Cryptocurrencies Demystified

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Cryptocurrencies (or “Crypto”, “Coin) are so much in news these days that most of you would have heard about them in news, on TV channels, or on social media. Few people call it a revolution, others are calling it fake, but do you know what cryptocurrency is, its usage, how it is different from existing currencies (Dollar, Pound, Rupees, etc.), the technology behind it, and why govt agencies are against it. Sounds confusing? Don’t worry.

This article will explain cryptocurrency and clear most of your doubts in a very simple way.

So, what is Crypto?

Let’s understand this from an example. Suppose you’re living in India and want to receive money from a person in the US, so how will you do that? You’ll provide him with your bank account details (Name, Account number, IFSC code, and in case of wire transfer from the US to India, SWIFT code). For this transaction, both US and Indian banks will be involved, there will be currency conversion and processing charges, and the whole process will take 2–3 days, making it a time-consuming and costly method.

If I tell you there is an alternate solution through this transaction that can happen within a few seconds at a very minimal cost, you won’t trust me. It is where cryptocurrency comes into the picture. Before I explain how this transaction can happen in a few seconds through crypto, let’s first understand what cryptocurrency is?

A cryptocurrency is a digital currency built on computer algorithms, called Blockchain technology, and is an alternative method of payments. Crypto is different from Fiat currency such as US dollar or Indian Rupees because it is not issued by any government.

How do Cryptocurrencies work?

There are thousands of cryptocurrencies in the market today, and some of these names you would have heard such as Bitcoin, Ethereum, Ripple, etc. but all these work on a few principles:

​Built on Blockchain Technology

Cryptocurrency is built on Blockchain technology. For any transaction, the information is stored in a block or group linked to each other, and that’s why we call it blockchain. The records are kept in an encrypted format and stored on a network of computers, making it almost impossible to hack, manipulate, or steal the information.

Decentralized System

The fundamental difference of crypto is that it is designed on a decentralized system, is not controlled by any centralized bank or authority, and one single entity or person cannot decide or fluctuate its value.

Digital or virtual

They are digital and not in physical circulation like dollar or rupees notes, which you can physically touch. In a way, these currencies are virtual and typically used over the internet.

Where cryptocurrencies could be used?

Cryptocurrencies are in use in almost every industry now, and their applications are rapidly growing. Some of the major sectors where cryptocurrencies are in use include:

  • Financial sector for payment, cross border transactions, remittance
  • Healthcare and Insurance for storing patients’ data and providing various services
  • Gaming and Entertainment sector for rewarding players
  • Import and Export sector for paying for goods, legal agreements

Based on their usage, we can categorize cryptocurrencies into 4 types:

  1. A Currency such as Bitcoin, which is the first and the biggest cryptocurrency in the world designed to make transactions faster and cheaper.
  2. An Asset because some cryptocurrencies derive their values from the value of other assets. For example, Tether’s (USDT) crypto value is linked to US Dollar. These kinds of cryptocurrencies are used to store the value of your investment.
  3. An Object in which most of the cryptocurrencies fall because they are designed to solve real problems such as Ripple for remittance, Ethereum for smart contracts.
  4. Meme crypto has no specific purpose, and its value is mostly driven by speculations. You would have heard about Dogecoin or Shibu Coin, both of which used to pump up based on Elon Musk’s tweets.

Pros and Cons of Cryptocurrencies

Till now, you would have understood what cryptocurrency is, the technology involved, and its use cases. Now an obvious question comes to mind why do we need cryptocurrency, and is it better than existing currencies? Let’s understand it further.

Cryptocurrencies provide you significant advantages over existing currencies due to:

  • It’s faster and cheaper.
  • Very secure and safe due to decentralized system. Every data is stored on a distributed computers network, and if someone is trying to hack or manipulate the information, he has to update records in so many computers, typically at least 51% of computers in the network.
  • It has no control of a person or government. Prices are driven by demand and supply economics, and a central bank or govt agency can’t drive crypto values.

However, there are a few challenges involved with cryptocurrencies:

  • Non-regulated; in case of any issue or concerns, you don’t know where to raise a complaint. Moreover, transactions can’t be reversed.
  • High Power consumption due to distributed computers network involved though now, many new cryptocurrencies coming that require less power.
  • People are using it for an unlawful purpose though that is more of a fault of our system to stop such fraudulent activities. Ever since the beginning cash is also used for such wrongful acts, but we never blamed cash as wrong or should be banned.

Government agencies are against cryptocurrencies primarily because they will lose power and control over the economy. Cryptos are a threat to their business and monopoly. However, many countries are allowing the usage of cryptocurrencies for one or other purposes, and in the future, this list will only grow.

Should you invest in cryptocurrencies?

Cryptocurrencies are disrupting almost every industry and providing an exciting future opportunity. Understanding how cryptocurrencies work is important if you want to invest in this new asset class. While there might be opportunities to make a good return, there is a lot of risks involved. With a good understanding of different cryptocurrencies available in the market today, one could start investing in some of these promising coins.

Next week, we’ll provide you with insight on a cryptocurrency that is a leader in smart contracts and could be a great long-term investment.