What is cryptocurrency

You hear of cryptocurrency mostly in relation to Elon Musk these days. He says Bitcoin is good and suddenly the prices of Bitcoin start to rise. He says Dogecoin is not good and the prices of Dogecoin start plummeting.

But what exactly is cryptocurrency?

It is virtual currency

Cryptocurrency is virtual currency which is secured by cryptography. This means it is nearly impossible to counterfeit or double spend.

So, if you were hoping for a movie on a gang counterfeiting cryptocurrency [like they would any other kind of currency], you may have to rethink that!

Since there is no central authority that issues cryptocurrency, theoretically, it is immune to government interference and manipulation.

That’s not always true since Elon Musk has been known to manipulate the up and down of cryptocurrency.

They run on a technology called blockchain

Any time a person makes a transaction using cryptocurrency like Bitcoin, the information is added to a block. In that sense, a block is like a database.

Every block can contain about 2,500 transactions and once one block is filled, a new block is added, thus making a chain. Each new block is linked to the previous block. So, there is a record of all transactions contained within the blockchain.

If there is no bank verifying the transactions, who is checking if the currency is going in the right place?

Well, that’s the work of the crypto miners. They have to solve increasingly complex algorithms. Think of it like solving a Rubik’s cube puzzle. It is the miners who process the transactions.

And if they’re the first to solve this puzzle, they’re rewarded with 12.5 freshly released Bitcoins.

Demand and supply a factor to determine price of Bitcoin

Since Bitcoin is not issued by a bank or backed by a government, it is immune to things like inflation, monetary policy, etc. As of now, the supply of Bitcoin is limited to 21 million and there are only 18.6 million in circulation. So, what determines the price of a Bitcoin?

1.   Demand and supply

2.   Cost of producing a Bitcoin through the mining process

3.   Rewards issued to miners [for the above process]

4.   Number of competing cryptocurrencies

More than 4000 cryptocurrencies

As of January 2021, there are more than 4000 cryptocurrencies in the market. Not all of them enjoy a high acceptance or volume in trading, of course. Though Bitcoin is considered a pioneer, a new cryptocurrency may crop up at any time.

Other famous cryptocurrencies are Ethereum, Litecoin, Cardano and Polkadot.

Not a legal tender in India

Even though cryptocurrencies are legal in India meaning banks in India are allowed to have relationships with crypto companies, they’re not a legal tender. Meaning, you cannot do your Amazon purchases with cryptocurrency. You will have to pay in INR.

Huge cost to the environment

A Bitcoin transaction takes about 10 minutes to complete because miners have about that much time to be able to solve the puzzle. This amount of processing takes a lot of computer power which means lots and lots of machines creating noise, heat and adding that to the already precarious environment.

But if you compare crypto mining to the carbon footprint of current financial systems, it may not look so bad.