Decoding Cryptocurrency for a layman!
- January 18, 2022
- Posted by: MvM Team
- Category: Personal Finance
You have to be living under a rock if you haven’t heard about cryptocurrencies.
‘Crypto mei invest kia kya’ is the new national tagline. I am sure you must have heard it too. But what exactly is a cryptocurrency? Why is it so popular? Does it have some weight to it?
In this article, we will try and answer each of these questions.
Let’s start with the basics.
What is Cryptocurrency?
Cryptocurrency is a decentralised virtual/digital currency that can be used for online transactions. What makes it different from other form of digital payments like Digital Wallets or UPI is that it is not controlled and maintained by a central regulatory agency like RBI controls the printing and supply of money.
Rather, it is decentralised, meaning it is spread over thousands of computer networks throughout the world. It works on blockchain technology which is considered to be very safe and the same technology has a much wider use in business today.
How it works?
Let’s assume that there are four computer networks or nodes, spread across 4 different corners of the world. Now each time a transaction is to take place, a computer program on the cryptocurrency network generates a CRYPTED (that’s where crypto in cryptocurrency comes from) code, which is solved by all the nodes on the network.
Each such transaction is copied on all the nodes, therefore creating a decentralised ledger and making it practically impossible for someone to mess up with records later. This also ensures that the entire system never breaks down because if one of the nodes goes bad, other nodes in the network can continue functioning.
Use in real world
Crypto has plethora of uses. Transactions via crypto are very efficient i.e., they are very cheap. There is no transaction limit in terms of value or number of transactions. The network on which crypto operates in almost impossible to bring down, making it very safe.
However, it has become more of an investment avenue or rather a way of speculating and making quick money for a very large population, usually millennials. Some estimates indicate that India has close to 100 million crypto investors, the largest number in any country, with investments over 10 billion dollars. Cryptocurrencies are wildly volatile, with price fluctuation ranging from a few to thousands of percent in a matter of minutes, thus making it an unsuitable investment option for conservative or even experienced investors.
Pros | Cons |
Decentralised | Volatile |
Low Transaction costs | Unmonitored |
Easy for international transfers | Cannot flag large transactions |
Very Safe | Almost impossible to stop a transaction |
No limit on transaction number or value | Difficulty in digital tracing |
MvM View
We have barely scratched the surface here. Cryptos have so much more to it, and the network it operates on – Blockchain, is revolutionary. Blockchain has far reaching use and has the power to transform many aspects of the world. It will be foolish to deny that crypto has emerged as a new investment avenue, so much so the number of crypto investors in India have overtaken investors who invest in the stock market.
But the lack of transparency, legalisation, and oversight has made it the easiest scamming mechanism. Unaware investors have lost millions of dollars to scammers generated crypto networks. Therefore, it is, at most, a questionable avenue for investment.
On account of FOMO, if one wants to join the bandwagon of crytpo investors, invest only a very small part of your portfolio in the cryptos but again investment in cryptos require as much research if not more as is required in any other investment avenue as not all cryptos are alike, It is very important to understand what you buy, their use case and their future especially when a meme coin named after a dog can change your fortune overnight following a tweet by a powerful businessman.
