Today, cryptocurrencies have become a global phenomenon, known by most people, but understood by few. In 2021, you’ll have a hard time finding a major bank, accounting firm, a software company, or government that hasn’t researched cryptocurrencies or started a blockchain project. Beyond the noise in press releases, many people often fail to understand the basic concepts. Cryptocurrency is a subject that has loyal lovers as well as passionate haters. For those who don’t know what it is, let’s walk through the whole story and try to simplify it in short.
What is cryptocurrency?
Satoshi Nakamoto, the person who invented Bitcoins all the way back in 2008 as a peer-to-peer electronic cash system. Some of the cryptocurrency types include Bitcoin, Litecoin, Ethereum, Ripple, Stellar, Cardano, and more.
To realize digital cash, you need a payment network with accounts, balances, and transactions that is easy to understand. One major problem that every payment network has to solve, is to prevent double-spending. Meaning, to prevent one entity from spending the same amount twice. Usually, this is done by a central server that keeps records of all the balances in a decentralized network. You don’t have this server, so you need every single entity of the network to do this job.
Every peer in the network needs to have a full list of a full list with all the transactions to check if future transactions are valid or an attempt to double spend. But, how can these entities keep it consensus about these records, if the peers on the network disagree about one single minor balance? Everything breaks! They need an absolute consensus. Nobody knew how to achieve this until Satoshi proved it was possible.
A network of independent actors is economically incentivized to maintain the legitimacy of the transaction history. So that’s the gist of it, Cryptocurrencies are the key to the complex digital cash problem that Satoshi solved, how to maintain integrity and consensus across independent and potentially malicious actors. Cryptocurrencies are essentially the monetary incentive offered to anyone willing to keep the network secure. We can use Cryptocurrency as a mode of exchange like cash. Or we can use it as an asset just like we invest in gold
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The risks of investing in Cryptocurrencies
The price of Bitcoin for one is rising more and more after the pandemic. Needless to say, investors are pretty excited about investing in cryptocurrency. But they need to be cautious. Here are three things to know about investing in cryptocurrency.
| Cryptocurrencies are much more volatile than stocks, or bonds, or any of the office investors are typically used to investing in. Cryptocurrencies can go up and crash without warning. Bitcoin crashed a whopping 65% between January and February 2018.
| Be aware of scammers and corruption! especially now that Bitcoin and Ethereum have become so much more valuable. Hackers are going and attacking investors getting into their accounts. Even a few exchanges have been had.
India especially faces corruption in this subject. For example, funds of a scheme should reach the beneficiaries, but the officer misappropriates these funds beforehand. With the help of blockchain, a beneficiary can be connected to the funds peer-to-peer.
| Even though Cryptocurrencies are much different than the typical assets investors used to invest investing in like stocks, you still need to pay your taxes on them.
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Supreme court of India on Cryptocurrency
Now let’s see what does the supreme court says about this subject. After the demonetization in 2016, many people in India finally took crypto seriously. Many people were genuine investors, but many abused the system to launder money illegally.
After RBI came to know about these frauds, RBI issued a notice to all banks that no banks will offer services of Cryptocurrency exchanges. The case went to the supreme court, and it gave the verdict that ‘RBI withdrawing direct banking support was unconstitutional’. Article 19(1)(g) says that everyone has a right to conduct trade or business.
The apex court said that the right to create something that doesn’t violate any existing rule is an unsaid fundamental law. Hence, citizens have the right to create a new industry of cryptocurrencies and exchanges along with the fundamental right to trade. The bench also said that the central bank hadn’t demonstrated that trading in such currencies was damaging to the entities it regulated.
At the same time, the supreme court has also said that banking is also involved in this system. So RBI has the power to regulate cryptocurrency exchanges. The NITI Aayog is also looking into cryptocurrencies. There are talks to have a stable coin for the rupee.
The whole point is that until parliament decides the fate of cryptocurrencies, nobody can say what the future of crypto in India actually is.
Do we invest?
After understanding Cryptocurrency, comment your opinions below. Opinions may differ all the time, but the truth is, you need to make informed decisions. Cryptocurrency comes at the top of the risk pyramid, so make sure you understand all the risks of investing. Try to thoroughly understand the market before taking any steps. We’ll get practical experience only when we invest a small amount.
Because of Cryptocurrency, we have revolutionary blockchain technology in front of us. NITI Aayog says that India can be a hub for blockchain. It can solve problems in healthcare, education, land allocation. When we invest without thinking, without understanding the risks, we definitely end up making losses. We also make losses when we ignore the opportunities. Hence, understand before taking a step!