TLI Explains: Cryptocurrency, Digital Currency That Works On Blockchain

A cryptocurrency is a form of digital currency—hence like other currencies can be used to buy goods and services. But all the transaction takes place online.

These currencies are decentralised, thus are not issued by a central authority. In simpler terms, the government cannot interfere or manipulate these currencies.

Cryptocurrencies are not dependent on banks to verify transactions. They work on the 'blockchain technology' which does not use a single server to keep the record of all transactions; these are instead spread across several computers for recording as well as management.

In the blockchain, the transactions are recorded by blocks linked to each other on a ledger. Blockchain is a security measure for cryptocurrencies because if the data stored on one block is tampered with, it will not match with the subsequent blocks. The ledger is shared by hundreds and thousands of computers simultaneously. Since no central authority is involved, it is an unregulated currency, making it different from other digital forms of payment.

What Are The Different Types Of Cryptocurrencies?

Bitcoin is the most popular cryptocurrency in the world. For many years it was used as a synonym for cryptocurrency. It was the first cryptocurrency to come into existence, in 2009, and its current market capitalization stands at $735.3 billion.

But Bitcoin is only one of the many cryptocurrencies that exist. As of April 2021, there are more than 10,000 cryptocurrencies. Some of the popular ones are:

Litecoin: It was started in 2011 by a former Google employee, Charlee Lee. The goal behind creating Litecoin was to improve the technology of Bitcoin. Litecoin offers faster transactions and a lower transaction fee compared to Bitcoin.

Ethereum: It has the second biggest market capitalization after Bitcoin. It is a blockchain with its own cryptocurrency of the same name.

Dogecoin: This cryptocurrency started as a joke based on the popular Doge internet meme. Investments began in the currency, and now it holds a market capitalization of around $44 billion.

Other popular cryptocurrencies include Binance coin, Cardano,, and Tether.

What Makes Cryptocurrency So Popular?

Decentralization

For cryptocurrencies, instead of a bank maintaining transaction records, all the data is entered on a ledger. This ledger is stored on thousands of systems and is updated on each one of them with every transaction. Thus, the records are transparent and accessible to everyone on the network.

Security

Security is one of the biggest appeals of cryptocurrencies. Since the ledger is shared by many systems, the data is recorded and updated on all of them. If someone manages to tamper with the data on one system, it will be easily identified because the data on that system will not match with the others. It makes the chances of duplicate fraud impossible in cryptocurrency. Bitcoin alone has over a million bitcoin miners, and hence someone tampering with data on the ledger must do it on over a million PCs to make it work.

Non-Involvement of Banks

For trading in cryptocurrencies, banks are not needed. It saves people from the tedious paperwork involved in carrying out banking processes.

Since the data is stored on a ledger, international transactions are instantaneous instead of taking long hours, which is the case in the banking system. There is no transaction limit, and people do not have to worry about exchange rates and transaction fees.

Are Cryptocurrencies Legal In India?

Currently, in India, it is 100% legal to invest in cryptocurrency. There have been speculations about the government's stand on cryptocurrency because of its anonymity, unregulated nature, and lack of intrinsic value. According to reports, the Ministry of Corporate Affairs (MCA) has made it mandatory for companies to disclose crypto trading/investment. Experts see it as a positive step towards the legal regulation of cryptocurrency in the country.

In 2018, the Reserve Bank of India (RBI) had stopped banks from dealing in cryptocurrency, virtually banning its trade. However, Supreme Court in 2020 overruled the ban allowing trading in cryptocurrency in the country. Later, RBI confirmed that its earlier circular banning cryptocurrency was not valid after the Supreme Court's judgment.

Risk Factors Attached to Cryptocurrency

Volatile Nature

Unlike the standard currency, cryptocurrencies are digital and not backed by assets. So, it is difficult to determine their actual value. It makes their market value very volatile. Their prices are speculative, and therefore minor changes in the market massively impact the value of cryptocurrencies.

For example, Bitcoin suffered a massive decline in its value after a negative tweet by Tesla CEO Elon Musk. Bitcoin fell from $65000 in April to below $40000.

Lower Acceptance

In the present scenario, cryptocurrencies are not accepted as a form of payment by many entities. There are very few businesses that would exchange their goods or services for cryptocurrency. Therefore, it leaves them as a form of investment where a person could sell cryptocurrency for a higher value than they had brought it for, and not as a form of currency that could be used for payment.

Risks Due To Non-Regulation

There are speculations that lack of regulation makes cryptocurrency suitable for criminal or illegal activities. Recent reports suggest that cryptocurrency is being used on a large scale for payments on the Darknet. But currently, the data seems to suggest otherwise. Only 0.34 per cent of the cryptocurrency transactions are used for criminal activity.

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