Once you start using cryptocurrency, you can buy and sell services in this type of currency.
Currently, there are more than 10,000 cryptocurrencies traded publicly. However, there are some top 5 cryptocurrencies that you will always deal with on a daily basis. They continue to expand and proliferate. The total value of all cryptocurrencies put together exceeds $1.9 trillion. Bitcoin leads the cryptocurrency market with a market capitalization of about $800 billion. Bitcoin is followed by Ethereum, Binance Coin, Tether, Cardano in market cap. Cryptocurrencies are popular because the larger vision of supporters is to decentralize the money supply by removing the interference of the banking system.
What is Cryptocurrency?
Cryptocurrency or crypto does not exist as physical currency notes or coins. It is not physical cash. Rather, it is binary data. Serving as a medium of exchange, crypto uses a distributed and shared ledger system to record transactions. The ledger system validates transactions and coin ownership. The decentralization of crypto creates multiple contingencies. A transaction cannot be recorded in the ledger without consensus from a majority of stakeholders, who also have a copy of the shared ledger or database. New crypto cannot be added without consensus too. The first crypto to be released is Bitcoin. In 2009, Bitcoin, introduced the concept of wallets. A wallet is not tied to a person, rather it is tied to an address. This type of addressing creates a pseudonymous network than an anonymous network. Bitcoin owners were only identified by their wallet addresses. The fact that all transactions were recorded on the blockchain created trust amongst all participants in the Bitcoin network. Bitcoin used proof-of-work as the main consensus algorithm, although newer cryptos are increasingly using proof-of-stake instead. The regulation for crypto has increased. Countries such as the US, China, UK, South Africa, Korea, El Salvador, Turkey, and Cuba have recognized crypto as an official tender. Other countries may follow suit. Top Cryptocurrency exchange apps in India have started to mushroom as well.
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Understanding Cryptocurrencies
Transactions between peers happen over a blockchain network. Wallets send or receive transactions. The sender uses wallet software to transfer funds from their account to a public wallet address. Similarly, a receiver receives funds on their public wallet address. Peer to peer transactions are encrypted using public-private asymmetric key encryption. Once the transaction completes, it is broadcast to the entire network. Later, after a consensus, the transaction is added to the public ledger. The process to add a transaction to the ledger is called mining.
Miners are people who run software to confirm transactions. Once confirmed transactions are added to the public ledger. Miners are needed to resolve a puzzle that is cryptographic in nature. The miner who solves the puzzle first get reward points and also the privilege to add transactions to the blockchain.
Crypto can be obtained for use similar to how other currencies are obtained. Goods and services can be exchanged for crypto. The US Dollar can be traded for crypto or crypto can be traded for
other crypto. Trading is done on exchanges via brokers. They are third-party agents that deal in crypto buying and selling. Exchanges are similar to stock exchanges. Trading can also be done between peers by using the mediation of a third-party service. Crypto prices are based on demand and supply. Like regular currencies, crypto transactions also attract taxes such as capital gains tax and sales tax.
Types of Cryptocurrency
Crypto is divided into two categories – coins and tokens. The former can non-Bitcoin and Bitcoin currencies. The latter are programmable assets. These assets reside on a blockchain. The words coins, crypto, and tokens are used interchangeably. But in reality, they are distinctive from each other.
Coins are used as a form of digital currency and have their own blockchain. For example, Ether is a type of coin for use on the Ethereum blockchain. A coin that is not a Bitcoin is referred to as an altcoin. There are thousands of altcoins. Most of them are simply modified versions of Bitcoin. Some altcoins are not just another modified version, but are based on significant technology differences too.
Tokens also operate on a blockchain, but they are not used as currency. Because they are programmable assets, they are used in smart contracts. Tokens are used as units of value. Even real world items such as electricity, digital assets, and money can be sent and received with tokens. An example of a token is Basic Attention Token (BAT) which is utilized in digital advertising.
Tokens are further divided into value tokens, utility tokens, and security tokens. Because tokens represent value, they differ in the way they are created.
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Advantages and Disadvantages of Cryptocurrency
Digital currencies are gaining in prominence with the rise of blockchain. As this technology matures, it is providing a stable and robust technological infrastructure for digital currencies. Yet, as with anything, even digital currencies have their cons as much as they have their pros. Here is looking at the pros and cons of cryptocurrency.
Advantages of Cryptocurrency
• Crypto is not affected by inflation
o Currencies decrease in value over time with rising inflation. But with crypto, only a limited amount is released. For example, there are only twenty one million Bitcoins currently. So instead of declining, the value of Bitcoin will only increase when there is demand. In the long run, this aspect prevents inflation.
• Decentralized and self-governing
o Centralized governance is not required to manage crypto. Crypto transactions are stored in a distributed ledger and changed based on consensus. The virtue of being decentralized helps created a trusted environment and non-interference from any central authority.
• Security and privacy
o Blockchain technology is based on mathematical puzzles. Hence, mining is a fair activity. The ledger is based on an immutable record of transactions. Meddling with transactions will not yield any results, as the consensus protocol will discard the meddled transaction and even remove the host.
• Cost-effective
o Cross-border transactions are at the mercy of banks. Huge transaction fees are often a deterrent. People think twice to transact across geographies. But the blockchain based technology makes transacting across geographies in crypto negligibly costly. In most cases, the transaction fees are zero. By eliminating PayPal, VISA, and such third parties, people can be sure that their transactions are private, secure, and cost-effective.
• Faster fund transfer
o Transactions, be it domestic or across borders are very fast. This is true especially with cross-border payments. Transactions are faster than traditional wire payments operated by banks and third-party fund transfer organizations.
Disadvantages of Cryptocurrency
• Can be used illegally
o Wallet addresses are hard to track. Illegal deals using Bitcoin is hard to trace. Sometimes known as the dark web, Bitcoin has been used to trade in prohibited goods and services. Crypto is also used as a cover-up to convert black money to crypto and reconvert it when the need arises.
• Data theft
o Private keys can be stolen. Hackers can siphon off money from unsuspecting wallet users. Many users have lost their online wallets. The money inside the wallets was locked too. This aspect makes people reconsider using online wallets. They think that it’s a safer option to put money in bank vaults.
Criticism of Cryptocurrency
Maintaining a virtual wallet is like maintaining one’s bank vault in one’s personal computer. If the private key is compromised, there could be wallet sabotage. Unless of course the wallet owner realizes it quickly and generates another set of a private-public key combination.
Cryptocurrencies have always been highly volatile. Steep increases followed by steep decreases in value are common. Many people are skeptical to turn their real money to Bitcoin or altcoins. They would rather rely on a more stable currency system that does not have massive crests and troughs in value fluctuations.
The Financial Conduct Authority has not regulated the crypto market. There are no standardized rules. Even if a person starts a business based on crypto, there is no guarantee that the rules will stay the same. Being an evolving technology, it is expected that crypto will have substantial changes frequently.
Consumers moving to a new crypto could put businesses in a spot. The crypto they are using might lose value. Even if consumers move to mainstream currencies, it could affect the business. Purely crypto based businesses need to always be on the watch out for such issues.
Crypto can be used by scammers. Social media platforms are used by scammers for this. Gullible people are tricked into making investments into fake crypto investment schemes.
The Ten Most Significant Cryptocurrencies Apart from Bitcoin
• Ethereum – It is a popular crypto network. The use of blockchain technology and smart contracts is extensive. Smart contracts enable the creation of rules and regulations for controlling transactions.
• Dogecoin – The mascot or icon for this altcoin is a Shiba Inu dog. When Tesla CEO Elon Musk backed this altcoin, its value skyrocketed. Dogecoin does not have an upper limit on the number of altcoins that can be circulated.
• Cardano – A team of cryptographers, engineers, and mathematicians created this network. Cardano has a reputation of being stable.
• Litecoin – Charlie Lee, an MIT graduate, created this digital currency network. Similar to Bitcoin, this altcoin has a fast transaction rate.
• Polkadot – It is a crypto that offers interoperability between other cryptos. Based on proof-of-stake consensus, Polkadot connects permission-less and permissioned blockchains. The relay chain is the core component that allows interoperability between networks.
• Bitcoin Cash – Although Bitcoin’s hard fork, this altcoin has several changes from the original. Bitcoin cash has a larger block size, higher transaction speed, and does not depend on the Segregated Witness Protocol.
• Stellar – Facilitating large transactions between financial institutions, Stellar provides enterprise solutions. It is used for institutional transactions. It can be used by anyone since it is an open blockchain.
• Chainlink – A blockchain network that closes the gap between smart contracts on the blockchain and outside of it. The ability to connect to apps outside of the blockchain allows for multiple use cases.
• Tether – This crypto is classified as stablecoin. It is so because the crypto pegs its market value to an outside reference point or a currency. Tether attempts to regularize price fluctuations with this methodology. The price of Tether is directly influenced by the price of the U.S. Dollar.
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FAQ’s on Cryptocurrency
1. What Is Cryptocurrency in Simple Words?
Cryptocurrency is a digital currency. Digital files are used as money. Crypto has decentralized control. The crypto is not controlled by any one person or entity. Crypto is not under the ambit of banks, governments, or financial institutions. The control of crypto is based on a distributed ledger. Transactions are recorded transparently. Everyone has a single unified source of truth. Transaction records cannot be tampered with.
2. How Do You Get Cryptocurrency?
To get crypto, one needs personal ID documents, and after signing up on a crypto exchange, choose a method of payment. Then place an order. Start buying Bitcoins and altcoins from any of the best app to buy cryptocurrency in India. Store crypto in a personal online digital wallet and outside of the crypto exchange. By doing this, the risk of losing funds because the exchange was hacked is not present.
3. What Is the Point of Cryptocurrency?
Using crypto is fraud proof as long as you are using the best app for crypto trading in India. There is no issue of using counterfeit bills. Identities of coin owners are encrypted. Record keeping is transparent as identities in the records are based on wallet identities and not names of people. Blockchain records are immutable and virtually unhackable. This ensures the accuracy and integrity of transactions. Crypto is also very accessible, as it is Internet based. Settlement of transactions is instant and does not have to go through banking system processes.
4. How Does Cryptocurrency Make Money?
Buying coins such as Ethereum, Litecoin, Bitcoin, Ripple etc. from the best crypto trading app in India, and waiting for their value to increase is one way to make money. Once their value increases, selling them at a margin or profit creates income.
Cryptos can be held for getting dividends too. A number of cryptos pay a dividend for simply holding their crypto after purchasing it. Purchase some crypto via a cryptocurrency trading app in India and hold it over a period of time to start getting dividends.
Money can be made by operating a master node. This is a full node. It maintains all blockchain transaction activities in real-time.
5. What Are the Most Popular Cryptocurrencies?
Bitcoin cash, Ethereum, Stellar, Binance Coin, Cardano, Dogecoin, XRP, and Litecoin are some of the popular cryptos. Any of them can be chosen as the top 5 Cryptocurrency to invest in 2021. However, there are thousands of cryptos out there, and it depends on one’s research, interests, and understanding to choose a crypto.
