What is a Cryptocurrency and Should you Invest in One?

What is a Cryptocurrency

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Cryptocurrency is the highly popular form of currency with more than 5000 cryptocurrencies currently available in the world and many more coming up everyday. This has led to a boom in  cryptocurrency trading since the turn of decades with more investors flocking in to trade these new forms of currencies leading to their market values reaching all time highs within days or weeks of their inception.


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Brief History of Cryptocurrency

At the start of the human civilization people used the barter system where goods and services were exchanged between two or more people. For instance, someone might exchange five apples for seven oranges, but due to some glaring flaws in this system like it was not possible for people’s requirements to always coincide, the goods couldn’t be transported easily like modern currency which can be carried inside wallets and also there was no common measure of value to understand how many of your items are you willing to trade for other items.

Hence, in order to rectify these flaws the modern currency was invented which consisted of paper currency, coins, credit cards, and digital wallets—for example, Apple Pay, Amazon Pay, Paytm, PayPal, and so on, which is controlled by the central governments of most countries, who control through their fiscal and monetary policy control the economy at a given point in time.

However, post the Global Financial Crisis of 2008 the flaws within the system came to the limelight, with most of the Big Banks being considered as Too Big to Fail and requiring Bailouts from Central governments, which has led to the dwindling of faith of the common masses in the centralized banking infrastructure.

Evolution of Money

This has given rise to a new form of currency known as the cryptocurrency utilizing the Blockchain, to form a decentralized currency which removes dependency on central bodies like banks to authenticate any transaction and act as a middleman.

One of the first and the most popular cryptocurrency is Bitcoin which was developed post-Financial Crisis of 2008 by a developer by the name of Satoshi Nakamoto whose real identity is still very much a secret to this day.

If you are a new investor looking to invest in cryptocurrency, it is important to understand the underlying technology behind them, the Blockchain.

What is a Blockchain?

Cryptocurrencies are a form of digital or virtual currencies that run on a technology known as the Blockchain. A Blockchain is a decentralized distributed ledger containing records of transactions done by a person. This ledger containing the records of transactions is considered as a block and these blocks are linked together on a chain of previous cryptocurrency transactions.

Eg: Suppose 5 friends went to a restaurant for dinner and after finishing the dinner they want to split the bill. To do this they decide to pay using cryptocurrency, so one of the friends pays the bill at the restaurant and others decide to pay him via cryptocurrency.

This transaction becomes hassle-free using blockchain since it records each transaction on a ledger known as the block which gets updated every time someone transfers cryptocurrency to the guy who paid the bill ensuring that nobody has to keep track of the transaction given its automatically recorded on the blockchain and available for all to check.

With a blockchain, everyone who uses a cryptocurrency has their own copy of this book to create a unified transaction record. Software logs every new transaction as it happens, and each copy of the blockchain is updated simultaneously with new information, keeping all records identical and accurate.

Blockchain

To prevent fraud, each transaction is checked using one of two main validation techniques: proof of work or proof of stake. They are both techniques for validating the authenticity of transactions taking place on the blockchain with the verifies being rewarded with more cryptocurrency for their work. Let’s take a quick look at them:

Proof of Work

Proof of Work is based on an advanced form of mathematics knows as cryptography used for checking the validity of transactions.

Cryptography uses highly complex mathematical equations which can only be solved using powerful computers and no equation repeats itself overtime, meaning once its solved the network knows that the transaction is authentic.

However this mechanism is not perfect as it uses huge amounts of electricity to solve these equations and a very limited number of transactions can be processed at any given time. Hence, a lot cryptocurrencies are using Proof of Stake method for verifying transactions.

Proof of Stake

This method was introduced as an alternative to the Proof of Work mechanism is it requires lesser power consumption and can validate more number of transactions.

In this mechanism, the amount of transactions a validator can verify depends on the amount of cryptocurrency they are willing to stake to be part of the process, which much like submitting collateral to a bank.

Each person who stakes crypto is eligible to verify transactions, but the odds you’ll be chosen to do so increase with the amount you front. Because proof of stake removes energy-intensive equation solving, it’s much more efficient than proof of work, allowing for faster verification/confirmation times for transactions.

Due to this feature, many cryptocurrencies like Ethereum are moving their validation mechanisms from Proof of Work to Proof of Stake.

The above validating mechanisms ensure that each transaction in the blockchain ledger gets verified by the individual users but to be approved each transaction needs to verified by majority of ledger owners which reduces the risk of hackers being able to modify the ledger records as they would require a high majority of ledger owners to be able to approve their fraudulent transactions which is highly unlikely.

How to Use Cryptocurrency in India?

Due to the increasing popularity of various cryptocurrencies like Bitcoin, Ethereum, Dogecoin etc. a lot people have started holding these cryptocurrencies for trading in these assets. However, these cryptocurrencies are yet to be widely accepted as payment options across India.

This may change in the near future as many big companies like Paypal, Tesla, Burger King, Starbucks, etc. have started accepting these currencies as a form of payment for their goods and services.

You can also use eGift card stores like HighKart and Purse  for exchanging your cryptocurrencies for gift cards of your favorite stores like Amazon , Flipkart, Domino’s etc.

There are also ways of exchanging your cryptocurrency with actual money in your debit card using BitPay by paying a small convenience fee. However, that being said the primary motive behind holding cryptocurrency is to keep it as an alternative investment aside from stocks and bonds as it diversifies your portfolio in case of a downturn in the stock market. A lot of experts believe that cryptocurrencies like Bitcoin can be considered as a store of value like Gold, often referring to them as “Digital Gold”.

Best Cryptocurrencies to Invest in India

There are several cryptocurrencies who are widely popular among investors because of their profit potential and real-life use cases causing people to flock their money into them. Hence, we would like to provide a list of these digital assets which can be highly profitable in the coming years:

S.No.CryptocurrencyMarket Cap
1Bitcoin672.141B
2Ethereum255.9B
3Tether58.579B
4Cardano45.15B
5Binance Coin44.755B
6Dogecoin42.643B
7XRP40.479B
8Polkadot19.777B
9IInternet Computer16.293B
10USD Coin14.38B
11Bitcoin Cash11.992B
12Litecoin11.11B
13Uniswap11.057B
14ChainLink9.774B
15Sola Token9.568B
16Stellar8.735B
17Matic Network8.053B
18HEX7.893B
19Ethereum Classic6.597B
20Wrapped Bitcoin6.529B
Popular Cryptocurrencies in India

How to Invest in Cryptocurrency in India?

Trading in cryptocurrencies usually takes place through an exchange who match the demand and supply of the asset and allow user to buy and sell them at a suitable price. There are 3 major exchanges in India: Wazirx, CoinSwitchKuber, and CoinDCX. Unlike the share market, these exchanges are open 24×7, and investors can buy and sell their favorite cryptocurrencies any time of the day.

The barrier to entry in this market is very low as all you need is to open your account with any of the exchanges by providing KYC documents and you can start investing instantly. Also the fees charged by them is also very low, mostly around 0.2% for each trade, but they also tend to charge their customers a small fee for deposits and withdrawals into/from their crypto wallets.

However, most banks have stopped partnering with these exchanges which means that users can’t use bank transfer or UPI facilities for transferring funds and have to rely on the exchanges P2P service which utilizes demand and supply for USD meaning users have to buy USD and use that to buy into their favorite cryptocurrency.

Should you Invest in Cryptocurrency?

Experts hold mixed opinions about investing in cryptocurrency. Because crypto is a highly speculative investment, with the potential for intense price swings, some financial advisors don’t recommend people invest at all.

Most investors should think very clearly about their goals and expectations from their investments and consider the fact that most cryptocurrencies are high volatile in nature which leads to them being highly risky. Hence, they should only invest 5-7% of their total portfolio value into these assets which they can afford to lose.

However, that being said the upside potential to these assets is huge and one stands to realise huge gains if they do proper research into the cryptocurrency they like, stay on top of the news, monitor social media posts regularly from big investors like Elon Musk and check for any new developments or regulations in the crypto space.

Cryptocurrencies are also a great alternative to traditional investments like Stocks, Bonds, Currencies, and commodities and allows investors to diversify their portfolio if they are not confident about the current situation of most economies given the high inflation due to massive COVID relief packages and governments printing more hard currency to keep the economy and markets afloat during these tough times.

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