What is Cryptocurrency? How Does It Work?

Key takeaways

Cryptocurrency is another form of digital currency that exists just like our fiat currencies (USD, EURO, INR, etc.) The difference is the hard cash and security that allows for the wide adoption of cryptocurrencies in the world. At present, more than 11000 of them are floating in the market on several cryptocurrency exchanges.

What Are Cryptocurrencies?

Cryptocurrency is a digital currency that is used to buy goods or as an investment vehicle. It is decentralized and a perfect example of offering secure transactions with low fees. 

To this day, if you ask people about cryptocurrencies, they would say ‘Bitcoin.’ Unarguably, Bitcoin is the most popular cryptocurrency even after thousands of other coins exist in the market.

Cryptocurrencies are also known as digital currency as they exist only on the internet with transactions happening on a public ledger while they are being stored in a digital wallet.

How Does Cryptocurrency Work? 

Cryptocurrency is powered by Blockchain and harnesses all its underlying technology. They are decentralized and don’t require a centralized intermediary like banks to keep an eye on. Transactions that happen are recorded on the public ledger keeping the identities of people safe. It allows maintaining the integrity of the data and keeping the network secure. 

Cryptocurrency is created through a process called mining that involves solving complicated maths puzzles to generate coins. We will have a closer look at mining later in this blog.

How Many Cryptocurrencies Are There?

At the time of writing this blog, there are more than 10.1k cryptocurrencies in the market. While some of them have almost negligible to no value, most are designed to work for a specific purpose.

Ethereum, the second-most popular cryptocurrency after Bitcoin, was designed to provide a decentralized platform capable of running smart contracts. This feature gave other blockchains to be built atop Ethereum and utilizing its framework for their transactions. At present, over 3000 DApps are running on the Ethereum blockchain. One is Aave, a popular decentralized lending and borrowing platform that allows users to lend or borrow money easily by staking your cryptos. 

There are several cryptocurrencies in the market, and it would be a really difficult task to check their value in INR when most of them are traded in USD. Converting the price of Bitcoin to INR and other cryptocurrencies is now easier than before.

If we look at how much money is locked into the crypto market, you would be astonished to find the total market capitalization of all cryptocurrencies hit $2 trillion in August 2021, months after it rose to its April high of $2.2 trillion. The interesting fact here is that Bitcoin accounts for a majority of the market cap leaving a little bandwidth for other cryptocurrencies. 

Let us have a look at Top 7 cryptocurrencies by market cap (at the time of writing) that have a defining presence in the market.

How To Earn Cryptocurrency?

Cryptocurrency can be earned either by mining or by investing in them. 

Mining 

Mining cryptocurrency doesn’t involve going in with your tools and looking for cryptos in the cave, but it involves graphic cards and high-end CPUs that could clock and validate transactions.

It is the process of generating new coins by validating the transactions happening on the digital ledger. To validate the transactions, miners (or validators) try to find the solution to the hashing puzzle by using their GPUs and CPUs. 

Bitcoin, the most popular cryptocurrency, works on a Proof-of-Work consensus algorithm that burns a high amount of energy. The energy consumption is so high that it takes more than 50% of what they end up earning. 

Not only does it hamper the natural supply of electricity but is also a cause for the environment. The crypto industry is looking for ways to abolish this algorithm and to adopt better consensus algorithms that are eco-friendly. 

Investing

Cryptocurrencies are a great tool for investment as well as facilitate the easy buying and selling of goods (or services) both online and offline. Popular cryptocurrencies have shown massive returns over time that makes them a lucrative buy.

If we look at the data of returns provided by the Fixed Deposits offered by banks, it would take years to pass by to double your savings amount. With present rates of 5,6,7% and inflation acting as a major barrier, keeping a diversified portfolio surely calls for your attention.

However, many cryptocurrencies gave a stupendous ROI (Rate of Interest) in just a matter of years and if you are lucky enough, ICOs (Initial Coin Offering) would surely be a cherry on the cake. Many cryptocurrency exchanges provide easy buying and selling of a wide range of cryptocurrencies. 

How to Invest in Cryptocurrency?

There are plenty of options to explore for buying cryptocurrencies with dozens of applications and websites offering to invest in cryptos easily. CoinSwitch Kuber is one of the leading market players that allows buying cryptocurrencies with just a click!

Its easy-to-use interface, quick KYC process, and low starting amount make it a perfect place to start for people who are new to cryptocurrency. It allows for a wide range of payment options such as UPI or Netbanking, and anyone can start with just Rs100.

How Can You Use Cryptocurrencies?

The potential is upside where not only does it allow for investments and purchases but they are also a good tool for collecting NFTs, yield farming, and donating for a greater cause. We are listing some of the ways where you can take a headstart. 

Where to use cryptocurrencies

Are Cryptocurrencies Secure? 

Blockchain is the technology that fuels most cryptocurrencies. The blocks act as the foundation of blockchain as transactions are recorded and time-stamped within it. 

Blocks are linked to each other, so for hackers to tamper your digital ledger of transactions, they must individually alter each block, thus making it a phenomenally difficult task to accomplish. 

For doing altercations to the blockchain, the hacker would have to gain access to 51% control of the network of the blockchain to be granted access. It would require a vast sum of money and resources that would deplete the value. Therefore, it is pointless to even try!

What Are The Legalities Around Cryptocurrencies?

If we talk about cryptocurrencies, the legalities around them are country-specific. Germany & Dubai allow them to be traded and used legally, while countries like India and the US are still debating about how to regulate them.

South Korea and Japan have also come forward by allowing people to trade in Bitcoin and other cryptocurrencies, however, El Salvador has recognized Bitcoin as a legal tender. As countries are setting their foot to explore the future of cryptocurrencies, it aligns with the possible use cases they can extract. The future of cryptocurrency in India looks bright based on the investors, market, and people willing to enter the cryptic space.

Published on: 12/19/21, 9:54 AM