Cryptocurrency: Future of Money or Risky Investment?

Cryptocurrency is basically a type of currency that exists digitally or virtually. It is protected by various cryptographic methods, which ensure that online transactions can be carried out securely, without the need for any intermediaries.

The term "crypto" signifies the use of cryptographic methods and various types of encryption algorithms that are utilized to safeguard these transactions. These include methods like hashing functions, elliptical curve encryption, and the use of public-private key pairs. It's important for investors to understand that cryptocurrencies are private digital currencies that are not officially backed by the Indian Government.

Understanding the Concept of Digital Currency

Cryptocurrencies operate without the control of central government institutions, making them immune to any interference by such authorities. A considerable number of cryptocurrencies are underpinned by Blockchain technology, making them part of decentralized networks.

Simply put, a cryptocurrency is a form of digital money that operates on a system spread across numerous computers. The decentralized nature of cryptocurrencies allows for quicker and more cost-effective money transfers. It also ensures the system doesn't collapse due to a single point of failure. However, the adoption of cryptocurrencies faces some hurdles, including price volatility, suspected involvement in illegal activities that are difficult to track, high energy usage for coin mining, and the lack of a sovereign guarantee or approval.

Cryptocurrencies serve as a medium for storing or exchanging value. This function is made possible by a public ledger technology known as "Blockchain." It records data and keeps track of transactions made through the network. A Blockchain is essentially a digital chain of blocks, each containing a collection of transactions and additional data.

Cryptocurrencies are managed by a network of contributors called nodes. These nodes fulfill a variety of roles in the network, from storing data to validating transactional data. They collectively maintain the database and verify new transaction entries. The strength of this system lies in the fact that there's no single point of failure, meaning if one node goes down, it doesn't impact the Blockchain ledger. For those interested in delving deeper into Blockchain technologies, there are various online courses available where you can expand your knowledge in this field.

The Benefits of Using Cryptocurrencies

Cryptocurrency has garnered global investor interest. As technology and industrialization advance, digital currencies, such as Bitcoin, are gaining favor over traditional forms of money due to their ease of transfer, bypassing the need for banks or other financial intermediaries.

Let's delve into some more benefits of cryptocurrencies:

1.      Shield Against Inflation

Inflation often erodes the value of traditional currencies. Many individuals view cryptocurrencies, which have a capped supply, as a buffer against inflation. For instance, Bitcoin has a limit on the total number of coins that will ever exist. As the growth of traditional money supply outpaces the availability of Bitcoin, the price of Bitcoin will likely rise. Many other cryptocurrencies also cap their supply, serving as potential safeguards against inflation. With only 21 million Bitcoins ever to be released, as specified in its original programming, increased demand against this limited supply could potentially counteract inflation over time.

2.      Swift Transactions

When it comes to transferring funds, say to someone in the United States, cryptocurrencies allow for quick and seamless transactions, usually within minutes. This is a significant advantage over traditional financial institutions in the U.S., where most transactions take three to five days to settle, and wire transfers can take at least 24 hours.

3.      Economical Transactions

Cryptocurrencies facilitate inexpensive global fund transfers. The transaction costs associated with cryptocurrencies can be negligible or even nonexistent, effectively eliminating the need for third-party validation from entities like VISA.

4.      Decentralization

Cryptocurrencies embody a new paradigm of decentralized money. They challenge the traditional monopoly over currency and liberate money from central control. No government organization can manipulate the value or circulation of a cryptocurrency, adding a layer of security that many crypto enthusiasts find appealing.

5.      Investment Diversification

Investing in cryptocurrencies can yield profits. The crypto market has expanded substantially over the last decade. While there's a limited historical record of cryptocurrency price movements, they seem to have little correlation with other markets, like stocks or bonds. This makes them a potential avenue for portfolio diversification. However, it's essential to note that cryptocurrencies are often volatile, which could increase your portfolio's volatility if you're heavily invested in crypto.

6.      Easy Access

To transact with cryptocurrencies, all an investor needs is a computer or a smartphone with internet access. There's no requirement for identification verification, credit checks, or background approval to open a cryptocurrency wallet. This easy access, far simpler than dealing with traditional financial institutions, enables individuals to conduct internet transactions or transfer funds effortlessly.

7.      Safety and Security

Your cryptocurrency funds can only be accessed with the private key to your crypto wallet. If you lose or forget this key, your funds are irrecoverable. Additionally, transactions are secured by the Blockchain system, a distributed network of computers that validate transactions. It's generally more secure if investors store crypto assets in their own wallets. Transactions are further protected by the use of public and private keys, proof of work or proof of stake mechanisms, and various other incentive systems.

8.      Transparency

Thanks to the decentralized nature of Blockchain, anyone can track live money transfers by using a Blockchain explorer. This transparent, open system appeals to many investors and is seen as a check against corruption.

9.      Privacy Protection

With cryptocurrencies, there's no third-party involvement, which offers a certain level of privacy to your account. On the Blockchain investors are identified by their wallet addresses, making transactions pseudonymous and devoid of personal information. There are also many cryptocurrencies specifically designed to enhance privacy features.

10.  Effortless Currency Exchanges

Investors can buy cryptocurrencies using traditional currencies such as the U.S. dollar, Indian rupee, or European euro. Numerous cryptocurrency exchanges and wallets enable investors to trade in crypto and convert currencies at minimal transaction fees across various wallets.

The Drawbacks of Using Cryptocurrencies

Investing in cryptocurrencies may seem attractive and lucrative, but potential investors should be aware of several potential pitfalls.

·         While cryptocurrencies often tout their anonymity, they are technically pseudonymous, meaning they leave a digital footprint that can potentially be deciphered by organizations like the Federal Bureau of Investigation. This means there's a risk of surveillance from federal or government authorities who may monitor individuals' financial transactions.

·         On a Blockchain network, there is always a risk of a 51% attack. With this control, malicious entities could reverse completed transactions, halt ongoing transactions, double-spend coins, and prevent new transactions from gaining validation, among other disruptions. However, this kind of attack primarily threatens recently hard-forked networks and new Blockchain.

·         Most Blockchain operate on a proof-of-work consensus mechanism, which requires network participants to use powerful ASIC computers and the correct hash for a block to be added to the network. This process leads to high power consumption, prompting countries to take measures to mitigate its environmental impact.

·         Another significant drawback of cryptocurrencies is the absence of key transactional policies. For instance, the default stance for transactions across crypto wallets is typically a no refund or cancellation policy, which can pose problems if a transaction is made in error. Each crypto exchange or app also has its own set of rules, further complicating matters.

Legal Status of Cryptocurrencies

In India, cryptocurrencies are not regulated or issued by any central authority. Therefore, no guidelines are in place to resolve disputes in cryptocurrency dealings, and individuals who wish to trade in cryptocurrencies do so at their own risk.

The introduction of a tax on digital assets by India's Finance Minister, Nirmala Sitharaman, has ignited a debate about the legality of cryptocurrencies in the country.

Considering the views expressed by the Reserve Bank of India (RBI) Governor and other key ministers over time, it is safe to say that cryptocurrency is not officially prohibited in India. Until 2022, cryptocurrency was unregulated in the country. However, a significant change occurred in the Union Budget of 2022 when the government introduced a 30% tax on cryptocurrency profits and a 1% tax deducted at source. This action represented the Indian government's first steps in regulating cryptocurrency.

Although this move was welcomed by many as the beginning of official recognition for cryptocurrencies, the Government of India still needs to issue a formal declaration before cryptocurrencies can be considered fully legal in the country.

Taxation of Cryptocurrencies

Taxation of cryptocurrency in India can be quite complex. Initially, there were no specific regulations for income tax or goods and services tax (GST) on cryptocurrencies in India. However, this changed with the introduction of a new tax framework for digital or virtual assets, including cryptocurrencies, in the Union Budget 2022.

·         Cryptocurrency investors are now expected to maintain detailed records of their losses and gains as part of their income. Here are some key points from the new tax regime:

·         A 30% tax will be applied to earnings from the transfer of digital or virtual assets, including cryptocurrencies and Non-Fungible Tokens (NFTs).

·         When reporting gains from the transfer of virtual or digital assets, the cost of acquisition is factored in, and no deductions are allowed.

·         A 1% tax deducted at source (TDS) will be imposed on the buyer's payment if it exceeds a certain threshold.

·         If an individual receives cryptocurrency as a gift or through a transfer, it will be subject to tax at the recipient's end.

·         If investors incur a loss from their investment in digital or virtual assets, they cannot offset this loss against other income.

Final Thoughts

Cryptocurrencies in India can be purchased through dedicated crypto exchanges, as not all e-commerce platforms permit cryptocurrency trading. Surprisingly, popular cryptocurrencies like Bitcoin and Ethereum are seldom used for retail transactions within India. Instead, they are primarily utilized for cross-border transfers, mostly to locations outside India.

Potential crypto investors should thoroughly understand the associated risks before entering the crypto market. Despite these risks, given the numerous advantages discussed earlier, it's hard to argue that investing in cryptocurrencies offers no value. The benefits of safe, fast transactions make cryptocurrencies particularly appealing to investors who prioritize these qualities.

Frequently Asked Questions (FAQs)

1.      What are the top platforms for buying cryptocurrencies in India?

In India, renowned platforms for buying crypto include WazirX, UnoCoin, ZebPay, CoinDCX, and CoinSwitch Kuber.

2.      Which cryptocurrencies have the highest market value?

Bitcoin, Ethereum, and Tether (USDT) are some of the most valued cryptocurrencies in terms of market cap, with values of $322.3 billion, $149.0 billion, and $66.2 billion respectively.

3.      Is investing in cryptocurrency safe?

Investing in cryptocurrency carries its share of risks, just like any other investment. It is susceptible to market volatility, cybersecurity threats, and regulatory uncertainties, particularly as it's not supervised or endorsed by a central government authority in India.

4.      How can I buy cryptocurrency in India?

To buy cryptocurrency in India, you can utilize a crypto exchange such as WazirX, ZebPay, or CoinDCX. You can also use cryptocurrency brokers like IC Markets and Eightcap.