A cryptocurrency is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership. The first cryptocurrency was Bitcoin, which was first released as open-source software in 2009. As of June 2023, there were more than 25,000 other cryptocurrencies in the marketplace, of which more than 40 had a market capitalization exceeding $1 billion. At present the largest cryptocurrencies in the world by market cap are as follows:
- Bitcoin (BTC) Price: $63,861. Market cap: $1.25 trillion. …
- Ethereum (ETH) Price: $3,334. Market cap: $400 billion. …
- Tether (USDT) Price: $1.00. …
- BNB (BNB) Price: $525.34. …
- Solana (SOL) Price: $172.19. …
- XRP (XRP) Price: $0.5939. …
- USD Coin (USDC) Price: $1.00. …
- Cardano (ADA) Price: $0.6056.
Traditional versus cryptocurrency
Cryptocurrencies are not considered to be currencies in the traditional sense even though they describe many of the fungible blockchain tokens that have been created. They are generally viewed as a distinct asset class in practiceand signify various asset classes such c as commodities, securities, and currencies in various legal jurisdictions.
How cryptocurrencies are different from digital currency issued by Central banks?
Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency (CBDC). When a cryptocurrency is minted, created prior to issuance, or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database. Cryptocurrencies are used primarily outside banking and governmental institutions and are exchanged over the Internet.
Cash versus cryptocurrency
The cash is tangible currency but crypto currency is. Not. The traditional currency falls into monetary policy jurisdiction of Central banks, but cryptocurrency does not fall under the purview of monetary policy. The welfare efficiency of cryptocurrency is lower than cash. 2018, Bitcoin’s design caused a 1.4% welfare loss compared to an efficient cash system, while a cash system with 2% money growth has a minor 0.003% welfare cost. The main source for this inefficiency is the large mining cost, which is estimated to be US$360 million per year.
How cryptocurrencies are generated?
Mining is the process that Bitcoin and several other cryptocurrencies use to generate new coins and verify new transactions. It involves vast, decentralized networks of computers around the world that verify and secure blockchains – the virtual ledgers that document cryptocurrency transactions.
Mining of Cryptocurrency
Mining is the process that Bitcoin and several other cryptocurrencies use to generate new coins and verify new transactions. It involves vast, decentralized networks of computers around the world that verify and secure blockchains – the virtual ledgers that document cryptocurrency transactions. In return for contributing their processing power, computers on the network are rewarded with new coins. It’s a virtuous circle: the miners maintain and secure the blockchain, the blockchain awards the coins, the coins provide an incentive for the miners to maintain the blockchain. There are three primary ways of obtaining bitcoin and other cryptocurrencies. You can buy them on an exchange like Coinbase, receive them as payment for goods or services, or virtually “mine” them. as the blockchain has grown, the computational power required to maintain it has increased. (By a lot: In October 2019, it required 12 trillion times more computing power to mine one bitcoin than it did when the first first blocks were mined in January 2009
How Does Data mining work?
- Specialized computers perform the calculations required to verify and record every new bitcoin transaction and ensure that the blockchain is secure. Verifying the blockchain requires a vast amount of computing power, which is voluntarily contributed by miners.
- Bitcoin mining is a lot like running a big data center. Companies purchase the mining hardware and pay for the electricity required to keep it running (and cool). For this to be profitable, the value of the earned coins has to be higher than the cost to mine those coins.
- What motivates miners? The network holds a lottery. Every computer on the network races to be the first to guess a 64-digit hexadecimal number known as a “hash.” The faster a computer can spit out guesses, the more likely the miner is to earn the reward.
- The winner updates the blockchain ledger with all the newly verified transactions – thereby adding a newly verified “block” containing all of those transactions to the chain – and is granted a predetermined amount of newly minted bitcoin. (On average, this happens every ten minutes.) As of late 2020, the reward was 6.25 bitcoin – but it will be reduced by half in 2024, and every four years after. In fact, as the difficulty of mining increases, the reward will keep decreasing until there are no more bitcoin left to be mined.
- There will only ever be 21 million bitcoin. The final block should theoretically be mined in 2140. From that point forward, miners will no longer rely on newly issued bitcoin as reward, but instead will rely on the fees they charge for making transactions
What is blockchain of crypto?
A blockchain is “a distributed database that maintains a continuously growing list of ordered records, called blocks.” These blocks “are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Blockchain was invented by Satoshi Nakamoto”—the pseudonym of an unknown person or persons—“in 2008 to serve as the public transaction ledger of the cryptocurrency bitcoin, the first digital currency to solve the double-spending problem without the need of a trusted authority or central server.”
Blockchain owes its name to the way it stores transaction data—in blocks linked together to form a chain. As the number of transactions grows, so does the blockchain. Blocks record and confirm the time and sequence of transactions, which are then logged into the blockchain, within a discrete network governed by rules agreed to by the network participants.
The primary benefit of blockchain is as a database for recording transactions, but its benefits extend far beyond those of a traditional database. Most notably, it removes the possibility of tampering by a malicious actor.
Blockchain and hyper ledgers
Hyperledger is “an umbrella project of open source blockchains and related tools, started in December 2015 by the Linux Foundation and supported by industry players like IBM, Intel and SAP to support the collaborative development of blockchain-based distributed ledgers.”
Hyperledger participants believe that “only an Open Source, collaborative software development approach can ensure the transparency, longevity, interoperability and support required to bring blockchain technologies forward to mainstream commercial adoption.”
The objective of the Hyperledger project “is to advance cross-industry collaboration by developing blockchains and distributed ledgers, with a particular focus on improving the performance and reliability of these systems (as compared to comparable
Transaction fee
Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction. The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest. Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives. For example different currency exchanges have different transaction fee depending upon the factors how they work. For Ethereum, transaction fees differ by computational complexity, bandwidth use, and storage needs, while Bitcoin transaction fees differ by transaction size and whether the transaction uses SegWit. In February 2023, the median transaction fee for Ether corresponded to $2.2845 while for Bitcoin it corresponded to $0.659.
Cryptocurrency Exchanges
A crypto exchange allows investors to buy and sell digital currencies on their platform. Due to the huge adoption of cryptocurrencies at a global level, there has been a lightning increase in the number of cryptocurrency exchanges. After the URLs of nine crypto exchanges were banned in India, it is essential for an investor in India to opt for an exchange that is Financial Intelligence Unit India-(FIU-IND) registered. But, as this sector is in the developing phase and not yet fully regulated, it becomes crucial for investors to invest via reputed exchanges. Crypto marketplaces do not guarantee that an investor is completing a purchase or trade at the optimal price. As a result, as of 2020 it was possible to arbitrage to find the difference in price across several markets.
Based on their quality, features and performance, Forbes has identified the following as some of the best crypto exchanges in India in 2024:
- CoinDCX: Best Crypto Exchange for Advanced Traders.
- CoinSwitch: Best Crypto App for Beginners.
- WazirX: Best Crypto Exchange for Novice and Intermediate Traders.
- Mudrex: Best for Theme-based Crypto Baskets.
- ZebPay: Best Crypto Exchange for Intraday Trading and Crypto Lending.
Atomic Swaps
Atomic swaps are a mechanism where one cryptocurrency can be exchanged directly for another cryptocurrency, without the need for a trusted third party such as an exchange.
Legality of cryptocurrency in India
Legal Status of cryptocurrency in India
- There are no regulations or laws in India that prevent people from mining Bitcoin or other cryptocurrencies. People are therefore free to engage in crypto mining if they so want. Under the Indian Income Tax Act of 1961, mining income or profit is taxed.
- Cryptocurrencies as a payment medium in India are not regulated by any central authority. There are no rules and regulations or any guidelines laid down for settling disputes while dealing with cryptocurrency. So, trading in cryptocurrency is done at investors’ risk.
- Nevertheless, crypto currency transactions are taxable in India. Cryptocurrencies in India fall under the virtual digital assets (VDAs) category and are subject to taxation. The profits generated from cryptocurrency trading are taxed at a rate of 30 per cent, with an additional four per cent cess as per Section 115BBH.