Bitcoin: What is cryptocurrency, how it works?

Cryptocurrencies are probably the most talked about thing these days. Once hailed as the future of finance, the crypto coins have already taken over the world. Bitcoin was the first cryptocurrency to truly explode and since then, others like Ethereum, Ripple and even Dogecoin have appeared. Most of them have grown at an exponential rate. Yes, there have been few dips as well but, the crypto market has largely been on an upward trajectory over the last 12 months.It has picked pace in India too and a lot of people don’t want to miss out on the opportunity. A number of exchange platforms have made it easier for the investors to buy and sell cryptocurrencies in India but, there are a lot of questions that keep popping up. We try to answer some frequently asked questions about cryptocurrencies.

● What are cryptocurrencies?

In simple words, cryptocurrencies are digital money that can’t be seen or touched but have certain value attached to them. They are supported by blockchain technology which relies on a network of computers to keep track of transactions rather than on a centralised authority like a bank.

● How do cryptocurrencies work?

Cryptocurrencies are still very young and their exact use case is yet to be found. They can be compared to assets like Gold or real estate as a store of value. The idea is that as more and more people will start holding these coins, their value will increase over time and more use cases will appear.

● Can cryptocurrencies be converted into rupee or any other fiat currency?

Yes. Any cryptocurrency can be converted to rupee or other fiat currency using an exchange platform.

● How to buy or invest in cryptocurrencies?

Cryptocurrencies can be bought using various exchange platforms. The investors can download the apps from Google Play Store or App Store. They just need to sign up using their credentials, complete the KYC process, transfer money to the wallet and make the purchase.

● What are the things to keep in mind while investing in crypto?

Just like any other investment, crypto is also a long term solution. It has taken Bitcoin almost a decade to reach the levels it is at. Also, the market is new and more volatile than any other financial market. So, be patient, research well before investing and do not panic.

● Why do the price of cryptocurrencies fluctuate?

The crypto market works just like the stock market. The latter also witnesses ups and downs. However, the crypto market is young and more volatile. This is why it reacts more to developments and hence, we see more fluctuation.

● Why did the world need cryptocurrencies?

Cryptocurrencies were created as an attempt to decentralise financial transactions following the 2008 financial crisis. The idea was to put the power in the hands of people and reduce dependency on banks and governments. The early creators argued that governments print as much fiat currency as they want which has or will reduce its value over time. This is why a cap was put on crypto coins. For example, there are only 21 million Bitcoins in the world.

● What are the concerns around cryptocurrencies?

The major concern around cryptocurrencies is that they are largely built around speculation. Most crypto enthusiasts are hoping that the market will evolve and grow over time which will increase the value of these currencies and make them more mainstream. However, there is a huge chance that it might not happen. Commodities like Gold and Silver have coexisted with fiat currency but are only seen as a store of value and not a mode of payment.

● Can crypto replace fiat currency?

No. It’s very difficult to predict the future but the idea of entirely replacing fiat currency is far-fetched. The best case scenario is that the governments will take more control over cryptocurrencies, introduce new regulations and allow more seamless transactions. But, they are unlikely to replace the rupee or any other fiat currency.

● What is the crypto market?

Crypto market is like stock market, just that you trade in digital currencies instead of stocks. The major difference is tha cryptocurrency markets are decentralised, which means they are not issued or backed by a central authority such as a government. The entire market runs on a network of computers.

● What are the top cryptocurrencies in the world?

Bitcoin, Ethereum, Cardano and Ripple are the major cryptocurrencies in the world. Most of them have their specific purpose. For example, Bitcoin is seen as a substitute to Gold, while Ethereum is looked upon as a super computer. Then, there are meme coins as well. These include Dogecoin, Shiba Inu coin and others. They were created for fun and shouldn’t be taken too seriously.