Cryptocurrency is any form of currency that exists digitally and uses blockchain or cryptography to secure transactions. It got its name because it uses encryption technique to verify its transactions. Cryptocurrency is a digital payment network that does not rely on any financial or centralized agency to verify transactions. They are managed by peer-to-peer networks of computers. At its core, cryptocurrency is typically de-centralized virtual money designed to be used on the internet. Bitcoin, which launched in 2008, was the first cryptocurrency, and it remains by far the biggest, most influential, and best-known. In the decade since, Bitcoin and other cryptocurrencies like Ethereum have grown as digital alternatives to money issued by governments. Other well-known cryptos include EOS, Tezos and ZCash. Some are similar to bitcoin, other are based on other technologies or have new features that allows them to do more than transfer value. No company, government, or third-party is in control of it, and anyone, who is willing, can participate. A cryptocurrency blockchain is similar to a financial institutes balance sheet and crypto (or cryptocurrency) is distributed across participants of the digital currency’s entire network. Each currency, which is known as cryptocurrency, has its own blockchain technology which constantly re-verifies records of every single transaction ever made.
The economic value of cryptocurrency, like all goods and services, comes from supply and demand. Supply refers to how much is available—like how many bitcoin are available to buy at any moment in time. Demand refers to people’s desire to own it—as in how many people want to buy bitcoin and how strongly they want it. The value of a cryptocurrency will always be a balance of both factors.
There are also other types of value. For example, there’s the value you get from using a cryptocurrency. Many people enjoy spending or gifting crypto, meaning that it gives them a sense of pride to support an exciting new financial system. Similarly, some people like to shop with bitcoin because they like its low fees and want to encourage businesses to accept it.
There are several advantages as well as disadvantages of these digital currencies, for instance Cryptocurrencies represent a new, decentralized paradigm for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one that was triggered in 2008 by the failure of institutions in the United States. Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a
trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake. Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers. Flash loans in decentralized finance are a good example of such decentralized transfers. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading. Cryptocurrency investments can generate profits. Cryptocurrency markets have skyrocketed in value over the past decade, at one point reaching almost $2 trillion. As of May 2022, Bitcoin was valued at more than $550 billion in crypto markets. The remittance economy is testing one of cryptocurrency’s most prominent use cases. Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders, and, subsequently, converted to the destination fiat currency. This method streamlines the money transfer process and makes it cheaper. While though they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. They leave a digital trail that agencies such as the Federal Bureau of Investigation (FBI) can decipher. This opens up possibilities of governments or federal authorities tracking the financial transactions of ordinary citizens. Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the dark web, is already well known.
Cryptocurrencies have also become a favourite of hackers who use them for ransomware activities. In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated. For example, an MIT study found that just 11,000 investors held roughly 45% of Bitcoin’s surging value. One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume. The expensive energy costs coupled with the unpredictability of mining have concentrated mining among large firms whose revenues running into the billions of dollars. According to an MIT study, 10% of miners account for 90% of its mining capacity. Though cryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars’ worth of “coins” stolen. Cryptocurrencies traded in public markets suffer from price volatility. Bitcoin has experienced rapid surges and crashes in its value, climbing to as high as $17,738 in December 2017 before dropping to $7,575 in the following months. Some economists thus consider cryptocurrencies to be a short-lived fad or speculative bubble.
How does cryptocurrency work?
Cryptocurrencies use a technology called public-private key cryptography to transfer coin ownership on a secure and distributed ledger. A private key is an ultra-secure password that never needs to be shared with anyone, with which you can send value on the network. An associated public key can be freely and safely shared with others to receive value on the network. From the public key, it is impossible for anyone to guess your private key. Bitcoin is the first and most well-known, but there are thousands of types of cryptocurrencies. Many, like Litecoin and Bitcoin Cash, share Bitcoin’s core characteristics but explore new ways to process transactions. Others offer a wider range of features. Ethereum, for example, can be used to run applications and create contracts. All four, however, are based on an idea called the blockchain, which is key to understanding how cryptocurrency works. At its most basic, a blockchain is a list of transactions that anyone can view and verify. The Bitcoin blockchain, for example, is a record of every time someone sends or receives bitcoin. This list of transactions is fundamental for most cryptocurrencies because it enables secure payments to be made between people who don’t know each other without having to go through a third-party verifier like a bank. Blockchain technology is also exciting because it has many uses beyond cryptocurrency. Blockchains are being used to explore medical research, improve the sharing of healthcare records, streamline supply chains, increase privacy on the internet, and so much more. The principles behind both bitcoin and the Bitcoin blockchain first appeared online in a white-paper published in late 2007 by a person or group going by the name Satoshi Nakamoto. The blockchain ledger is split across all the computers on the network, which are constantly verifying that the blockchain is accurate. This means there is no central vault, entity, or database that can be hacked, stolen, or manipulated. Most cryptocurrencies are ‘mined’ via a decentralized (also known as peerto-peer) network of computers. But mining doesn’t just generate more bitcoin or Ethereum – it’s also the mechanism that updates and secures the network by constantly verifying the public blockchain ledger and adding new transactions. Technically, anyone with a computer and an internet connection can become a miner. But before you get excited, it’s worth noting that mining is not always profitable. Depending on which cryptocurrency you’re mining, how fast your computer is, and the cost of electricity in your area, you may end up spending more on mining than you earn back in cryptocurrency. As a result, most crypto mining these days is done by companies that specialize in it, or by large groups of individuals who all contribute their computing power.
Legality
The government or monetary authorities grant fiat currencies their power as a means of exchange. Cryptocurrencies, on the other hand, are not backed by any government or corporate entity. As a result, establishing their legal standing in many financial countries throughout the world has proven problematic. The fact that cryptocurrencies have primarily operated outside of the current economic infrastructure doesn’t help things. El Salvador was the first country in the world to accept Bitcoin as legal money for monetary transactions as of December 2021. Crypto laws in the rest of the world differ as per jurisdiction. Bitcoin has also been praised for its several advantages, including minimal transaction fees and quick processing. That explains why hundreds of billions of dollars have poured into new kinds of currency in recent years. Blockchain, the technology that underpins bitcoin, has also come to a step closer to widespread acceptance.
How secure is Cryptocurrency?
The security that cryptographic proof provides to digital asset transactions is not easy to break. Every transaction that gets initiated in the crypto-financial system needs to be verified by the majority of the ledger network distributed across the internet. The transaction gets rejected if this does not happen. Also, transactions are verified through mining, a process of solving complex algorithms. This process consumes a lot of energy making it expensive and takes a significant amount of time to get noticed if anything is fishy. Any user from any part of the world able to access the web can transfer crypto, there is no geographical barrier or conversion fee. The utility of digital money has been recently witnessed by the world amid the ongoing Russia-Ukraine war. People from all around the world extended their support to Ukraine by making cryptocurrency donations. Ukraine’s Deputy Digital Transformation minister, Alex Bornyakov confirmed that the country has raised around $100 Million to withstand the Russian invasion. The supply of the currency is limited because new currency only comes into circulation when blockchain miners verify any transaction. The demand for cryptocurrency is increasing each passing day because more people are getting aware of the potential of this asset. Limited supply and more demand for cryptocurrency make the crypto market highly volatile and risky.
Cryptocurrency in India
Between 2012 and 2017, the popularity of cryptocurrency in India grew immensely. In India, cryptocurrency exchanges such as Zebpay, Coinsecure, Unocoin, Koinex, and Pocket Bits have sprung up during this time. Several other cryptocurrencies were also introduced in the global digital economy throughout this time period. It is also essential to note that Bitcoin, the most popular cryptocurrency, had risen from roughly $5 at the start of 2012 to almost $1,000 by the end of 2017, which genuinely reveals the growth of popularity of crypto. In 2013 and 2017, the Reserve Bank of India stated on cryptocurrency in two press announcements that expressed its concerns on cryptocurrencies. The announcements very clearly indicated that the virtual currency is not backed by them as well as disallowed commercial banks from accepting it as a deposit or a medium of exchange. This statement was set aside by the Supreme Court in 2017 due to two PILs filed, one for banning crypto and the other for regulating crypto. It is imperative to understand that crypto has never been banned in India, and neither has crypto mining. At the same time, it is not completely legal to trade in crypto either since there is no law governing it; it lies in the ‘grey’ area of the law. The crypto bill that the Cabinet is currently working on is unlikely to outright ban cryptocurrencies, but it will regulate them. As per a report, India’s cryptocurrency exchanges would be regulated by the Securities and Exchange Board of India (SEBI). Citizens of India would be compelled to keep their cryptocurrencies on Indian exchanges solely – the new legislation is said to make it illegal for users to maintain their funds on worldwide exchanges or in private wallets. People would have a set length of time to move their funds when the law is implemented, after which they might be penalised in the range of 5 to 20 crore. According to our Finance Minister, Mrs. Nirmala Sitharaman, the government is aggressively scrutinizing the hazards that cryptocurrencies pose to the Indian economy. The future of cryptocurrency in India is still uncertain, owing to the fact that the central government wants further consultations on the subject before making a final decision about its crypto bill.
Cryptocurrency and Recession
In simple terms, recession is a situation that occurs when the domestic output of goods and services dips. It is a phenomenon that every country witnesses but with varied intensity. Whenever the countries are doing well economically, the Gross Domestic Product (GDP), which is the most comprehensive measure of economic activity, will rise. But, if it is the other way round, the GDP will fall. Since the start of this year, the global economy has been low due to several macroeconomic factors. It started with the Omicron virus spreading, followed by the war between Ukraine and Russia, and the collapse of the economics of the US and Europe. Significantly, the COVID-19 pandemic in the last year has impacted most businesses and people, indirectly affecting the economy while crashing global markets. With this, inflation has been reaching new highs every month. As a result, the Federal Reserve and Central Banks are taking the hawkish route in response to the impending recession. Also, whenever the US President starts discussing a possible recession, the public gets anxious and moves away from the riskier assets, be it stocks, equities, or cryptos. During the economic downturn, investors usually show herd behaviour. Investors and institutions supporting the projects may either reduce their investments or abandon their undertakings which can impact the crypto markets. Since crypto investments are considered to be of higher risk, investors tend to sell them at the first sign of any volatility or crisis. In terms of human capital, recession can also impact the crypto market. With crypto adoption increasing, more projects will open great job opportunities within the space. In times of recession, if a crypto organisation plans to cut costs, it may result in widespread layoffs. A recession would form a poor macro environment for global markets, especially for cryptocurrencies. People during a tight financial crisis have less money to spend on essential items, so they may not be able to invest in risky assets like cryptos and equities. As long as the fear of recession continues, crypto will struggle like any other asset varying in the intensity of drop. However, recessions are a kind of evolutionary bottleneck where weak projects expire and strong projects keep getting stronger. But if people believe that the product is worth their investment despite money being tight, it is certainly indicative of its long-term value.