Understanding Cryptocurrencies: Can Your Money Actually Double Up?

Cryptocurrency is one of the hottest topics of discussion right now. The performance chart of Bitcoin, one of the most popular cryptocurrencies out there, has shown massive growth. This has motivated a lot of people to invest in cryptocurrency in hopes of getting their investment doubled up. However, it is not as simple as it sounds. There are multiple things that one needs to understand before making any investment in the volatile crypto market.

What is Cryptocurrency?

Cryptocurrency is divided into two parts, one is cryptography and one is currency. First, let's try to understand what is cryptography. Cryptography is associated with the process of converting ordinary plain text into unintelligible text and vice versa. Unintelligible meaning which can't be understood, so it is the process of converting plain text into a text which can't be easily understood. It is a method of storing and transmitting data in a particular form so that only those for whom it is intended can read and process it.

Cryptocurrency, in simple terms, is digital cash. Suppose someone wants to send money from India to the USA. They can not do it directly. This process requires an intermediary, which in this case is the bank. This is not the case with digital currencies. Digital currencies do not need any intermediary and the transactions can be made directly between the parties involved.

Advantages of Cryptocurrency

There are multiple advantages that come with the transaction of cryptocurrency.

1. No intermediary required
2. No geographical barrier
3. The absence of an intermediary reduces the transaction charges
4. The transaction is very fast. Different cryptocurrencies have a different time period that can range from 10 seconds to 10 minutes.

Disadvantages of Cryptocurrency

Cryptocurrencies come with certain disadvantages as well

1. The transactions are irreversible
2. Used for a number of illegal activities around the web and the dark web.

Is Cryptocurrency Legal in India?

There is a big debate around the question. The debate comes with 2 aspects. The first one being, if cryptocurrency is legal in India and the second, is it a legal tender in India. Both of these questions have different meanings and answers.

Addressing the first question about the legality of cryptocurrencies in India. It is legal in India. On April 6, 2018, RBI imposed a banking ban on Indian banks to have any relation with crypto companies. The same was lifted in the same year by Supreme Court, allowing Indian banks to have business and exchange relations with crypto companies. The result of this is that trading in cryptocurrencies, as of today, is legal in India.

However, the problem is that cryptocurrency is still an illegal tender of money in India. If someone wants to buy a product in exchange for cryptocurrencies, that can not be done.  These transactions have to be made only in INR. Does this make it illegal?  The answer to that is No, it does not.

In a similar scenario, one can not buy any product in the Indian market in exchange for shares and equity. Similarly, cryptocurrency can not be used as a payment mode, but that does not mean it is illegal to possess or trade-in crypto.

What is Blockchain?

The word Blockchain comprises two simple words, Block and Chain. A block is a database that stores a lot of information. The information consists of the data of the sender, data of the receiver, the time of the transaction, etc. When transactions like these keep happening, the block starts becoming full. When a block is full of information, another block of database is created to store further information. The new block continues storing the information from the last transaction in the previous block. The series of storing information is carried forward from the last transaction in the previous block. All these blocks of information are linked together with a chain. Hence, the name Blockchain. Deleting data from a blockchain is not possible, as every new block indicates the last transaction in the previous block. Deleting a block will show that there is something missing in the sequence. This is also the reason why it is said that blockchain is immutable.

Should You Invest in Cryptocurrency?

Before deciding on whether to invest or not, it is important to understand the volatility of the same. Talking about Bitcoin, in December 2017, the cryptocurrency saw the then high value of $19,000 for one BTC. This did not stay on for long, and it hit the lowest of $4,000 for one BTC in March 2020. The value then shot to almost $42,000 for one BTC. This goes to show how uncertain and volatile the market is.

The best part about crypto is that it can be bought in fractions. You don't need to invest a huge amount of money and buy a whole BTC. You can buy a fraction of one BTC as and when you have the money.

Which Cryptocurrency Should One Invest In?

The crypto market is very similar to any other market. Therefore, investing in large-cap resources is always a better option. Bitcoin has the largest market capitalization with 65%. However, it is always best to invest a small amount of money into cryptocurrencies. The volatile nature makes it very prone to losses, and large investments directly translate to large losses if the market goes down.

Conclusion

There are many rumours and tips around the whole crypto market. It is important to know and understand the risk and the volatile nature of the same. Investing based on word of mouth never works, and a little research and understanding cryptocurrencies before making any monetary investment doesn't hurt anyone.