Cryptocurrency – Meaning And Its Working

Many people are of the view that Cryptocurrency is an alternative to traditional currency. Recently, Bitcoin’s value again increased by 9.9% to $20,116 after it crashed to its highest value since 2020. The value of other cryptocurrency also increased.

A lot of questions arise in the minds of investors like what is cryptocurrency, how it works in the virtual market and who regulates it, etc.

So let us discuss in detail about cryptocurrency.

The Meaning of Cryptocurrency:

In the traditional financial system, we exchange notes for goods and services with one another. On these notes the Central Bank is the guarantor.

Cryptocurrency is a digital currency which is used as a mode of payment. In it transactions are done on computers without any interference of central banks or the Governments. In other words, the Central Bank is not the guarantor of these cryptocurrencies. Cryptocurrency is also known as Virtual Currency.

It is expected that the future of financial institutions will be largely dependent on digital currencies.

The Types of Cryptocurrencies are:

At present, there are more than 2000 cryptocurrencies which are available in the market. Out of these cryptocurrencies the top are mentioned as under;

1. Bitcoin
2. Ethereum
3. Solana
4. Cardano
5. Binance coin
6. Tether
7. USD coin
8. Litecoin
9. Diem
10. XRP and many more.

The Working of Crypto Coins-

The working of cryptocurrency depends upon Blockchain technology. All the details of transactions, that is

➢ who transacted

➢ to whom

➢ how much amount to be transacted

are recorded in a Public account, in encrypted form (code), called Ledger. This ledger is called the Blockchain. It is available on all computer networks.

The Meaning of Crypto-mining:

• Crypto mining is a method by which new crypto coins like Bitcoins are generated by the miners.
  
• The transaction of crypto-coins is done from one computer to another computer. 
  
• This transaction is verified by Miners by solving a tough mathematical equation.
  
• For solving this mathematical calculation miners needed very expensive computers and a lot of electricity. So the big miner firms are set up in a country where electricity is cheaper than other countries. Kazakhstan and the Texas state of USA is considered the hub of cryptocurrencies as electricity rates are cheaper here.
  
• As a reward for solving the equation and adding a block in the Blockchain Miners got crypto-coins.

Let us again learn the concept of crypto working and crypto mining through a diagram;

What is Bitcoin?

Bitcoin was the world’s first digital cryptocurrency, so it is used as a synonym for cryptocurrency. The total number of Bitcoins is fixed at 21 million.

Founder – It was founded anonymously using the name Satoshi Nakamoto.

Founding Year – It was founded in 2009 after the 2008 financial crisis.

1 Bitcoin value = $20,409

1 Bitcoin value = ₹15,28,504

Advantages of the cryptocurrencies:

➔ It is a very secure method as all the details of transactions are in encrypted form.

➔ It removes the control of a third party, that is the Central Bank or Government, over the transactions. 

➔ In this method we do not need to fill any document for the transaction. We can also send the crypto coins from one country to another country without any additional fee, so it is a money-saving method. 

➔ The amount is transferred just by solving a mathematical equation by the miners, which is done in a few minutes so it is a time-saving method. 

➔ It increases the financial inclusiveness of people as anybody can make transactions using crypto coins as they only need a smartphone and an internet connection. They do not need to go to the banks or stand in long queues. 

Disadvantages of the cryptocurrencies:

➔ As there is no regulation of the digital currency by the Central bank or the Government, so the chances of fraud may increase. 

➔ Since all the transactions are done with the use of computers so the hackers can hack the system. 

➔ The value of these cryptocurrencies is not stable. It changes each day. The value depends on demand and supply power, so the chances of risks increase. 

➔ On mining the digital cryptocurrencies by miners the electricity is used in a large amount which releases Carbon Footprint and it will affect the environment and climate. 

➔ The process of investing in cryptocurrency is not investor-friendly. In simple words, investors fail to understand the workings of these digital assets. So they try to avoid investments in these cryptocurrency. They find it easy to invest in gold, bonds or stocks. 

➔ In order to mine or produce a new crypto-coin a large network of fast computers is required, so it is a very expensive method. 

➔ The reward from mining of crypto coin is reduced by half amount after every 4 years

Year                                                          Reward (Bitcoins) 

2009                                                          50 

2012                                                           25 

2016                                                           12.5 

2021                                                           6.5 

➔ These currencies are not universally acceptable. Some countries banned the trading of the cryptocurrencies such as 

China 

Bangladesh 

Qatar 

Egypt 

Iraq 

➔ The transactions done in crypto coins may be used for illegal activities like Money laundering, terror funding, tax evasion as no regulation by the central banks. 

In short, the countries started to recognize the fast growth of cryptocurrencies. Now, they are making special laws for the trade of cryptocurrencies. 

Mostly, people use cryptocurrency as an investment like gold and diamonds. Many Apps are providing the services for the transaction in crypto-coins such as eToro, Coinbase, Gemini, CoinSwitch, Kuber etc.