Learn Cryptocurrency
14 Jan 2021

What is Cryptocurrency? How Does It Work?

CoinSwitch Kuber

Cryptocurrency is not just a word; it involves the emotions of thousands of people who use it to supplement their income, or for purchasing products on the internet. 

It is a great mode of investment that has offered 10x returns in a short period. However, cryptocurrencies are also prone to volatility – their prices fluctuate almost daily. 

This blog post will take you through all the ifs and buts around cryptocurrency, and will help you to learn about this in a very concise way.

Key takeaways

Cryptocurrency is another form of digital currency that exists just like our fiat currencies (USD, EURO, INR, etc.) The difference is the hard cash and security that allows for the wide adoption of cryptocurrencies in the world. At present, more than 11000 of them are floating in the market on several cryptocurrency exchanges.

  • Cryptocurrency is a form of digital currency that is distributed on the internet free from centralized entities and intermediaries like Banks.
  • They work on the principle of Blockchain Technology and are stored in digital wallets that allow easy buying and selling of cryptocurrencies.
  • Ethereum has swept the market by introducing smart contracts and hosts more than 3000 decentralized applications built on top of them.
  • Cryptocurrencies can be earned broadly by mining (a process to generate new coins) or by Investing. Their purpose is not limited to being a medium of exchange but also has varied use-cases such as the purchase of NFTs, tipping your favorite content creators, etc.
  • Legalities are like another hurdle that comes on their way and are based on the location where they are used.

What Are Cryptocurrencies?

Cryptocurrency is a digital currency that is used to buy goods or as an investment vehicle. It is decentralized and a perfect example of offering secure transactions with low fees. 

To this day, if you ask people about cryptocurrencies, they would say ‘Bitcoin.’ Unarguably, Bitcoin is the most popular cryptocurrency even after thousands of other coins exist in the market.

Cryptocurrencies are also known as digital currency as they exist only on the internet with transactions happening on a public ledger while they are being stored in a digital wallet.

How Does Cryptocurrency Work? 

Cryptocurrency is powered by Blockchain and harnesses all its underlying technology. They are decentralized and don’t require a centralized intermediary like banks to keep an eye on. Transactions that happen are recorded on the public ledger keeping the identities of people safe. It allows maintaining the integrity of the data and keeping the network secure. 

Cryptocurrency is created through a process called mining that involves solving complicated maths puzzles to generate coins. We will have a closer look at mining later in this blog.

How Many Cryptocurrencies Are There?

At the time of writing this blog, there are more than 10.1k cryptocurrencies in the market. While some of them have almost negligible to no value, most are designed to work for a specific purpose.

Ethereum, the second-most popular cryptocurrency after Bitcoin, was designed to provide a decentralized platform capable of running smart contracts. This feature gave other blockchains to be built atop Ethereum and utilize its framework for their transactions. At present, over 3000 DApps are running on the Ethereum blockchain. One is Aave, a popular decentralized lending and borrowing platform that allows users to lend or borrow money easily by staking your cryptos. 

There are several cryptocurrencies in the market, and it would be a really difficult task to check their value in INR when most of them are traded in USD. Converting the price of Bitcoin to INR and other cryptocurrencies is now easier than before.

If we look at how much money is locked into the crypto market, you would be astonished to find the total market capitalization of all cryptocurrencies hit $2 trillion in August 2021, months after it rose to its April high of $2.2 trillion. The interesting fact here is that Bitcoin accounts for a majority of the market cap leaving a little bandwidth for other cryptocurrencies. 

Let us have a look at the Top 7 cryptocurrencies by market cap (at the time of writing) that have a defining presence in the market.

Cryptocurrency market cap infographic


*Data is backed by CoinMarketCap as of August 18, 2021

How To Earn Cryptocurrency?

Cryptocurrency can be earned either by mining or by investing in them. 

Mining 

Mining cryptocurrency doesn’t involve going in with your tools and looking for cryptos in the cave, but it involves graphic cards and high-end CPUs that could clock and validate transactions.

It is the process of generating new coins by validating the transactions happening on the digital ledger. To validate the transactions, miners (or validators) try to find the solution to the hashing puzzle by using their GPUs and CPUs. 

Bitcoin, the most popular cryptocurrency, works on a Proof-of-Work consensus algorithm that burns a high amount of energy. The energy consumption is so high that it takes more than 50% of what they end up earning. 

Not only does it hamper the natural supply of electricity but is also a cause for the environment. The crypto industry is looking for ways to abolish this algorithm and to adopt better consensus algorithms that are eco-friendly. 

Investing

Cryptocurrencies are a great tool for investment as well as facilitate the easy buying and selling of goods (or services) both online and offline. Popular cryptocurrencies have shown massive returns over time that makes them a lucrative buy.

If we look at the data of returns provided by the Fixed Deposits offered by banks, it would take years to pass by to double your savings amount. With present rates of 5,6,7% and inflation acting as a major barrier, keeping a diversified portfolio surely calls for your attention.

However, many cryptocurrencies gave a stupendous ROI (Rate of Interest) in just a matter of years and if you are lucky enough, ICOs (Initial Coin Offering) would surely be a cherry on the cake. Many cryptocurrency exchanges provide easy buying and selling of a wide range of cryptocurrencies. For example, if you want to buy Bitcoin, you can just download the CoinSwitch app and start right away. 

How to Invest in Cryptocurrency?

There are plenty of options to explore for buying cryptocurrencies with dozens of applications and websites offering to invest in cryptos easily. CoinSwitch Kuber is one of the leading market players that allows buying cryptocurrencies with just a click!

Its easy-to-use interface, quick KYC process, and low starting amount make it a perfect place to start for people who are new to cryptocurrency. It allows for a wide range of payment options such as UPI or Netbanking, and anyone can start with just Rs100.

How Can You Use Cryptocurrencies?

The potential is upside where not only does it allow for investments and purchases but they are also a good tool for collecting NFTs, yield farming, and donating for a greater cause. We are listing some of the ways where you can take a headstart. 

  • Donation: There are a lot of non-profit organizations that accept donations in various cryptocurrencies. Not only does it help someone in need but also provides certain tax reductions for the person donating. The website save the children accepts Bitcoin in donations since 2013.
  • Purchases: A wide range of stores accept Bitcoin and other cryptocurrencies. Shop your favorite products easily with cryptos. Paypal and subway are two popular examples that accept payments in cryptocurrencies.
  • NFTs: Non-fungible tokens are gaining popularity in recent times as a measure to bridge the gap between collectibles and buyers. However, you can only buy NFTs through cryptocurrencies that are listed on various websites. Rarible hosts a majority of NFTs on its website and allows easy payments.
  • Tipping: Liked a service? You can tip the person! Popular streaming platforms allow tipping in their native cryptocurrency to help engage the audience and compensate authors, musicians, or content creators fairly. Tron is a perfect example where content creators are tipped directly by the users.
  • Yield Farming: This new concept allows you to stake your cryptocurrencies in the liquidity pools for guaranteed returns. This provides a double benefit where your value appreciates as well as you earn interest in it. Aave is a popular Defi platform that allows people to stake their cryptocurrencies in return for interest.

Where to use cryptocurrencies

Are Cryptocurrencies Secure? 

Blockchain is the technology that fuels most cryptocurrencies. The blocks act as the foundation of blockchain as transactions are recorded and time-stamped within it. 

Blocks are linked to each other, so for hackers to tamper your digital ledger of transactions, they must individually alter each block, thus making it a phenomenally difficult task to accomplish. 

For doing altercations to the blockchain, the hacker would have to gain access to 51% control of the network of the blockchain to be granted access. It would require a vast sum of money and resources that would deplete the value. Therefore, it is pointless to even try!

What Are The Legalities Around Cryptocurrencies?

If we talk about cryptocurrencies, the legalities around them are country-specific. Germany & Dubai allow them to be traded and used legally, while countries like India and the US are still debating about how to regulate them.

South Korea and Japan have also come forward by allowing people to trade in Bitcoin and other cryptocurrencies, however, El Salvador has recognized Bitcoin as a legal tender. As countries are setting their foot to explore the future of cryptocurrencies, it aligns with the possible use cases they can extract. The future of cryptocurrency in India looks bright based on the investors, market, and people willing to enter the cryptic space.

Frequently Asked Questions (FAQs)

Q1. What is the concept of cryptocurrency?

Cryptocurrency can be defined as a digital currency that utilizes the functions of blockchain technology and is secured by cryptography. It provides an environment free from centralized entities. 

Q2. What is the best cryptocurrency to invest in right now?

There is no answer to this question as it depends on person to person. Most of the cryptocurrencies are still in the development stage and have the potential for good returns if invested at the right time. We advise you to do your own research (DYOR) before investing and only invest that you can afford to lose.

Q3. What are the different types of cryptocurrencies available?

The cryptocurrencies available in the market differ on some parameters from the rest of the crowd. However, cryptos fall into one of the two major categories – coins and tokens. The below tabular difference will be an insight into how the two differ from each other.

 

Parameters Coin Token
Distribution Coins are mined through the mining process  Usually, tokens are distributed in ICOs
Use-cases Coins are majorly used for payments Tokens can be used for a variety of purposes
Blockchain They are based on their native blockchain They are built on existing blockchain

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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CoinSwitch Kuber

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