Introduction to Cryptocurrency
Cryptocurrency is a digital or virtual currency secured by cryptography, operating independently of central authorities like governments or banks. Examples include Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC).
Key Features:
- Decentralization: No single entity controls the network.
- Security: Transactions are encrypted and immutable.
- Transparency: All transactions are recorded on a public ledger (blockchain).
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How Cryptocurrency Works
Blockchain Technology
- A decentralized digital ledger records transactions across a network of computers.
- Each “block” contains multiple transactions; once verified, it’s added to the chain permanently.
- Benefits:
- Tamper-proof: Altering past transactions is nearly impossible.
- Transparent: All participants can view the ledger.
Acquiring Cryptocurrency
- Digital Wallets: Store public/private keys to send/receive crypto.
- Mining: Solving complex algorithms to validate transactions and earn crypto rewards.
Major Cryptocurrencies
| Cryptocurrency | Key Attributes |
|---|---|
| Bitcoin (BTC) | First cryptocurrency (2009); peer-to-peer transactions; capped supply of 21 million coins. |
| Ethereum (ETH) | Supports smart contracts and dApps; uses Ether (ETH) for fees. |
| Litecoin (LTC) | Faster transactions than Bitcoin; ideal for small payments. |
| Ripple (XRP) | Facilitates cross-border payments; partners with banks. |
| Bitcoin Cash (BCH) | Fork of Bitcoin; larger block size for scalability. |
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Legal Status of Cryptocurrency
In India
- Regulatory Uncertainty: Cryptos are not legal tender but taxed at 30% (2022 Budget).
- RBI’s Stance: Warns against risks; explores Central Bank Digital Currency (CBDC).
- Supreme Court Ruling (2018): Overturned RBI’s ban on crypto transactions.
Global Landscape
- Legal Tender: Only El Salvador and Central African Republic accept Bitcoin.
- Regulated Markets: Japan, South Korea, and Germany have clear frameworks.
- Restrictions: China and Russia impose bans on crypto trading.
Challenges of Cryptocurrency
- Volatility: Prices fluctuate rapidly (e.g., Bitcoin’s 70% drop in 2022).
- Security Risks: Exchange hacks (e.g., Mt. Gox, 2014).
- Energy Consumption: Bitcoin mining uses more electricity than some countries.
- Scalability: Limited transaction speeds (e.g., Bitcoin processes ~7 transactions/second).
The Future: Central Bank Digital Currency (CBDC)
- Digital Rupee (e₹): RBI’s pilot program for a blockchain-based currency.
- Advantages Over Cryptos:
- Backed by the government.
- Stable value (pegged to fiat currency).
- Reduced fraud risks.
FAQs
Q: Is cryptocurrency legal in India?
A: Not banned, but taxed at 30%. The RBI discourages its use due to volatility risks.
Q: How do I buy cryptocurrency?
A: Through exchanges like CoinDCX or WazirX using INR. Store in wallets like MetaMask.
Q: What’s the difference between Bitcoin and Ethereum?
A: Bitcoin is digital gold; Ethereum enables programmable contracts (smart contracts).
Q: Can governments shut down cryptocurrencies?
A: They can regulate exchanges but not decentralized networks like Bitcoin.
Q: Why is crypto mining energy-intensive?
A: Solving cryptographic puzzles requires powerful computers running 24/7.
Conclusion
Cryptocurrency merges finance and technology, offering decentralization but facing hurdles like regulation and scalability. India’s CBDC may bridge the gap between innovation and stability. For investors, understanding risks and staying updated on laws is crucial.