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What is Cryptocurrency? And why do we need it?

How many times has it been that we saw the term “cryptocurrency” in the newspapers? How many times have our friends and relatives asked us, “Why aren’t you investing in crypto?”?

These days people have been investing in and talking about cryptocurrency everywhere. Cryptocurrency is one of the hottest topics of discussion as well as the focus of several people, so that begs the question: What is cryptocurrency?

In simpler terms, cryptocurrency is the currency in digital form. This is just another form of currency used to conduct transactions. In medieval times, when humanity had not mastered the concept of money, we used to exchange one commodity for another.

Evolving further, we developed coins, followed by currency notes and now we have reached the next stage to have digital currency. This digital currency is to be used like the currency notes we presently use for day-to-day activities. But they are not simple. Cryptocurrency is called so because they use cryptographic methods to encrypt the transactions.

Moreover, it is safer than the basic currency since there are no transaction limits, there is no middleman to complicate the transaction and the transactions conducted using these currencies are a lot faster and safer. They are traded online like stocks and commodities but they do not have anything to base their value on other than the currency itself and such markets trade 24×7.

But why do we need cryptocurrency?

In 2008, during the global financial crisis, people realized that they needed currency that was free of external control, free of manipulation by other parties, a decentralized form of currency.

This marked the birth of Bitcoin, the first cryptocurrency. The currency was first mined and released on open-source software in 2008 by an individual named Satoshi Nakamoto, an alias for a person(s) whose identity is still a mystery.

The most fascinating fact about cryptocurrency is the fact that it is not under the control of any government or bank. It is not in control of any single person or entity. 

Our standard fiat currency represents debt. It is an “IOU”, issued by the respective country, whose value is displayed on the paper itself. That is the reason why our currency notes say, “I promise to pay the bearer the sum of ………….. Rupees.”.

However, cryptocurrency does not represent debt, it represents its own value which is determined purely by demand and supply. Moreover, unlike our normal currency, cryptocurrency is formed using advanced cryptography methods which make it impossible to forge.

So how does cryptocurrency work?

Cryptocurrencies operate using a technology called ‘Blockchain’. This technology stores data in the form of blocks that are connected to more blocks using chains. These blocks are given unique hash codes and contain all the relevant information about the transactions they are recording as well as the hash code of the block that it has succeeded.

In case of any changes that need to be made, the changes are not made to the block on which the data is stored. Instead, the changes are recorded on a new block that is added to the chain. This ensures transparency in the chain as well as a record of the change.

However, the most unique point of Blockchain is the method of storage of data. Unlike old methods of documentation or new methods of cloud/server storage, Blockchain technology stores data on a network of computers. This network of computers stores the data, called “Ledger”, which is essentially the list of transactions conducted, and they validate each other to ensure that the data is not fake, which in turn creates trust in the data.

However, adding blocks in a blockchain is no simple task. Miners who mine the currency need to solve complex cryptic problems to add blocks. When such a problem is solved, the source computer sends the solution, called “Proof-of-Work” to all computers in the network to validate it via its algorithms and adds the block upon verification. Newer methods called “Proof-of-Stake” & “Proof-of-History” are also being used by several cryptocurrencies which are environment friendly and improve scalability.

How Safe is Cryptocurrency?

A technology as sophisticated as Blockchain prevents any kind of fabrication. For example, if a person tries to add 500 Bitcoins to his ledger fraudulently, the ledger in one computer will vary from the ledgers in all the other computers. This will raise a red flag and forcefully terminate the erroneous entry in the computer thereby rectifying it.

To make such an entry, the person will need to make the same entry in more than half of the computers simultaneously which is virtually impossible. 

However, there still exists a risk. Hackers are unable to hack the currency itself, but they can hack your digital wallets. Cryptocurrency is held in digital wallets and traded on cryptocurrency exchanges, and these can be attacked by hackers. For example, Polynetwork, an intermediator for connecting blockchains, was hacked in August 2021 wherein cryptocurrencies worth $611 million were stolen from them, making it the largest cryptocurrency hack ever.

Read now about India’s latest approach towards cryptocurrency.

What are some of the Cryptocurrencies out there?

There are several cryptocurrencies that are being traded today. Some of the most notable and famous ones are Bitcoin, Ethereum, Dogecoin, Solana, LiteCoin, and Cardano.

All cryptocurrencies except Bitcoin are referred to as “Altcoins”. The key differentiator between cryptocurrencies, other than their market cap, is their operational methods. All of them tend to increase their efficiency as compared to their peers and use different algorithms, such as Bitcoin uses SHA256 while Ethereum uses Ethash. 

Are Cryptocurrencies good?

One of the most important questions people think about when they hear about cryptocurrencies.

This thought arises out of the rumors that cryptocurrency is mainly used for criminal activities due to its untraceable nature. It is a valid concern but normal currencies are also used to fund criminal endeavors. The major concern is the carbon footprint generated by their mining.

A lot of time and power is consumed to mine cryptocurrencies which results in a huge carbon footprint. Moreover, cryptocurrencies are extremely volatile. They could reach amazing highs and fall to terrifying lows. For example, on 09/11/2021, Bitcoin reached a high of Rs 54,39,270 but on 19/02/2022, it traded around Rs 31,77,750.

What is the future of cryptocurrencies?

This is a difficult matter to discuss. Influential people like Bill Gates and Elon Musk openly support cryptocurrency while seasoned investor Mr. Warren Buffet, CEO of Berkshire Hathaway, has openly chosen to be against it. 

The Indian government has currently set up a tax of 30% on all cryptocurrency gains. Moreover, the Deputy Governor of RBI said in a statement that banning cryptocurrencies is most advisable for India while calling them similar to Ponzi schemes. The main aim of cryptocurrency is to set up a decentralized currency but by adding regulations to it, the purpose of the currency is defeated.

India has also recently announced about releasing its own regulated Digital currency, The Digital Rupee. Read more.

Presently, cryptocurrency has not set up its value as a long-term investment, yet. Bitcoin has been selected as the legal tender in The Republic of El Salvador, making it the first country to do so. Egypt, Iraq, Qatar, Oman, Morocco, Algeria, Tunisia, Bangladesh, and China have all banned cryptocurrency. There are several coins today but most of them are predicted to not be able to survive in the future. 

The existence of cryptocurrency as an asset for trade could be long but its adoption as a mode of conducting transactions, i.e. a legal tender, is far off in the future, if at all possible.

Article by Aman Agarwal

This article is brought to you in association with jobaaj.com

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