Cryptocurrency is a digital currency for which encryption techniques are used to regulate its use and generate its release. Unlike, flat currencies like INR, USD, EUR etc – cryptocurrency is not regulated or controlled by any bank, government or centralized financial authorities. Instead, it relies on the power of internet to guarantee its value and confirm transactions.
Users on a network verify every transaction and those transactions then become a matter of public record. When a user buys/receives cryptocurrency, the user is given a digital key to the address of that currency. User can use this key to access and validate to approve transactions. The key can be kept safe in cryptocurrency wallets. Cryptocurrency aims to be decentralized, secure and anonymous. Cryptocurrency is entry in database that no one change without fulfilling specific conditions. The only major difference, then, between cryptocurrency and regular money is how those entries in the database are changed. At a bank, its a central figure who does the changing, the bank itself. With cryptocurrency the entries are managed by a network of computers belonging to no one entity. The database is called the blockchain. Essentially, it is a digital ledger that uses encryption to control the creation of money and verify the transfer of funds. This allows users to make secure payments and store money anonymously, without needing to go through a bank.
Information on the blockchain exists as a shared and continuously reconciled database. The blockchain database isn’t stored in a single location, and its records are public and easily verified. No centralized version of this information exists for cybercriminals to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet. Units of cryptocurrency are generated through a process called mining, which involves harnessing computer power (CPU) to solve complicated math problems. All cryptocurrencies are maintained by a community of miners who are members of the general public that have set up their machines to participate in validating and processing transactions. Those who do not want to mine can purchase cryptocurrency through a broker and store it in a cryptocurrency wallet.
In 2008, Satoshi Nakamoto published a white paper ‘Bitcoin- a peer to peer electronic cash system’. While, Bitcoin was the first and remains the most popular cryptocurrency, others saw its potential and soon jumped on the bandwagon. Many cryptocurrency have been attempting to replicate bitcoin’s success, some with better results than others. In the year 2017, a record of 800 altcoins (alternate coins- different variants of bitcoin) has been made, this market does not seem to be slowing down. Some of the altcoins are Ether(ETH), Litecoin(LTC), Dogecoin(DOGE), MONERO(XMR), DASH(Dash), Ripple(XRP), Tether(USDT), BitShares(BTS) etc.
What are the uses of Cryptocurrency?:
1. Purchase of products and services
2. Money Transfers and cryptocurrency tipping
3. Get paid in cryptocurrency
4. Investment opportunities
What are the Merits of Cryptocurrency?:
1. Low transaction Fee: Because miners are simply rewarded cryptocurrency from network itself, there are typically little or no fees for core transactions.
2. Ownership: With your digital key, access to your currency is yours alone. Unlike money you store at a bank, your use of cryptocurrency cannot be frozen or limited by any entity.
3. Identity Protection: Paying with credit/debit cards requires submitting sensitive banking information that could be stolen or compromised. Cryptocurrency can be sent directly to a recipient without any information other than total amount you want to send.
4. Risk-free for sellers: Payments using Cryptocurrency can’t be reversed, which means merchants don’t have to worry about stopped payments. The blockchain makes it difficult for you to be defrauded.
What are Demerits of Cryptocurrency?:
1. Accessibility: Since cryptocurrency mining and transactions can only happen on network, illiterate people will find it difficult to understand the working mechanism. Also rural areas that do not have access to internet will not be able to perform cryptocurrency transactions.
2. Volatility: Cryptocurrency exchange rates can vary greatly, which means the amount you pay or receive one day could be wildly different next day.
Cryptocurrency is, despite all its risks, perhaps the most exciting asset of the 21st century. A decentralized digital currency that works on the very interesting and likely here-to-stay blockchain technology. There are a thousand reasons to be excited about cryptocurrency, but also real reason to be conservative in your investment strategy. Don’t dump your whole 401k into cryptocurrency, but don’t be scared to get a toe wet with a small investment you are comfortable losing.
Author: Akshay Palande
Akshay Palande is a passionate teacher helping hundreds of students in their UPSC preparation. With a degree in Mechanical Engineering and double masters in Public Administration and Economics, he has experience of teaching UPSC aspirants for 5 years. His subject of expertise are Geography, Polity, Economics and Environment and Ecology.