Gone are the days of traditional financial transactions. Instead, this is the age of digital transactions and payments, where practically everything can be purchased ‘cashless’. The latest entrant in this field is cryptocurrency.
You must have heard people talk about Bitcoin, Ethereum, and many other cryptocurrencies.
First, it is essential to know what cryptocurrency is. Post this; we will understand how cryptocurrency works.
What is Cryptocurrency?
A cryptocurrency is a virtual or digital currency. Cryptography completely secures this currency, and therefore, it is practically impossible to double-spend or counterfeit it. Also known as crypto, this currency is designed in a manner so that it can function as a medium of exchange via a computer network.
This currency is not dependent on any kind of central authority like a bank or the government for upholding it or its maintenance. Individuals can use this decentralized form of currency over the internet. Bitcoin is the most sought-after and largest traded cryptocurrency in the world.
Brief History of Cryptocurrency
The history of decentralized cryptocurrency dates back to 2008 when Bitcoin came into existence. A group of anonymous computer programmers created Bitcoin and launched it under the name - Satoshi Nakamoto.
With this peer-to-peer electronic payment system, you can transfer value online. Satoshi is the smallest unit of a Bitcoin, and a total of 100000000 Satoshis make one Bitcoin. This is why you can invest in Bitcoin with just one dollar.
Bitcoin didn’t do much in the market as there was minimal trading. People did not have an idea that such kind of trading was possible. Since it had never been traded, cryptocurrency could not be assigned any monetary value. The first time Bitcoin was sold, it was worth $100 million.
In 2011, Altcoin appeared in the market, which was considered an alternative cryptocurrency. It had better features like anonymity and better speed.
Unsurprisingly for a currency designed to have no regulatory oversight, Bitcoin has proven to be an attractive target for criminals. In 2014, the largest global Bitcoin Exchange, Mt.Gox, went offline. As a result, around 850,000 Bitcoins of almost US $450 million value vanished from the market.
By 2016 another cryptocurrency was trying to steal Bitcoin’s thunder. As a result, enthusiasm was growing for the Ethereum platform. The Ethereum platform also came with its coin, Ether, and its arrival was marked by the emergence of Initial Coin Offering (ICO). ICO was a fundraising platform that offered investors a chance to not only trade stocks and shares for startups but also invest and trade in cryptocurrencies. However, in the United States, the SEC warned investors that since there was no oversight, this platform could be a Ponzi scheme or a scam disguised as a legitimate investment.
2017 was a great year for cryptocurrency as many businesses and governments worldwide started accepting Bitcoin as a payment medium. As a result, the cost of one Bitcoin rose to the $3000 mark. By the end of 2017, BTC prices reached almost $19,783, and the market cap of crypto coins rose from $11 billion to $300 billion. Take a look at the history of cryptocurrency in India; you will find that many cryptocurrency exchanges were mushrooming in the country. Still, many questions were raised by the Reserve Bank of India and other financial authorities in the country.
In 2019, Bitcoin was validated by Facebook, a significant feather in the cryptocurrency’s cap. People started understanding this currency more and more. FOMO factor came into the picture, and prices soared. Stablecoins and various regulations, investments made in cryptocurrency became less volatile.
How Does Cryptocurrency Work? Understanding Bitcoin
Cryptocurrency runs on a blockchain, which is a distributed public ledger. There is a record of all the updated transactions which currency holders hold. Small units of cryptocurrency are created through the mining process.
Computers are used for solving complex mathematical problems, and then coins are generated. Once you buy cryptocurrency, you can store them in cryptographic wallets and spend them as and when you want.
You can move a crypto unit from one person to another, and you will not need a third party for this transaction. However, you will have to choose a suitable platform from which you will do your cryptocurrency transactions. These platforms include WazirX, enabling users to trade, manage and analyse digital assets. CoinSwitch Kuber is one of the most trusted crypto trading platforms backed by Sequoia Capital. Furthermore, ZebPay has committed to bringing cryptocurrencies to the market with 5+ million users served. Lastly, CoinDCX has become a popular crypto trading app in India with more than 10 million users.
Benefits of Cryptocurrency
Mentioned below are some of the benefits of investing in cryptocurrency:
- Low fees with an extremely short settlement time period
- Easy and convenient transactions
- One of the fastest-growing markets with exponential growth in the industry
- Due to blockchain security and cryptography, trading in cryptocurrency is incredibly secure
- The market remains open 24x7
- There is total transactional freedom in this inclusive financial system
- It provides a good hedge against inflation
- Returns from cryptocurrencies are often outsized
- An excellent way of portfolio diversification
Disadvantages of Cryptocurrency
Just knowing the benefits of cryptocurrency will not be enough when looking to make investments. There are some disadvantages too which need to be considering before making an investment decision:
- The cryptocurrency market is a highly volatile one
- It takes effort and time to understand cryptocurrency and its way of working
- There are serious scalability issues in crypto
- They are not a very trusted and reliable source for long-term investments
- There are cybersecurity risks, including phishing, hacking, etc.
How is Cryptocurrency Integrally Related to the concept of Decentralized Finance (DeFi)?
Decentralised finance, also known as DeFi is an upcoming financial technology based on secure distributed ledgers. Cryptocurrencies use the same concept. Generally, financial institutions and banks have control over financial products, money and financial services.
But, when it comes to the concept of decentralised finance, there will be no such control of any authority. With DeFi, there is no need to pay any fees for using financial services.
With DeFi you can do the same thing the bank does - earn interest, borrow, lend, trade assets etc. However, it doesn't need any paperwork or a third party, making the transactions faster. Cryptocurrency follows this concept entirely, and therefore, it is integrally related to the idea of decentralised finance.
Cryptocurrency’s Present Status Globally
It is needless to say that millions of people have invested in cryptocurrency, and many of them have received good returns from their investments. As a result, global investors are vouching hard for cryptocurrency investments.
Many eminent celebrities and personalities are investing in cryptocurrency as well. One example is Kevin O’Leary, a celebrity investor who has 20% of his portfolio in cryptocurrencies and blockchain.
Zach Pincus, an investment club treasurer and a sophomore, have huge cryptocurrency investments. He opines that many businesses like Norwegian Air, KFC, Microsoft, and Virgin accept Bitcoin.
Globally, the rate of cryptocurrency adoption has been relatively high in the last few years. As a result, many countries are looking at Bitcoin more favourably, and El Salvador became the first country to accept crypto payments. The country's government has launched a wallet app, namely Chivo, for facilitating transactions using Bitcoin. A Crypto bill has been introduced in Panama as well. Along with Bitcoin, the country also plans to include Ethereum.
The currency will be used for taxation and other civil purposes. In Asian countries like India or South Korea, the cryptocurrency industry is booming. Regulatory and finance authorities are also showing keen interest in this industry.
Corporate blockchain investigation is moving fast from cryptocurrency to digital ledger technology. With a digital ledger in place, there is open-source visibility of all kinds of information and transactions. This works excellently for supply chain and digital commerce and has proved to succeed in corporate ambience.
Prominent implementation of blockchain technology
For instance, Walmart has a supply chain blockchain, and it is used in tracking romaine lettuce. A few months back, there was a romaine lettuce salmonella outbreak. Unfortunately, it took quite a long time to track the point from where the outbreak initiated.
The whole romaine lettuce industry, a multi-million dollar business, shut down for over a month. There is tracking at every point in the supply chain on a blockchain.
Facebook has announced that it plans to develop and introduce its new Libra cryptocurrency. It plans to work with a huge network of significant partners, including Visa, Mastercard, STRIPE, PayPal, Lyft, Uber, etc.
Nestle also has a supply chain blockchain prototype now for tracking milk. With a transparent tracking system for milk or any other product, you can enhance the product's value, appeal, and pricing. Most importantly, customers also appreciate this transparency.
Why is Cryptocurrency the Future: Cryptocurrency Future Predictions
The way the cryptocurrency industry is flourishing in the world and India, days are not far when this will be the mode of transaction for many businesses. However, since India has a centralised finance structure, it is difficult to predict the exact future of cryptocurrency in India.
However, the number of crypto investors in India is not significantly less. As a result, the government and finance regulatory bodies are giving a deep thought to whether they should include crypto into the mainstream currency mode or not.
The future of crypto in the next five years looks promising, provided the the main challenge of volatility can be mitigated. In addition, blockchain technology is also being put under a robust scanner to secure it from cyber attacks.
Despite the risks and challenges, cryptocurrency adoption will see an uptick. There might be more legislation and regulations, but there are high chances that crypto will go mainstream in the near future. It is advised to be a well-informed investor regarding Bitcoin's future outlook.
Making investments in cryptocurrencies is your personal choice. However, if you are interested in knowing about cryptocurrency and how this currency functions, this is the right time that you start learning. The global financial landscape will surely undergo a massive change in the coming years, and cryptocurrency and digital transactions will play a pivotal role in making the changes.
With the concept of decentralised finance (DeFi) taking shape and prominence gradually, cryptocurrencies are sure to have a bright future in the coming years. Who knows, you might be paying your coffee bills with cryptocurrency in the near future!