What is cryptocurrency and how does it work?

Cryptocurrency is a decentralized digital currency that is based on blockchain technology and secured by cryptography. To understand cryptocurrency one must first understand three terms: blockchain, decentralization, and cryptography.

Blockchain is a digital ledger that's accessible only to those with permission. With blockchain, you can create cryptocurrencies, and they'll have real value for years. This is a book of ledgers, with a particular focus on money.

Anyone can have access to this information, and if shared is transparent, immediate, and immutable. Immutable is a term used to describe anything recorded in the blockchain. It means it's there to stay, and nobody can change it.

Centralized currency is the government’s money, such as the Indian rupee. Decentralization of cryptocurrencies means that no single organization is accountable for supervising the rise and fall of a particular cryptocurrency. This is much more efficient than central money.

The following are some of the advantages:

Cryptography is the process of encoding data to secure it from unauthorized access. Encryption and decryption are two of its uses. It is sometimes used for ecommerce. Blockchain uses cryptography to provide a lot of benefits to its users, including privacy and immutability.

The roots of cryptocurrency technology can be traced back to the 1980s, with the invention of a blinding algorithm. The algorithm is all about safe and immutable digital transactions. Digital currencies are important for the modern-day economy.

Satoshi Nakamoto introduced the fundamental ideas that form the basis of the Bitcoin network. Since then, a group of people have continued to refine those ideas into a technology that has revolutionized commerce and finance.

In 2008, the first major bitcoin transaction was completed between a Microsoft employee and a programmer who wanted to purchase the game Half-Life 2 using bitcoins. It would be years before it was officially adopted by leading merchants, starting with WordPress in 2012.

The underlying blockchain technology is being used in banking, insurance, and other business sectors. Cryptocurrency is expected to grow at a compound annual growth rate of 12. 8% between 2021 and 2030, thanks to the need to improve the efficiency of payment systems and the increase in global remittances.

How Does Cryptocurrency Work?

Bitcoin is a cryptocurrency and it is not controlled by the government or central regulatory authorities. As a concept, cryptocurrencies work outside of the banking system using different brands or types of coins. Bitcoin is the major player.

1. Mining

With cryptocurrencies, it's all about the mining. A new cryptocurrency is generated via a process called "mining". This is a very complex process. Basically, miners are required to solve mathematical problems over specially equipped computers to be rewarded with bitcoins in exchange.

It is said that if you can survive for 30 days without eating or drinking, you can certainly survive a day without mining Bitcoin.

2. Buying, selling and storing

You can buy cryptocurrencies from central exchanges, brokers, and individual currency owners or sell them to them. Bitcoin, Ethereum, and Ripple are the best digital currencies to buy with a bank account. You can also buy and sell coins from exchanges like Coin base.

Once the cryptocurrency is purchased, it can be stored in a digital wallet, which you must have for safekeeping. Digital wallets are hot or cold. They're connected to the internet, so they're convenient to use, but they're also vulnerable to theft and fraud. A cold storage account allows you to make transactions 24 hours a day, seven days a week.

3. Transacting or investing

You can transfer Bitcoins from one digital wallet to another, using only a smartphone. Once you own them, your choices are too. You can use them to buy goods and services, trade in them, or exchange them for cash.

You can use these debit cards to withdraw cash at ATMs, just like you would any other debit card. Converting cryptocurrencies to cash is also possible using the web banking, and if you have a peer-to-peer (P2P) wallet like blockchain.info, it’s easy to convert cryptocurrency to cash.

Types of Cryptocurrencies

Cryptocurrencies are growing fast, which means they’re only getting more popular. cryptocurrencies are likely to be more than ten thousand by the year 2022.

Bitcoin is the world's first widely accepted form of cryptocurrency. Bitcoin is so popular that there was a time when its name was synonymous with cryptocurrency. This is good news! When investors are aware of Bitcoin's value, they know how much money they could get from investing. The price of a single Bitcoin in 2021 was about $68,000 but the good news is, you can usually buy larger fractions of it so you don't have to spend the whole amount

An altcoin is an alternative digital currency to Bitcoin. Ethereum is the most popular cryptocurrency ecosystem in the market. Its value has been increasing since the beginning of 2017, and it shows no signs of slowing down. There are many other altcoins out there, including Luckyblock, Shiba Inu, and Terra.

The concept of crypto coins and tokens can be confusing to many, so be sure to read this short guide before continuing. Coins and tokens appear to be the same at first glance. However, they differ in many ways.

Should You Invest In Cryptocurrency?

Cryptocurrencies have come a long way, but there are still several advantages and disadvantages to investing in these coins. The three reasons that work in favor of and against cryptocurrencies.

Advantages:

They are private and secure: Blockchain is the technology that underlies most cryptocurrencies, ensuring the security and anonymity of your data. It also assures high levels of security through cryptography, which we talked about in our earlier section on encryption.

They are decentralized, immutable, and transparent: The entire system is built around a shared ownership model, where data is made available to all permission members and is tamper-proof.

They are a hedge against inflation: Cryptocurrency is a great investment in times of inflation. An investor is said to be comparing cryptocurrency to gold. One of the reasons why it’s so difficult to create Bitcoin is that, just like gold, they are in limited supply, as there is a cap on mining

Disadvantages:

They are not widely understood: Cryptocurrencies are a relatively new concept, and their long-term sustainability remains to be seen.

They are prone to high risks: Cryptocurrencies have both risks and rewards. They are highly volatile and speculative, so they are prone to sharp downturns. Bitcoin is a risky investment for many reasons.

Digital currency is not a very good option, as it has a major drawback; it has no inherent value. There is a supply-demand type of equation that is used to determine the value of cryptocurrencies like bitcoin.

So it is possible that an exchange could experience an increase or decrease in its value due to speculation.

Cryptocurrencies are a highly risky investment and people should know that their usage is banned or restricted in most countries. Their legality is questionable in some countries like India.

Scalability is a problem: It's a complex issue, which has more to do with the technological side of the blockchain. Blockchain has become a buzzword that is often misunderstood by many, including developers who are used to coding in a procedural paradigm. There are many different crypto payments, making them more efficient than modern-day electronic payments.

Cryptocurrency in India

Since the 2018 Union Budget announcement, the fate of cryptocurrency in India is largely decided. Until then, there was no clear direction for cryptocurrency in India.

The move by India’s finance minister, Arun Jaitley, is clearly a step in the right direction. Cryptocurrency offers a viable alternative to fiat currency. Cryptocurrency is a valid form of currency that the government recognizes. This is not 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. He suggested that it was time for India to ban cryptocurrency. The country's crypto-ban, which was enacted after the Reserve Bank of India issued a circular warning against "unregulated virtual currencies", is still in place.

Bottom Line

Cryptocurrency has already become the future of money. And it’s only a matter of time until this technology completely changes how we send money across the world. If you want to invest in it, do your research first. Investing in cryptocurrency is not a new phenomenon. With the recent surge in popularity and value, coupled with falling returns on bank deposits, more people are looking for cryptocurrency advice.

If you're going to buy into the cryptocurrency world, make sure to get in on the first wave, so you'll be able to move your money around more freely than those who came after. The cryptocurrency market is rife with scammers. Hence buying or trading it through authorized channels is essential, especially at the beginning.

Investing in cryptocurrency is a very risky venture, but it can pay off big if done right. Don't get yourself into the position of losing money, because it's really dangerous. If you are uncomfortable with the risk, it’s best to stay away from it. The following is a list of ways to profit from cryptocurrency buying, trading, mining, and so on. The second method can lead to a larger loss but can be more suitable to trade in a short time.

Cryptocurrencies are also highly volatile, so it is recommended to start small and diversify your investments. Don't put all your eggs in one basket. As a beginner, it helps to rely on expert advice and grow your own expertise by researching the subject. This type of research requires an understanding of your country’s historical and current policies on cryptocurrency. And as always, invest only what you can afford to lose.

Jaya Vaidhyanathan is the CEO of BCT Digital, a global technology company that specializes in innovation for financial services. She's got a Master of Business Administration degree from Cornell University and she's a CFA charterholder, so she's got the financial knowledge and the expertise.

Aashika has been an editor and writer for Forbes India and for Forbes Online for over a decade. She was also part of the launch team for Forbes Asia. Aashika is now the India editor for Forbes Advisor. She has previously worked at CNBC TV18, Thomson Reuters, The Economic Times and Entrepreneur.