Everything You Need To Know About Cryptocurrency
Table of Contents
What Is Cryptocurrency?
A cryptocurrency is a type of digital asset that is built on a network that is distributed across many computers. Because of their decentralised structure, they can exist independently of governments and central authorities. Unlike the rupee, which RBI manages, there is no central authority that governs and maintains the value of a cryptocurrency. Instead, these responsibilities are distributed among cryptocurrency users over the internet.
The term “crypto” refers to the encryption methods and cryptographic techniques used to protect these entries, such as public-private key pairs, elliptical curve encryption and hashing functions.
What is Blockchain?
Blockchain is a set of linked blocks or an online ledger. In which each block contains a set of transactions that each member of the network has independently verified. Every new block generated must be validated by each node before being confirmed, making forging transaction histories nearly impossible. The contents of the online ledger must be agreed upon by the complete network of an individual node or computer that keeps a copy of the ledger.
What are smart contracts?
A smart contract is a self-executing contract in which the terms of the buyer-seller agreement are directly encoded into lines of code. The code and the agreements contained within it are spread across a decentralised blockchain network. Transactions are trackable and irreversible, and the code controls the execution.
Brief history of digital currency
The decentralised digital currency has been discussed for decades. The anonymous multiple e-cash protocols of the 1980s and 1990s, generally based on a cryptographic primitive known as Chaumian blinding, provided a currency with a high degree of privacy. Still, the protocols were largely unsuccessful due to their reliance on a centralised intermediary.
Wei Dai’s b-money proposal in 1998 was the first to introduce the concept of creating money through computational puzzles and decentralised consensus. Still, the proposal was scant on details as to how decentralised consensus could be implemented. In 2004, Hal Finney introduced the concept of “reusable proofs of work,” a system that combines ideas from b-money with Adam Back’s computationally challenging Hashcash puzzles to create a cryptocurrency concept. Still, he again fell short by relying on trusted computing as a backend.
In 2009, Satoshi Nakamoto created the first decentralised currency by combining established primitives for managing ownership via public key cryptography with a consensus algorithm known as “proof-of-work” to keep track of who owns coins.
How is a cryptocurrency created?
Mining is how new cryptocurrency units are released into the world, generally in exchange for validating transactions.
Proof of work and Proof of stake are the two most common consensus procedures used to validate transactions before they are included in a blockchain. Verifiers are then compensated for their work with cryptocurrency.
Proof of Work
Proof of work is a method of authenticating blockchain transactions in which an algorithm generates a mathematical puzzle that computers compete to solve,
Each participating computer, known as a “miner,” solves a mathematical puzzle that aids in verifying a set of transactions known as a block, which is subsequently added to the blockchain record. The first computer to complete the task is rewarded with a certain amount of cryptocurrency for its work. In Bitcoin, for example, a miner receives 6.25 BTC.
The competition to solve blockchain puzzles can necessitate massive amounts of computing power and electricity. After deducting the costs of power and computer resources, miners may barely break even with the cryptocurrency they earn for validating transactions.
Proof-of-work cryptocurrencies, For example, Bitcoin mining, currently consume electricity at an annualised rate of 127 terawatt-hours (TWh), equivalent to the electricity consumed by Maharashtra in one year(2020).
Proof of Stake
Some cryptocurrencies employ proof of stake verification to reduce the electricity required to review transactions. To participate in the proof of stake process, a person must stake or temporarily lock up cryptocurrency in a communal safe for the chance to verify transactions.
It’s almost like bank collateral; everyone who stakes cryptocurrency is eligible to verify transactions, although your chances of being chosen typically increase with the amount you stake.
Because proof of stake eliminates energy-intensive equation solving, it is far more efficient than proof of work, allowing for faster transaction verification/confirmation.
To verify transactions, both proof of stake and proof of work rely on consensus processes. This means that, while each relies on individual users to verify transactions, each validated transaction must be reviewed and approved by the most number of ledger holders.
While mining in a proof-of-work system is impractical for the average individual, the proof-of-stake model requires less powerful computers because validators are picked randomly based on the amount they stake. However, to participate, you must already own a cryptocurrency. (If you have no cryptocurrency, you have nothing to stake.)
Top 10 Cryptocurrencies (In terms of market capitalisation)
1. Bitcoin (BTC)
Market cap – Over $437.6 billion
It is the original cryptocurrency, created in 2009 by someone using the pseudonym Satoshi Nakamoto.
2. Ethereum (ETH)
Market cap – Over $203.8 billion
Ethereum, a cryptocurrency and a blockchain platform, is a favourite among programmers due to its potential applications, such as smart contracts that runs automatically when predetermined conditions are satisfied. Most of the NFTs are also built on the Ethereum platform.
3. Tether (USDT)
Market cap – Over $66.53 billion
Tether is a stablecoin, which means it is backed by fiat currencies such as US dollars and Euros and theoretically maintains a value equal to one of those denominations. In principle, this implies Tether’s value should be more consistent than other cryptocurrencies, and it may be preferred by investors who are wary of other coins’ excessive volatility.
4. USD Coin(USDC)
Market Cap: Over $54 billion
It is a stablecoin, redeemable for US dollars at a 1:1 ratio and is backed by dollar-denominated assets kept in accounts with US-regulated financial institutions. You can always redeem 1 USD Coin for US$1.00, giving it a stable price. It is an Ethereum token, so you can store it in an Ethereum-compatible wallet.
5. Binance Coin (BNB)
Market cap: Over $50.9 billion
Binance Coin has grown beyond simply facilitating trades on Binance’s exchange platform. It is now used for business, payment processing, and even booking travel. It can also be exchanged or traded for other cryptocurrencies such as Ethereum or Bitcoin.
6. Binance USD (BUSD)
Market cap: Over $17.7 billion
It is a 1:1 USD-backed stablecoin approved by the New York State Department of Financial Services (NYDFS) and issued in partnership with Paxos.
7. XRP (XRP)
Market cap: Over $17.4 billion
XRP is a digital technology and payment processing firm. On that network, XRP can be used to facilitate exchanges of various currency types, including fiat currencies and other major cryptocurrencies.
8. Cardano (ADA)
Market cap: Over $17.2 billion
Somewhat later to the crypto scene, Cardano is notable for its early embrace of proof-of-stake validation. This method expedites transaction time and decreases energy usage and environmental impact by removing transaction verification’s competitive, problem-solving aspect in platforms like Bitcoin. Cardano also works like Ethereum to enable smart contracts and decentralised applications, which ADA, its native coin, powers.
9. Solana (SOL)
Market cap: Over $13.7 billion
Developed to help power decentralised finance (DeFi) uses, decentralised apps (DApps) and smart contracts, Solana runs on a unique hybrid proof-of-stake and proof-of-history mechanisms that help it process transactions quickly and securely. SOL, Solana’s native token, powers the platform.
10. Polkadot (DOT)
Market Cap: Over $9.5 billion
Polkadot (DOT), founded in 2016, is a unique blockchain interoperability protocol that connects different chains. It also allows exchanging data and processing transactions for parachains or parallel blockchains without compromising security. Developers can create their blockchains while using the Polkadot security.
The core founder of Ethereum, Gavin Wood, created Polkadot. The exciting feature of DOT is that it has no hard limit on its total supply. Instead, a new token is constantly in circulation.
Which are the best Crypto exchanges in India?
What are different Charges to check before selecting a Crypto exchange?
1. Joining Fees (At the time of opening the account)
2. Deposit Fees (At the time of funding the wallet)
3. Trading Fees (Maker /taker) (Making a Purchase or Sale)
4. Withdrawal Fees (Transfer from wallet to the bank account)
How to buy cryptocurrency?
1. Select a Crypto Exchange
There are hundreds of exchanges(where buyers and sellers meet to exchange dollars for coins) out there; you’ll want to opt for one that balances ease of use with low fees and high security.
You can also move your cryptocurrency from one crypto exchange to another. For example, suppose you transfer bitcoin from your WazirX wallet to another crypto exchange. In that case, you must first, Obtain the deposit address from the cryptocurrency exchange to which you wish to transfer your coin and use the details on WazirX.
2. Decide on the account funding Option
You must fund your account after selecting an exchange before you can begin investing. You can fund your account with bank transfers, net banking, other payment wallets, a cryptocurrency wallet, or UPI, depending on the exchange.
Remember that platforms may charge higher transaction fees for specific funding options.
3. Place an Order
You can place your first purchase order once your account has been funded. Depending on the exchange, you may be able to buy it simply by hitting a button, or you may need to input the cryptocurrency ticker symbol, such as (BTC) for bitcoin. Then you must enter the amount you wish to invest.
You will own a portion of a cryptocurrency when the transaction is complete. That’s because buying a single unit of most cryptos requires a significant upfront investment. For example, Bitcoin’s current price was close to ₹16,94,205.66, and you’d need to invest that much to buy a Bitcoin. If you invested less, say 1,0000, you’d get a percentage of a Bitcoin, in this case, 0.59%.
4. Select a Storage Option
Your cryptocurrency exchange most likely provides an integrated wallet or a chosen partner where you can safely store your Cryptos. Some users are concerned about leaving their cryptocurrency with exchanges, where hackers may steal it.
Crypto exchanges store most customer assets in offline so-called cold storage. You can keep your crypto in an online or offline wallet if you want ultimate security. However, if you withdraw cryptocurrency from an exchange, you may be charged a modest withdrawal fee.
If you use a third-party crypto custodian, you may be unable to access your cryptos if you lose the private secured key that serves as your wallet password. This has locked some crypto millionaires out of their fortunes.
How to sell your Cryptocurrency?
When you’re ready to sell your cryptocurrency, you can do it through your exchange as you did when you first bought it. Most exchanges provide multiple order types, so you can choose to sell only when it reaches a specific price (limit order) or put an order that executes immediately.
You can sell your entire holdings or just a portion of them. The funds will be transferred to your bank account when the sale is completed. However, your transaction may be subject to a holding time before you can make a transfer back to your bank account. This isn’t a concern as it only takes a little time to ensure the transactions are clear.
When you sell your Bitcoin, you may make a profit. If you do, you’ll be on the hook for capital gains taxes as cryptocurrency sales must now be reported on your taxes.
Are Cryptocurrencies legal in India?
In India, cryptocurrencies and non-fungible tokens (NFTs) are currently unregulated. While the Reserve Bank of India (RBI) attempted to ban cryptocurrencies in 2018, the Supreme Court overturned the action, leaving cryptocurrencies in regulatory limbo – neither illegal nor legally legal.
While there have been claims of a comprehensive Cryptocurrency Bill, no such Bill has been made public, and the Government of India’s position on cryptocurrency is unknown. There does not appear to be any movement to substantively regulate NFTs.While the government considers its position on cryptocurrencies and NFTs, it has adopted a new tax regime targeted at taxing gains and possibly income from virtual digital assets (VDAs), which include cryptocurrencies, NFTs and similar digital assets that the government may specify.
What is taxation on Cryptocurrency in India?
Under the Income Tax Act of 1961, there is a 30% tax plus surcharge and cess on the transfer of any VDA such as Bitcoin, Ethereum or other cryptos(Income Tax Act). However, the legal status of cryptocurrency remains unknown.
Should you Invest in Crypto?
Whether you should invest in cryptocurrencies depends on your investment goals and preferences, just like any other asset or security. Approach it as a speculative investment, taking into account the significant volatility and risk associated. Consider cryptocurrency ownership to be outside the standard portfolio for people who already have a diverse portfolio and a long-term investment plan.
As for how much to invest, It depends on the portfolio you are willing to lose if the investment goes south. It could be 1% to 5% or 10%. From a loss perspective, it depends on how much you have now and what’s at stake.