Explained: What is a cryptocurrency?

Explained: What is a cryptocurrency?

Narendra Modi government is moving a bill on cryptocurrency in the Lok Sabha during the Winter Session of Parliament, scheduled to be held later this month

Representative Image. Credit: AFP Photo

A section of the finance and business world on Tuesday felt tremors after it was made public that the Narendra Modi government, as anticipated, is moving a Bill on cryptocurrency in the Lok Sabha during the Winter Session of Parliament, scheduled to be held later this month. The Cryptocurrency and Regulation of Official Digital Currency Bill seeks to prohibit all but a few private cryptocurrencies and would effectively ban citizens in India from transacting in most cryptocurrencies.

But, what is cryptocurrency?

Any cryptocurrency is essentially a digital asset with a value that eventually translates into real money. Some of the popular cryptocurrencies are Bitcoin, Ethereum, Polkadot, Dogecoin etc. All cryptocurrencies are secured by cryptography, what it does is that the technology makes it nearly impossible to duplicate or counterfeit the currency. Unit of cryptocurrency is measured in coins 

One Bitcoin is worth over Rs 42 lakh, as of November 24. 

A significant feature of all cryptocurrencies is that they are not governed by any government entity. They are spread across the world all connected through the internet. Each coin consists of a unique code that can be used to trace and track movements, making it highly transparent, the defining feature of the system. 

Also read: Centre plans to bring bill to ban private cryptocurrency, 25 other bills at Winter Session

How does it all work?

For starters, cryptocurrencies work on a network of blockchains. Blockchain is the technology on which all cryptocurrencies function. It is a network of thousands of computers connected to each other on a peer-to-peer basis. Thus, all transactions and communications are performed without any gateway or middleman. For regular currency, banks play as a middleman between transactions. 

All these transactions are digitally stored on blocks, which are accessible to everybody on that network. There is no entity that holds control over such a system and experts say hacking into it or rewriting these records is nearly impossible.  

How to get hands-on cryptocurrency?

Like stocks, cryptocurrency is traded on markets. And like in markets, this has brokers too. Some of the prominent ones in India are WazirX, CoinDCX, Coinswitch Kuber, among others. These companies enable access to exchanges to buy cryptocurrencies, for a percentage of commission. Customers can buy or sell, check prices and gather other key information about a given cryptocurrency. 

These are stored in a digital wallet that has a 'private key' -- a password to carry out transactions in the crypto world. Types of wallets also vary depending on factors like security and accessibility. 

It is not necessary that you need to buy a full coin of a particular cryptocurrency. People can buy a really small fraction of a coin. And in case of the Bitcoin, a tiny fraction can still mean a significant amount of money. 

Also read: Cryptocurrency bill: All you need to know

Is there a way to get crypto for free?

Yes, a process called mining. It involves solving computation problems and cryptographic equations among other things to generate a new coin. But mining is largely seen as a complex and sophisticated task, making it near impossible for a regular person to master. Plus, Bitcoins are not unlimited, there will only be so many coins that can be traded. But in the case of Ethereum, new coins are added albeit with a limit. 

Volatility as a concern 

Cryptocurrencies have had a roller-coaster run on the exchanges across the world, making them highly volatile. Since it is still in the nascent stages. many who simply want to make a quick buck further destabilise the system, making them more volatile. 

India lately has seen a boom in crypto trading. With the emergence of new trading platforms, Indians have flocked to the apps, seeking an excentric alternative for investments. And the Centre's move to introduce the Bill spread shock waves across the industry, with cryptocurrency values witnessing a drop as high as 25 per cent on Tuesday. 

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