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Cryptocurrency: Fundamentals And Investment Risk

Cryptocurrency, a fusion of "crypto" and "currency," is a form of digital money. "Crypto" signifies secrecy, while "currency" pertains to money. It is shapeless and cannot be seen. Unlike traditional money, cryptocurrency is not controlled by banks or governments, offering a unique and decentralized payment system. It operates outside the bounds of conventional monetary regulations, accessible globally. Terms like digital coin, virtual money, crypto, coin, virtual currency, electronic coin, digital token, and blockchain token refer to the same entity: cryptocurrency.

The technology underpinning cryptocurrency is blockchain, a secure digital ledger. Using a private key, similar to a password, users can interact with their cryptocurrency holdings. These keys are stored in digital wallets, and transactions are recorded on the blockchain.

Cryptocurrency, while digital, holds great value and security. It operates on complex codes and cryptographic techniques. However, entering the cryptocurrency realm requires caution and learning. It is not advisable to invest in cryptocurrency without having deep knowledge of its business.

As an alternative to traditional payment methods, cryptocurrency has the potential for everyday transactions, surpassing credit cards and cash. To become widely accepted, it needs increased stability. Mastery of cryptocurrency trading can lead to rewards, but blind conformity to trends should be avoided.

Cryptocurrency represents a departure from conventional financial systems. Its value is tied to mathematics and cryptographic principles, making it resistant to counterfeiting. Prominent examples of cryptocurrencies include Bitcoin and Ether.

Cryptocurrency's decentralized structure empowers users, eliminating the need for central authorities such as banks. Each cryptocurrency operates within its blockchain, ensuring secure transactions.

Cryptocurrencies are created through mining, a process using powerful computers to solve complex problems. However, these computers consume a lot of electrical energy and generate a lot of heat, which may cause environmental pollution.

Miners are people or groups who use their computers, electricity, and space to find digital coins. They solve complex problems to create new coins or validate transactions. Miners can also refer to specialized computers made just for this job.

First Cryptocurrency
Bitcoin, the pioneer cryptocurrency, was introduced by Satoshi Nakamoto in 2008. Its scarcity, with only 21 million available, sets it apart from traditional currencies.

Public Key and Private Key
Private keys are essential, akin to personal signatures, providing control over cryptocurrency holdings. Losing the private key means losing access to the coins. The private key is paired with the public key, serving as an identifier within the blockchain. Wallet addresses are linked to public keys. Public key is like your email address and private key like password. Understanding the importance of public and private keys is crucial for security. Public keys identify coins, while private keys enable control. Protecting private keys is vital, akin to safeguarding passwords.

Cryptocurrency Wallet
A cryptocurrency wallet is software that securely stores private and public keys. It facilitates sending, receiving, and balance monitoring of cryptocurrencies. Different types of wallets exist, each offering varying levels of security, including hardware, paper, and online wallets.

Storing cryptocurrency in wallets is safer than exchanges. Wallets can be online (hot) or offline (cold), based on internet connectivity.

Legal in India
In India, cryptocurrency is legal, but there is no proper regulation for operation of the cryptocurrency like traditional money. The inception of Bitcoin marked the beginning of the cryptocurrency era, and it remains distinct from traditional banking systems. The expansion of cryptocurrencies led to the creation of alternative coins or altcoins.

Cryptocurrency offers considerable anonymity. Unfortunately, this can be exploited by criminal elements using cryptocurrency for ulterior motives like money laundering, terrorism and child crimes, analogous to misuse of conventional money. Nonetheless, it curbs government tracking of purchases and preserves personal privacy.

Cryptocurrency offers a means to transact, trade, and invest while evading government oversight and financial institution tracking. In a globally destabilized economy, this system can provide stability.

A blockchain is like a digital chain of records called blocks. These blocks are linked together and kept safe using special codes. Once a block is complete and has a time stamp, it can't be changed, making it very secure.

Blockchain is the digital system where cryptocurrencies live. It's not controlled by one group, but by a whole community, which makes it nearly impossible to change anything without everyone agreeing. It uses blocks of code to record every single movement or use of a cryptocurrency, creating a complete history.

Think of a blockchain as a chain made of data blocks. Each block can hold different information, often transactions. Each block has a unique code that shows its data. And each block's data includes the code of the block before it.

Cryptocurrency Exchange
Cryptocurrency exchanges work like stock brokerage platforms, but they focus on providing access to various cryptocurrencies. These online services let you buy, sell, and store different digital currencies in your portfolio.

On these platforms, you can exchange traditional money (fiat) for cryptocurrencies and also trade between different types of cryptocurrencies. However, it's not recommended to keep your cryptocurrencies on exchange platforms due to security risks like hacking. It's safer to transfer your cryptocurrencies to a personal wallet.

In India, crypto exchanges are popular for buying and selling cryptocurrencies. They allow you to convert regular fiat currencies into digital assets. Cryptocurrency is different from fiat money, which derives its value from government rules. Examples of fiat money include the dollar, yen, rupee, and euro.

Bitcoin, being the first cryptocurrency, has numerous exchanges globally. Bit Stamp and Coinbase are well-known US-based exchanges, while is established in Europe. If you're interested in trading various digital currencies, a crypto marketplace is where you can find them all.

In India, several exchanges run by local crypto startups offer trading of cryptocurrencies like Bitcoin, Ethereum, and Dogecoin. Names like WazirX, CoinDCX, CoinSwitch Kuber, Unocoin, ZebPay, and BuyUCoin are familiar in this space. You can create an account on these exchanges without owning any cryptocurrencies initially.

The registration process with an exchange involves these steps:
Sign up by providing basic details. Activate your account via an email link. Complete the registration process, which may require more personal information due to local laws and regulations. This includes your name, address, phone number, country of residence, and even your date of birth for identity verification.

Investment in Cryptocurrency
Before you invest in cryptocurrency, remember these five important rules:
  • Only use money you can afford to lose.
  • Keep a small part of your total investments in crypto, maybe 5-10%.
  • Use trusted platforms because the crypto industry is not regulated.
  • Pick the right coins; out of thousands, many are worthless or scams.
  • Most importantly, be ready for the possibility of losing all your money.

In summary, cryptocurrency offers a novel form of digital money, enabled by blockchain technology. Though it is not illegal in India, it is not regulated. There is a lot of risk in investment in cryptocurrency. Don't invest in cryptocurrency without deeply learning the intricacies of its trade and even if you invest in it, invest a very small amount of your money in hand. It operates independently of banks and governments, providing security and global accessibility.

Understanding its intricacies and practicing due diligence are crucial before venturing into the world of cryptocurrency. Due to its anonymity, many criminals are using it for money laundering, terrorism activities, tax evasion and children related crimes etc. Transaction through cryptocurrency can be done very fast globally.

  1. Cryptocurrency Investment Strategy, SATO AKIRA
  2. The Everything Guide to Investing in Cryptocurrency, Ryan Derousseau
  3. Cryptocurrency for Beginners, Vignessh B
  4. Cryptocurrency, 50 Expert Secrets for Beginners, Jared Synder
  5. The Basics of Bitcoins and Blockchains, Antony Lewis
  6. Cryptocurrency Mining, Devan Hansel
  7. Blockchain Revolution, Don Tapscott and Alex Tapscott
  8. Mastering Bitcoin, Andreas M. Antonopoulos
Written By: Md. Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email: [email protected], Ph no: 9836576565

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