Cryptocurrency – the buzzword of investing community

Cryptocurrency has gained traction among business minded people all for good reasons. Founder of Twitter Jack Dorsey, Rapper Jay Z, Winklevoss twins, Investor Stanley Druckenmiller, Mike Novogratz, Investment Manager Anthony Scaramucci and CEO of Tesla are some of the famous backers of cryptocurrency. Tesla Company had even started accepting bitcoin, the largest and most popular currency, as a mode of payment to buy electric vehicles. Though after some time the company changed its decision by giving the reason that it is in the interest of protecting the environment.

What is Cryptocurrency?

In simpler terms, cryptocurrency is a digital form of money and uses cryptography to secure transactions. It is based on blockchain technology (digital ledgers in which transactions are recorded in the form of blocks). Cryptocurrency uses encryption to authenticate and secure transactions. Cryptocurrency generally uses decentralized control as opposed to central bank digital currency. Thus, as cryptocurrency is not issued by the central bank, it is immune from government intervention.

Bitcoin is the most popular cryptocurrency among the investor community. Its value has increased manifold due to its limited supply. Ethereum and meme coins like Dogecoin, Shiba Inu are also gaining traction among investors.

What is Crypto Mining? How does crypto mining work?

Crypto Mining is the process in which one gets cryptocurrency as a reward for solving cryptographic equations by using computers. Those who do the process of mining are called miners. For crypto mining one needs to have a wallet, mining software and mining hardware.

Unlike the central banking system, cryptocurrency operates on a decentralized system. Thus to verify the transactions, like to make sure that the sender has enough money to make payment, miners come into play. All transactions are bundled into a list and are then added to an unconfirmed block. The authenticity of the block is then confirmed by miners. After the authenticity of a block is confirmed then it gets inserted into the blockchain. Miners use computers and some cryptographic processes to solve complex equations which helps in verifying that the transaction is genuine or not, and in return miners get reward in form of cryptocurrency.

What are the benefits of cryptocurrency?

·         No Intermediary involvement: As cryptocurrency uses a decentralized system, transactions are done without any involvement of a third party. Thus unlike the traditional banking system, people can do transactions directly without any intermediary.

·         Protection from identity theft: Under traditional systems, identity threat is there. But by using cryptocurrency one can decide what details one wants to send to the recipient and thus the recipient will not be able to see other details, thus it guards privacy of a person's financial history and protects one from identity theft.

·         Lower transaction fees: As miners get compensated by the network for confirming the authenticity of transactions so there is little to no fees for doing transactions on cryptocurrency exchange.

·         Cross-Border Payments: Cryptocurrency allows individuals to make cross-border payments. In the traditional banking system, it takes time for cross-border transactions to take place. Also in some cases, cross-border payment is not even possible because of sanctions or friction between two countries.

·         Crowdfunding: Entrepreneurs try to raise money by Crowdfunding. With cryptocurrency it becomes easier to do Crowdfunding. Also if more investors are involved then small investments can be made which reduces risks involved.

What are the risks associated with cryptocurrency?

·   Cyber security issues: Though hackers cannot hack blockchain networks, they can hack individual accounts by using techniques such as phishing and social engineering. They trick individuals to obtain passwords from them. Thus individuals are vulnerable to cyber attacks which can result in the loss of their investments.

·   Use for illegal transactions: As government cannot track down a user wallet address, owing to high privacy that cryptocurrency platform provide to users, so it is now used as a mode to do illegal transactions like to do terror funding, money laundering and for extortion purposes.

·   Adverse effects of mining on environment: Mining of cryptocurrency is an energy intensive task, as it requires huge amounts of electricity to run advanced computers. Thus it increases carbon footprint because majorly electricity is produced by using coals.

·   Data losses can lead to financial losses: If a user loses the private key of his wallet, then the wallet will remain locked and hence the user will not be able to access his coins inside the wallet. Thus it can result in huge financial loss for users.

·   Volatile: Cryptocurrency is extremely volatile. In a matter of months its value can double or become half. The newness of cryptocurrency and speculative bets by investors contribute to its volatility. Thus cryptocurrency is not the right option for an investor who is looking for a stable source of return.

What is the scenario of cryptocurrency in India so far?

More than 10 crore investors in India have invested in cryptocurrency so far. The amount of money invested by them is more than 6 Lakh crore rupees. There are about 380 cryptocurrency startups operating in the country. Indians who are aged between 18-35 years are driving the cryptocurrency investment in India.

Cryptocurrency is not regulated in India so far. The decision regarding the regulatory framework for cryptocurrency is not yet finalized. It remains to be seen what stance India will take on cryptocurrency. According to some industry experts, there is very less possibility of an outright ban on cryptocurrency in India, given the number of Indians who invest in cryptocurrency. Government might take a balanced approach. Early adoption of digital coin trade can give India an advantage over others in the rapidly growing global cryptocurrency ecosystem. Now people are taking a calibrated approach as there is no clarity on regulations. Once the government will give clarity on this, then there is a possibility that more people will start investing in it. Thus all eyes are on Cryptocurrency and Regulation of Official Digital Currency Bill 2021, which will determine the future of cryptocurrency in India.