In the digital age, the concept of cryptos has become a buzzword, sparking both intrigue and confusion. Some think cryptos are internet money that is making people rich while others feel it is just a phase and will pass soon.
This blog aims to demystify the complex world of crypto, breaking it down into digestible pieces of information. Let's dive into the world of cryptos and understand how they work.
What is Crypto?
Crypto currency, often shortened to 'crypto', is a type of digital or virtual currency. It uses cryptography for security, making it extremely difficult to counterfeit. Unlike traditional currencies issued by a central bank (like INR or the US Dollar or Euro), crypto operates on a technology called blockchain, a decentralized technology spread across many computers that manage and record transactions. And, to understand cryptos it is important to understand what a blockchain is.
How does Crypto Work?
Cryptos work using a technology called the blockchain. Blockchain is a decentralized technology spread across multiple computers that record and manage transactions. This technology ensures the integrity of transaction data, an aspect that is essential for the success of crypto.
Think of blockchain as a digital book that records Bitcoin and other digital money transactions. This book is made up of pages we call "blocks," and each page has a list of transactions on it. This digital book is kept on many computers (we call these "nodes") all over the world.
When a new page (or block) is added to the book, every computer needs to agree that it's correct. This makes it really hard for anyone to cheat or change the transactions that have already been recorded.
What does Owning Crypto Mean?
Owning crypto is different from owning something you can touch, like a dollar bill. Instead, you own a special key - it's like having a secret password that lets you move your digital money from your account to someone else's. This is done directly between people without needing a bank or other trusted middleman.
Also Read: What Are Crypto Tokens
Types of Crypto and Their Examples:
There are over 4000+ cryptos listed on CoinMarketCap and there are several which are not even listed on the platform. This makes the list of cryptos a long one. Here are the top few ones whose names you might or might not have heard:
Bitcoin (BTC)
Introduced in 2009, Bitcoin is the pioneer of cryptos. Its blockchain ledger is secured by a process called "proof of work," which ensures the authenticity and integrity of every transaction on the network. Despite considerable market fluctuations, Bitcoin has demonstrated remarkable resilience, with a value range of $26,000 to $28,000 at the time of writing.
Ethereum (ETH)
Ethereum, founded by Vitalik Buterin, is a special type of crypto that also serves as a platform for blockchain technology. It has become popular among developers due to its unique features, including smart contracts and the creation and exchange of non-fungible tokens (NFTs). Its value has also seen considerable growth, despite market fluctuations.
Maker (MKR)
Maker powers a digital currency called DAI that maintains a stable value by being pegged to the US Dollar through a process called crypto collateralization. The platform is governed by a decentralized organization called MakerDAO, which allows its users to participate in the decision-making process.
Chainlink (LINK)
Chainlink is a platform for trust-minimized computations that power Web3 applications. It plays a crucial role in the tokenization of real-world assets and cross-chain connectivity. Chainlink is also working on enhancing the security and functionality of cross-chain transactions and providing proof of reserves for DeFi assets. Furthermore, it is working on a low-latency oracle solution to support high-speed trade execution in the DeFi derivatives market.
Litecoin (LTC)
Litecoin is a peer-to-peer crypto that was created by Charlie Lee in 2011. It was an early Bitcoin spinoff or "altcoin" and it's often considered the silver to Bitcoin's gold. Litecoin offers faster transaction confirmation times and a different hashing algorithm than Bitcoin.
How to Buy Crypto Online
There are two broad ways to buy crypto, one is through centralized exchanges and the other is through decentralized exchanges or DEXs.
Centralized Method
In this, you purchase your cryptos from a centralized authority or centralized crypto exchanges like CoinDCX. You have to complete your KYC and deposit fiat money like INR to be able to purchase crypto. The basic steps involved in the process are:
- Create an account on the crypto exchange from where you want to purchase crypto.
- You'll need to register and provide some personal information to complete the KYC.
- Deposit Fiat Currency: Transfer traditional money into your account.
- Buy Crypto: Purchase your chosen crypto using the deposited funds.
Decentralized Method
Here, no centralized authority is involved in this process and you purchase your cryptos from a decentralized exchange or DEXs. They do not require KYC and operate on a peer-to-peer basis. These exchanges are controlled by smart contracts rather than individuals.
Also Read: Custodial V/S Non-Custodial Wallets
How to Store Crypto Online
Cryptos are stored in a digital wallet. This can be online through an exchange, on your computer, or a specialized hardware device. Each wallet has a pair of cryptographic keys: one public, one private. The public key is your wallet address, and the private key is used to access and manage your funds.
based on who controls your funds, crypto wallets can be broadly classified into custodial wallets & self-custodial wallets.
Custodial Wallets
These wallets are controlled by third parties like crypto exchanges. When you store your cryptos in the account of a crypto exchange, it is a custodial wallet. In that scenario, your funds are owned by a third party since the private key that transfers your funds lies with them.
Non-custodial Wallets
Non-custodial or self-custody wallets are where you own and control your funds. In this scenario, no third party is involved and you have your own private key. With self-custody wallets, the responsibility to manage and secure your funds lies with you. These types of wallets are more secure as no other person can access your funds.
Is Crypto Legal in India?
The legality of crypto varies by country. Some nations, like Canada and the USA, have generally accepted its use. Others, like China and Russia, have restrictions or outright bans. Always check local regulations before investing.
In India, the buying and selling of cryptos is allowed and banks help in facilitating the transactions. But, they are yet to be adopted as the legal tender of India.
Safety of Crypto
While blockchain technology makes crypto transactions secure, it doesn't mean they are without risk. And, just like taking caution when dealing with financial matters, it is always safe to only use reputed platforms and secured means to perform your crypto transactions.
Also Read: Basics Of Decentralized Finance
Advantages & Disadvantages of Crypto
Top Reasons to Invest in Crypto
- Potential for High Returns: Despite volatility, many investors have seen substantial returns.
- Diversification: Crypto can be a good way to diversify your investment portfolio.
- Innovation: Investing in crypto supports blockchain technology, which has potential far beyond digital currencies.
Things to Consider Before Investing in Crypto
- Volatility: Cryptos are known for their price volatility. Be prepared for value fluctuations.
- Regulation: The regulatory environment for crypto is uncertain and can change.
- Research: Always do your own research (DYOR) before investing. Understand the project, its utility, and its potential growth.
In conclusion, cryptos are reshaping the financial landscape, offering new opportunities for investment and commerce. However, as with any investment, it's crucial to understand what you're getting into and proceed with caution. Happy investing!
Frequently Asked Questions
Should I invest in crypto?
Investing in crypto can be profitable, but it's not without risk. It's important to do your own research and consider your financial situation and risk tolerance before investing.
Is crypto a good investment?
Crypto has the potential for high returns, but it's also highly volatile. It can be a good investment for those who understand the market and are willing to take on the risk.
Can I buy crypto in exchange for INR?
Yes, you can buy crypto in exchange for INR. Many crypto exchanges in India allow you to buy cryptos using INR.
