Many investors have heard about cryptocurrency, the ups and downs in the price of Bitcoin, success stories when several thousand dollars made people millionaires. But in reality, everything is much more complicated. Before investing in a cryptocurrency, you need to understand what it is, what are the main advantages and disadvantages of an asset, differences from traditional money, as well as the main ways of earning.
Last Updated: October 5, 2022 (A few hours ago…)
Everyone listen to cryptocurrency, But only a few peoples know about cryptocurrencies. In simple means, Cryptocurrency means virtual currency or it’s also known as digital currency which doesn’t have any physical shape.
Think that you have an amount in your bank but what happens if you are not able to deposit it into cash. Think that you can only transfer from one side to another side but can’t use it as a coin or paper currency. It’s just like that.
Cryptocurrencies are in only digital shape even it is not present in physical shape. Cryptography is that method that secures the cryptocurrency and makes it unable to counterfeit or double spend. there are so many types of cryptocurrencies that are built on blockchain technology. Blockchain technology is a Network-based technology that is mainly used to decentralize cryptocurrencies when disparate networks of computers are enforced by any distributed leader.
Cryptocurrency is not issued by any authority or country. Every central authority denied issuing cryptocurrency. Central authorities said that they are not rendering them.
If we talk that what is the basis of any cryptocurrency: this is only a network-based asset that is distributed to a huge number of computers in digital or virtual form in a decentralized structure. Decentered structure – this mainly allows the cryptocurrencies to use in the whole world without any control by any government and organization. It can Exist anywhere outside the control of any central authority.
If we include experts opinions, then the finance and law system and also some industries will break by blockchain and technologies related to this.
- Cheaper Money Transfer
- Faster Money Transfer
- Decentralized system
- Price volatility
- Heigh energy consumption
- mining activities
- used in criminal activities.
Cryptocurrencies: What is it?
First of all, we have to know about Crypto – it’s means about “Hidden” or “Secrete”. Currency means you know well. Crypto-currency means Hidden currency (Decentralised and does not come under any Government, and central monetary authority). Here crypto is used for encryption to Verify any users or transactions. It means that there are using a high, proper, and strong way to encryption the storing and transmitting cryptocurrency data between wallets and to public ledgers.
Cryptocurrencies are digital or virtual currencies that are not in physical shape and are underpinned by cryptographic systems. on any kind of transition, it doesn’t allow any 3rd party intermediaries to transfer and maintain the Crypto-currencies to secure the online payment system.
It uses so many complex algorithms and techniques of cryptographic techniques that make safety to maintain the data through public-private key pairs, hashing functions, and elliptical curve encryption
Cryptocurrency is an electronic means of payment without physical form expression. The basic unit of measurement is “coins” or coins. They are used as traditional money, including storage, transfer to third parties, payment for goods or services.
Unlike an electronic wallet, a cryptocurrency is based on a complex cryptographic algorithm. The principle of operation of digital coins is based on an open data transfer protocol. All actions, including issuing new money and processing transactions, are performed collectively by the participants in the network.
there are 2 main ways to get any crypto-currency:
- Crypto Mining
But there is a problem with cryptocurrency purchasing that there are only a few sites and techniques are here which allow the cryptocurrencies and not all e-commerce sites allow this kind of purchasing.
There are some crypto coins which is going to be popular and makes a better position in people’s heart. Like Bitcoin, Ethereum, Dogecoin, Chainlink, Litecoin, Polkadot, and so on. Here Bitcoin is no. 1 in popularity but it is still not used in all stores (mainly in retail).
- transaction – an operation to transfer money between accounts;
- blockchain – a continuous chain of related blocks where transaction data is recorded;
- block – a set of data about transactions, as well as the number of the previous block;
- mining – the process of finding new blocks for which they give a reward and adding them to the blockchain;
- a node is an analogue of a server that constantly downloads information about the blockchain and allows you to exchange fragments with other network participants;
- wallet – consists of a public key (wallet number) and a private key (password for access).
Blockchain System / Technology
Blockchain technology is used to maintain the functionality of cryptocurrencies. According to Name, it’s a type of chain which is used to connect the block (online ledger) – containing sets of transactions but it takes a lot of time because it is verified by each member of the connected networks. Whenever any block is generated then it will be verified by each node before being confirmed. these main things make it impossible to forge any transaction histories.
Types of Cryptocurrency
There are so many types of cryptocurrencies. Some are getting popular like Bitcoin, Ethereum, Dogecoin, Chainlink, Litecoin, Polkadot, and so on. Bitcoin is on no 1 in popularity and also valuable cryptocurrency is created by Satoshi Nakamoto and Bitcoin is available in public from 2009 But Now on October 5, 2022 – it has more them 20 million bitcoins and is covering the approximate more them $1.5 trillion market cap. Each cryptocurrency has its own specification and function. Like Ethereum is known to gas and same contract platform and Ripple’s XRP is used by banks.
In the wake of Bitcoin’s success, many other cryptocurrencies, known as “altcoins,” have been launched. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch. They include Solana, Litecoin, Ethereum, Cardano, and EOS. By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over $2.1 trillion—Bitcoin represented approximately 41% of the total value.
How cryptocurrencies work:
- Decentralization – all actions are performed by network participants without the involvement of a single central issuer. Information about funds is stored in all nodes, so in case of problems, access to the data is retained.
- Deflation – when most cryptocurrencies are issued, the final emission of coins is known, which guarantees the value of the asset and the absence of inflation.
- Security – the use of blockchain and special algorithms allows you to protect the network from hacker attacks. The more miners and nodes a cryptocurrency has, the more difficult it is to carry out an attack.
- Anonymity – each user receives a wallet number that has nothing to do with his personality. But knowing the public key, you can see information about the amount of money in the account.
Help: the value of a cryptocurrency is determined by the level of user trust. The more people use it, the higher the cost and demand for new coins.
Pros and cons of cryptocurrencies
The popularity of cryptocurrencies is due to a lack of trust in government and traditional money. People began to get frustrated with monetary policy, so they resorted to using a decentralized payment system. The main advantages of cryptocurrencies:
- Reliability. Encryption algorithms, blockchain and computing power make it difficult to hack or tamper with money data.
- Open source. This allows anyone to investigate the software, look for bugs, and suggest improvements to the network.
- Limitation. The number of coins issued is limited and known in advance. The parameter can be changed only with the consent of the majority of users on the network.
- Cross-border payments. It is no longer necessary to use banks or expensive intermediaries to transfer money to other countries.
- Control over funds. In the event of bankruptcy of a bank, no one guarantees the safety of funds or the possibility of their return. The holder of the cryptocurrency is personally responsible for the digital money.
- Earning opportunity. The popularity and development of new technology allows for greater return on investment compared to traditional tools.
Despite a number of advantages, cryptocurrencies have significant disadvantages:
- The risk of losing all your money. To access the money stored in the wallet, you need to enter the private key. It cannot be restored or changed. In case of loss of login data, funds will be frozen in the account.
- 51% attack. The security of any cryptocurrency lies in the decentralization of computing power. In the event that one person or a group of persons gains access over 51% of the network resources, this will allow making any changes to the operation of the blockchain. However, the more computing power a cryptocurrency has, the more difficult it is to implement this plan.
- Volatility of the exchange rate. The value of digital coins is influenced by the level of user confidence and demand. Also, the market reacts unpredictably to changes in the policy of leading countries regarding cryptocurrencies.
- No Warranties. All risks fall on the shoulders of investors. In case of loss of money, theft of funds, lack of access to the wallet, nothing can be done.
How cryptocurrency differs from regular (fiat) money
Fiat money is used by people to pay for goods and services in everyday life. These can be funds on a bank card, banknotes or coins. In other words, fiat money is issued by the government, which sets its value and guarantees its value. Trust in funds is reinforced by the number of sales and purchase transactions and the payment of taxes in national currency.
Reference: fiat currencies are not backed by anything other than people’s trust. Currently, standards that call for the use of gold or other precious metals to provide value for money are not in place. The rate of fiat money depends on the state’s attitudes and the economic situation in the country. If necessary, the government can print an unlimited amount of money and put it into circulation. This increases inflation and lowers confidence in money.
Cryptocurrencies are issued by network members. The maximum number of coins is known in advance, which indicates a deflationary nature and an increase in the value of an asset in the future. The miners are engaged in the emission of new coins – they process transactions and extract new blocks for which a reward is provided. Although the value of digital coins is not supported by anything, it directly depends on the level of demand. The more people are interested in cryptocurrencies and start using them, the higher the price. The market is self-regulated.
Note: one of the key differences between fiat money and cryptocurrencies is the impossibility of canceling the operation. In case of an erroneous transaction to someone else’s bank account, a refund procedure is provided. With cryptocurrencies, this is not possible.
Where to buy cryptocurrency and is it legal
There are several ways to buy digital assets:
- Exchange sites or platforms – special resources that analyze reviews, reliability, solvency and reserves of sites. You can buy cryptocurrency using dollars, euros or rubles. It should be borne in mind that exchangers sell the most popular coins. If you need to buy promising assets or cryptocurrencies with a small capitalization, only exchanges are suitable.
- Direct purchase. On special forums, you can get acquainted with the holders of cryptocurrencies and make an exchange directly. Before making a deal, it is necessary to study the information about the person and make sure of his honesty. The main advantage is the absence of additional commissions.
- Cryptocurrency exchanges – designed for both trading and buying digital assets. After replenishing the account with fiat money, it will be possible to buy and withdraw cryptocurrencies.
Reference: the speed of transaction processing depends on the network congestion and the chosen cryptocurrency. Transfer in the Bitcoin network will come within 30-60 minutes, Ethereum – 2-3 minutes, Litecoin – up to 20 minutes.
India legislation does not prohibit bitcoin, blockchain technology and other cryptocurrencies. The purchase of digital assets is allowed, but there is still no clear position of the state regarding taxation of profits. New rules that will define the concept of cryptocurrency, provisions on the declaration of assets and the payment of taxes are being developed.
Can they get jailed for buying and selling cryptocurrencies?
It is planned to adopt a bill on the legalization of cryptocurrencies in India. It provides that individuals and “unqualified investors” can buy digital assets worth up to 600 thousand rubles annually. Violation of the rules is punished in accordance with applicable law. Large investment amounts are available only to qualified investors.
Help: it is impossible to track the amount of money received from mining, or the purchase amount when using foreign banks. The law is more related to the fight against money laundering.
The question of criminal liability arises in cases where the cryptocurrency is obtained in a fraudulent way or through illegal activities. There have been no precedents of prosecution for simple investment yet. But in the case of withdrawing money related to digital assets, the bank may request documents confirming the legality of the origin of the funds. If the income is received from mining, you will need documents for equipment, a cryptocurrency wallet number and even an electricity bill. Such caution is associated with the law on combating the legalization of proceeds from crime.
How to make money on cryptocurrencies
The way to make money on cryptocurrencies depends on personal preferences and start-up capital. Some investors use mining, others – long-term storage of assets, and some prefer active trading.
The main options for making money:
- Mining – buying equipment and using it to mine new coins. The method will require cheap electricity, technical skills and large investments. At the same time, the payback period depends on the rate of the chosen cryptocurrency.
- Cloud mining is the rent of computing power from a company that maintains the equipment. The investor chooses only the number of hashes and the cryptocurrency for mining.
- Buying on the stock exchange and holding is an investment in popular and promising assets, just like ordinary securities. The profit is provided by the rise in the price of the coins.
- Trading is the conclusion of profitable trade deals on the stock exchange by analyzing the current situation and predicting market movements.
- Arbitration between exchanges – buying cryptocurrencies on one exchange and selling at a better rate on another. For small amounts, the method does not make sense.
- Investment funds are analogous to mutual funds in the world of cryptocurrencies, which hold stable, moderate and risky digital assets in their portfolio.
Since cryptocurrencies carry risks, we recommend combining several methods. Diversification of strategies and the number of assets will help not only save funds, but also increase investment capital.