What Is Cryptocurrency And How Does It Work? – Forbes

Published: Mar 4, 2022, 2:53pm
Cryptocurrency is decentralized digital money that is based on blockchain technology and secured by cryptography. To understand cryptocurrency, one needs to first understand three terminologies – blockchain, decentralization, and cryptography. 
In simple words, blockchain in the context of cryptocurrency is a digital ledger whose access is distributed among authorized users. This ledger records transactions related to a range of assets, like money, house, or even intellectual property. 
The access is shared between its users and any information shared is transparent, immediate, and “immutable”. Immutable means anything that blockchain records is there for good and cannot be modified or tampered with – even by an administrator.
Centralized money refers to the regular money that we use, which is governed by authorities like the Reserve Bank of India. Decentralization in cryptocurrency means there is no similar authority that can be held responsible for supervising the rise and fall of a particular cryptocurrency. This has many benefits over centralized money. 
Some of these benefits include the following:
Cryptography is the method that secures data from unauthorized access by the use of encryption techniques. Most of the claims that blockchain makes, like privacy and immutability, are enabled through cryptography. 
The roots of cryptocurrency technology can be traced back to the 1980s with the invention of what is called a “blinding algorithm”. The algorithm is all about secure and immutable digital transactions. It remains fundamental to the modern-day digital currency. 
In 2008, a group of people (currently known under the pseudonym Satoshi Nakamoto) created the guiding principles of the first and leading cryptocurrency in the market today, Bitcoin. In 2009, Bitcoin was launched to the world. But it would be years before it was formally recognized as a means of payment among leading merchants, starting with WordPress in 2012.
The underlying blockchain technology is today used in banking, insurance, and other business sectors. Growing at a compounded annual growth rate of 12.8% since 2021, the cryptocurrency market is estimated to reach $4.94 billion by 2030, thanks to the need to improve the efficiency of today’s payment systems, rise in global remittances and increased need to secure data.
Cryptocurrencies are not controlled by the government or central regulatory authorities. As a concept, cryptocurrency works outside of the banking system using different brands or types of coins – Bitcoin being the major player. 
Cryptocurrencies (which are completely digital) are generated through a process called “mining”. This is a complex process. Basically, miners are required to solve certain mathematical puzzles over specially equipped computer systems to be rewarded with bitcoins in exchange. 
In an ideal world, it would take a person just 10 minutes to mine one bitcoin, but in reality, the process takes an estimated 30 days.
Users today can buy cryptocurrencies from central exchanges, brokers, and individual currency owners or sell it to them. Exchanges or platforms like Coinbase are the easiest ways to buy or sell cryptocurrencies. 
Once bought, cryptocurrencies can be stored in digital wallets. Digital wallets can be “hot” or “cold”. Hot means the wallet is connected to the internet, which makes it easy to transact, but vulnerable to thefts and frauds. Cold storage, on the other hand, is safer but makes it harder to transact. 
Cryptocurrencies like Bitcoins can be easily transferred from one digital wallet to another, using only a smartphone. Once you own them, your choices are to: 
a) use them to buy goods or services 
b) trade in them 
c) exchange them for cash
If you are using Bitcoin for purchases, the easiest way to do that is through debit-card-type transactions. You can also use these debit cards to withdraw cash, just like at an ATM. Converting cryptocurrency to cash is also possible using banking accounts or peer-to-peer transactions. 
There are tens of thousands of cryptocurrencies available today with the figure pegged at 10,000 in 2022. Major cryptocurrencies include the following:
Bitcoin is the world’s first widely accepted form of cryptocurrency. Bitcoin is so popular, there was a time when its name was synonymous with cryptocurrency. But potential investors need to know bitcoins have become very expensive. In 2021, the cost of one Bitcoin was $68,000. But the good news is, you don’t always have to buy an entire coin, you can buy smaller fractions of it.
Altcoin is the term used for any alternative digital currency to bitcoin. The most popular in this ecosystem is Ethereum – one of the fastest-growing cryptocurrencies in the market. There is also a range of other altcoins in the market today such as Luckyblock, Shiba Inu and Terra.
The concept of crypto coins vs tokens can be confusing to many. At first glance, coins and tokens appear the same. However, the two have many differences 
There are many advantages to dealing in cryptocurrencies, and a fair share of disadvantages as well. Here are the top three reasons that work in favor of and against cryptocurrencies.
Until the 2022 Union Budget announcement, the fate of cryptocurrency in India was largely undecided. 
In the Budget, the Indian Finance Minister’s announcement on levying a 30% tax on gains on the transfer of virtual digital assets, which includes cryptocurrency, was initially seen as an endorsement of cryptocurrencies. It set off the debate on whether or not the tax on cryptocurrency indicates the government has recognized it as a legitimate form of currency. 
However, this isn’t true and there have also been speculations that a ban on private cryptocurrencies would follow the launch of the RBI’s own official digital currency. Something to this effect was openly stated by RBI Deputy Governor T Rabi Sankar in February 2022, when he said it was advisable for India to ban cryptocurrency. Will this turn out to be similar to the government’s ban on cryptocurrency in 2018 (which was overturned by India’s Supreme Court in 2020) remains to be seen.
Whether cryptocurrency is the future of money or not, one thing is clear: It is not advisable for anyone to invest in it without doing enough research. Investing in cryptocurrencies is not a new phenomenon. But with the recent surge in popularity and value, coupled with falling returns on bank deposits, more people are looking for cryptocurrency advice. 
If you have decided to invest in cryptocurrencies, ensure that you start with the leading cryptocurrencies like bitcoin, as newer ones may not have sufficient liquidity (you may not be able to sell them when you want to). The market is rife with scamsters. Hence using authorized platforms to buy or trade cryptos is important, especially while starting out. 
Investing in cryptocurrency is a risky venture. You need to be aware that there is a high chance of losing your money. If you are not comfortable with the risk, it’s better to stay away from it. There are many ways you can profit from cryptocurrency – buying coins, trading coins, mining coins, and so on. The last one requires the maximum resources but also has the potential for higher returns while buying or trading can be done more easily.
Cryptocurrencies are also highly volatile, so it is recommended to start small and diversify your investments. Simply put, do not place all your eggs in one basket. As a beginner, it helps if you initially rely on expert advice and gradually grow your own expertise by researching the subject. For this type of research to be successful, it is also important to develop an understanding of your country’s historic and current policies on cryptocurrency. And as always, don’t invest more than you can afford to lose.
Jaya Vaidhyanathan is the CEO of BCT Digital, a global technology company specializing in innovation for financial services. She holds an MBA in Finance and Strategy from Cornell University and is a CFA charterholder.
Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.

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