The type of currency used until 2009, was either cash or digital cash, which was ultimately governed and regulated by a certain central authority, for example, Banks. The name Cryptocurrency was derived from the word, ‘encryption’ because it uses advanced coding to store and transmit cryptocurrency data. The main aim was to provide security and safety.
Let us first understand what cryptocurrency actually is. A cryptocurrency is a digital currency that was designed to hold value that can be exchanged through a computer network. This is the first medium of exchange that is not reliant or governed by any central authority. The value of such currency does not depend on the inflation rates, or any kind of monetary policies, but is majorly affected by the demand and supply of a particular coin, competition between different types of coins, cost of producing crypto, and other factors. Cryptocurrencies are basically digital assets and not currencies. These can be often termed as digital commodities, securities, as well as currencies viewed as a distinct asset class in practice.
The ownership of such coins is executed through different authorised crypto-trading platforms. The ownership and the transactions are recorded in a digital ledger, which is a computerised database, that uses cryptography to create, control, and maintain the currency. Such technology is referred to as blockchain technology. The process of creating a cryptocurrency is named mining, which uses computing power to solve complicated mathematical problems. Hence, making it almost impossible to crack the code and the ownership is always secured.
When a cryptocurrency is mined or created prior to the issuance or issued by a single issuer, it is generally considered to be centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, i.e., a blockchain, that serves as a public financial transaction database. Blockchain can be considered as a boon or a bane because of its potential to disrupt all industries with its decentralisation and mutual trust behavior.
Types of Cryptocurrencies
In 2009, the first cryptocurrency, called Bitcoin was launched. Bitcoin is the most popular and valuable cryptocurrency. Satoshi Nakamoto (widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown) invented it and introduced it to the world via a white paper in 2008. Bitcoin remains to be the most vulnerable crypto-coin to date. In the wake of Bitcoin's success, many other cryptocurrencies, known as "altcoins," have been launched.
There are currently over a thousand different cryptocurrencies in the world. Each cryptocurrency claims to have a different function and specification. For example, Ethereum's ether markets itself as gas for the underlying smart contract platform. Ripple's XRP is used by banks to facilitate transfers between different geographies. These are known as utility tokens. According to the crypto-trading market, there are many such altcoins that are famous among traders.
- Ethereum (ETH): the goal is to create a decentralized suite of financial products that anyone in the world can freely access.
- Litecoin (LTC): based on an open-source global payment network and often been referred to as “silver to Bitcoin’s gold.”
- Cardano (ADA): has the sixth-largest market capitalisation at $38.5 billion according to February 2022 reports.
- Polkadot (DOT): a unique PoS crypto that is aimed at delivering interoperability.
- Bitcoin Cash (BCH): earliest and most successful hard forks of the original Bitcoin.
- Stellar (XLM): designed to provide enterprise solutions by connecting financial institutions for large transactions.
- Dogecoin (DOGE): though, created the coin as a joke, commenting on the wild speculation of the cryptocurrency market, but caused a stir in 2021 as the price of the coin skyrocketed.
- Binance Coin (BNB): operates as a payment method for the fees associated with trading on the Binance Exchange.
How to Invest in Cryptocurrencies?
There are many cryptocurrencies available in the market and the number is growing continuously. But the actual question is that after having so many options, and so much uncertainty, how can we invest in crypto? Let's find out.
The initial step is to choose a suitable platform that will connect you with the market. We currently have two options available as a trader. One is the traditional brokers and the other is the cryptocurrency exchanges. Most people prefer the second option, where they have wallet storage and have interest-bearing account options.
Next, we need to fund the trading accounts opened with either of the options. There are different trading fee tiers based on the amount of capital you want to invest to open an account on these crypto trading exchanges, which should be researched before we start funding our crypto trading account.
After following procedural necessities we can place an order via broker's or exchange's web or mobile platform. There are other channels through which one can buy, sell and hold cryptos, such as Bitcoin trusts, ETFs, Blockchain companies, and many more. Although the investing options, amount, and medium completely depend on the risk-taking capacity and investment goals.
Investing in cryptocurrencies and other initial coin offerings is highly risky and speculative because of the volatile nature of this asset class. A qualified professional should always be consulted and proper knowledge of the market should be acquired before making any financial decisions.
Pros and Cons of Crypto
The decentralized nature of Cryptocurrencies is not affected by economical factors, government norms, or, made-up supply and demand. This is because the technology itself is decentralized and a transaction, once made is neither reversible nor faked and is recorded in the public ledger. Hence, the concept has great opportunities in a secured and digitalised economy.
But, each coin has two sides to it.
Crypto-investing can be a preferable option because of its decentralized nature which cannot collapse at a single point of failure. It is a cheaper and safer option as compared to other online transaction options.
On the other hand, cryptocurrency trading and lack of knowledge of blockchain technology might put you in a circumstance where there are chances of possible capital loss. So to be precise, a person without any knowledge of computers, internet and technology will find it hard to understand this new futuristic concept.
Recent trends in Cryptocurrency
The total market capitalisation of all cryptocurrencies now exceeds $1.6 trillion with over 300 million crypto users worldwide.
According to Reuters, The final week of 2021 saw a third straight week of investment outflows from cryptocurrency funds, even as it capped a year of strong inflows into digital asset investment products, data from digital currency manager Coin Shares showed.
Although, 2021 saw an upsurge in the crypto-industry, like never before. From hitting the $3-trillion market cap to the complete ban on crypto trading and mining by China, multiple events made 2021 a truly dramatic year for cryptocurrencies. Bitcoin and Ethereum also saw high prices, giving profits to the holders. In 2022 the investors are looking forward to grow in the industry as Bitcoin gains more mainstream adoption and global presence, but many government authorities remain skeptical about it being adopted as a legal tender.
Talking about Ethereum, Ethereum 2.0, expected to complete in 2022, will make the network more scalable and sustainable. Its native token ether (ETH) clocked nearly 445 percent gains in 2021. Metaverse is expected to be one of the hottest topics in the digital space in the year 2022. A part of the Metaverse, Decentraland, has caught the attention of a lot of investors already.
India has already introduced a tax of 30 percent and a 1 percent tax deductible at source (TDS) from cryptocurrency investment, from the financial year, 2022-23 onwards.
El Salvador, a South American country has been one of the biggest proponents of cryptocurrency adoption. In September 2021, El Salvador became the first country to adopt Bitcoin as a legal tender. Russia has also approved to legalise cryptocurrency and the current drafts suggest that it will be treated like any other foreign currency in terms of handling taxes.
Future of Cryptocurrencies
There are numerous opinions about Crypto being adapted as a mode of exchange. But, analysts estimate that the global cryptocurrency market will be more than triple by 2030.
Whether the concept is acceptable or not, the rising trend of cryptocurrencies will soon bind the businesses, investors, and the economy as a whole to deal with it. Cryptocurrency has been allowed to spread as a uniquely decentralized financial asset but there are mixed feelings about regulation's impact.
Cryptocurrencies have the potential to disrupt the existing financial order and democratise finance. The size of the cryptocurrency space has grown exponentially in the past decade, with new innovations and a collective market capitalisation of more than $1.75 trillion. In spite of so many currencies out there, Bitcoin still rules the cryptocurrency game.