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Decoding Cryptocurrency

By February 16, 2022February 23rd, 2023No Comments
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Cryptocurrency has been in the news lately as to how it must be regulated. At its core, Cryptocurrency is mostly the decentralized currencies (or tokens) anticipated being used in the digital space, which is based on blockchain technology. Stephen Colbert puts it as – “It is gold for nerds.” Another analogy is made to casino chips – you need to exchange them for real currency. 

How does Cryptocurrency work and what are they worth?

Highly encrypted, decentralized, and digital. Cryptocurrencies circulate without the central authority that manages them, like the government or banks. Cryptocurrencies can be traded to buy everyday goods and services, though they are often preferred for investment assets like stocks and real estate. They also form a significant chunk of some decentralized financial structures, where digital tokens are an essential tool for carrying out transactions. 

According to Coinmarketcap, a market research website, there are more than 17,000 cryptocurrencies in circulation and traded publicly. Ethereum, Dogecoin, and Bitcoin are the most familiar and accepted versions of cryptocurrencies. In 2008, Satoshi Nakamoto invented and wrote a paper on “Bitcoin: A Peer-to-Peer Electronic Cash System” where he described it as “An electronic payment system based on cryptographic proof instead of trust.” All the cryptographic proof is received in the form of transactions that are documented and filed on a Blockchain. 

Cryptocurrency Relies on Blockchain Technology 

Cryptocurrencies like Bitcoin and Ethereum are powered by Blockchain technology. Blockchain is a distributed ledger technology (DLT) that records the provenance of digital assets immutable and translucent with the use of decentralized and cryptographic rehash. Buchi Okoro, CEO, and Co-founder of the African cryptocurrency exchange Quidax says, “Imagine a book where you write down everything, you spend money on each day. Every book resembles a block, and the whole book, a group of pages, is a blockchain.”

Everyone who uses a cryptocurrency will have their own copy of this book to design an undivided transaction record. The software divides every new transaction as it transpires, and each copy of the blockchain is entered with advanced data, maintaining all the records indistinguishable and authentic. To avoid any kind of fraud, every transaction is audited using two different validation techniques: Proof of Work or Proof of stake.

The Role of Consensus in Crypto

Cryptocurrencies commonly use one of the two mechanics to create a system of trust and regulate which transactions are valid and added to the blockchain.

Proof of Work

Proof of Work is a process of authenticating transactions on a blockchain in which an algorithm provides high-powered math equations that computers race to solve. Every computer participating is a “miner,” that helps in verifying a group of transactions – which is referred to as a “block” which in turn adds to the blockchain ledger. The very first company to do so will be rewarded with some cryptocurrency for its efforts. The chase to solve blockchain puzzles will require an intense amount of computers and electricity.

Proof of Stake

To minimize the amount of power required to validate transactions, some of the cryptocurrencies use proof of stake verification methods. The number of transactions each person can verify is defined by the extent of cryptocurrency; they are willing to “stake,” or bolt up in a time being communal, safe, for the opportunity to enroll in the process. “It’s similar to a bank endorsement,” says Okoro. Proof of stake eliminates energy-demanding equations. Solving it’s more efficient than proof of work, indulgent for quicker verification/validation times for transactions.

Mining and Use of Cryptocurrency 

Crypto Mining is the way to upload or release new units of cryptocurrency into the market. The average consumer was able to do this, but at present, it’s become really expensive. There are so many people who have advanced their equipment and technology to outcompete. And proof of work cryptocurrencies requires ample amounts of power to mine. It is estimated that 0.21% of the entire world’s electricity is used in powering Bitcoin farms. That’s roughly the exact amount of electricity Switzerland uses in a year! 

Cryptocurrencies can be used to make everyday purchases, but they don’t have mainstream acceptance yet. A handful of online retailers like accept Bitcoin, but it’s far from the norm. Using crypto to securely make purchases depends on the purchase to be made. If you want to use it at a retailer that does not accept it directly, cryptocurrency debit cards can be used like Bitpay in the U.S. 

If you are going to pay a person or a retailer, who accepts cryptocurrency, a cryptocurrency wallet is a must. You can also scan the QR code or enter the phone number or wallet address manually. But the transactions are not instantaneous, as they must be verified using proof of work or proof of stake. It takes between 10 minutes and two hours, depending on the type of cryptocurrency. And this time taken to complete the traction is what makes it secure. 

Investing in Cryptocurrency

Cryptocurrencies can be bought on cryptocurrency exchanges and peer-to-peer networks, similar to Coinbase and Bitfinex. Even on smaller crypto purchases, the exchanges charge prohibitively high prices. Coinbase charges a fee of 0.5% of the purchase and also a flat fee of $0.99 to $2.99 depending on the type of crypto used. Brokerage platforms like Robinhood and Webull allow you to invest in crypto. The most famous cryptocurrencies including Bitcoin, Ethereum, and Dogecoin can be traded on these platforms. 

Buying Cryptocurrencies is almost like buying individual stocks. To explore the world of the crypto market, you need to invest in individual stocks of the crypto companies. Investing in big companies that are adopting blockchain technology, like IBM, Bank of America, and Microsoft will involve less risk. 

Should You Invest in Cryptocurrency? 

Business tycoons are giving their valuable inputs and opinions on cryptocurrency. Mukesh Ambani, Chairman, and Managing Director, Reliance Industries said at International Financial Service Centers Authority (IFSCA) that he believes in Blockchain Technology and it will redefine the world of Finance. 

The Chairman of Infosys Nandan Nilekani, said, “If we have a very well regulated and legal, lawful crypto market, not as a currency but as an asset, and a lot of youth building innovative applications could create a wave of global companies.”

Founder and CEO of Paytm Vijay Shekhar Sharma confirmed that the digital payment platforms will endeavour into cryptocurrency once India legalizes.

About 20 million Indians have taken a dive onto the crypto bandwagon in 2021. Currently, Indians hold crypto assets worth $5.3 billion. The biggest Indian crypto-broking platform, CoinSwitch Kuber, catalogued a 3,500% rise in the transaction dimension and swayed 15 million users, recently becoming one of the unicorns with a $1.9 billion valuation.

WazirX, Indian leading crypto exchange, validated a record trading of over $43 billion in 2021, so far the highest in India – a growth of 1,735% from 2020.

Because crypto is a highly analytical investment with the dormant for intense price swings. Certified Financial Planner, Ian Harvey talks to investors about the proportion of their briefcase they’re willing to lose if the investment goes south. It may be 1% to 5%; it could be 10%, he says. It depends on how much they have now and what’s really at stake for them, from a loss perspective.

Budget 2022 and Cryptocurrency 

Indian Finance Minister Nirmala Sitharaman announced in the annual budget presentation to parliament on February 1, 2022, “Any income from the transfer of virtual digital assets would be a 30 percent tax – in the effect of capital gains tax.” The custom will also be applicable to Non-Fungible Tokens (NFTs) in addition to crypto exchanges.

Further elaborating on the taxation model for such digital currencies, the budgetary speech outlined that there has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to regulate them and place them under a tax regime. All crypto transfers above a certain monetary value will be liable for a 1% TDS deduction, which will in turn help authorities keep track of the movement of such currencies in the economy.

“India is finally on the path of legitimizing the crypto sector in India,” affirmed Nischal Shetty, Co-founder, and CEO of WazirX, India’s largest crypto exchange.

Cryptocurrency in India is a major concept. Since the pandemic struck the country and left the economy to tumble, more Indians have shown interest in cryptocurrency investment with the hope of bringing in good benefits. After the announcement of a tax on digital assets in the Union budget 2022, there has been a lot of buzz among the investors.

Cryptocurrencies and Cryptography are powerful, society-shaping technologies and we’re just beginning to understand their reach and influence. In the upcoming article, we will further discuss the crypto ecosystem by delving into cryptographic trust, how crypto investors and experts are reacting to the current tax implications, and more.

Authored by Pratheek. V