5 Basics of Cryptocurrency for Beginners

Currency has been a part of economy since the cavemen days. The barter system of the Mesopotamian tribes was the earliest form of currency where goods were exchanged in return of goods. In fact, Romans even exchanged services in their empire in return for salt! In this system, the value and requirement of goods were not being made, which then gave way to coins. The first coin was minted in as early as 110 BC moving to paper notes which became popular around 1900 AD. The notes and coins fit in our wallets and shrunk to plastic money or credit cards and debit cards to now the most widely used digital wallets such as Paytm, Google Pay etc.

All these modern currency transactions have been controlled by banks and government as agents or “middle men” controlling the transaction. Digital technology has led to the further evolution of cryptocurrency, which is touted to be the future of currency with even Bill Gates supporting it.

While you may have heard of cryptocurrencies like Bitcoin as buzzwords in the market, here’s a simple breakdown of the concept.

What is cryptocurrency?

Cryptocurrency is digital currency where two individuals can directly transfer the currency without the need for banks. These peer-to-peer transactions are secured with cryptography such as blockchain technology.

Why is cryptocurrency becoming popular?

Often with bank transactions, we may have experienced failures or there’s a limit to how much we can transfer, and security is a pressing concern. Here’s where cryptocurrency has an etch over the traditional online transfer.

  • The encrypted transfer chain makes it difficult to hack into and reduced risk of loss

  • It does not require a central authority like a bank or a government. Even international transactions can take place within minutes.

  • The value of a Bitcoin is not fixed, depends on market trends and can be seen as stocks and investment.

How many cryptocurrencies are there?

Currently, there are more than 1600 cryptocurrencies! Bitcoin was the first cryptocurrency formed by Satoshi Nakamoto in 2009 and is the most popular one.

Bitcoin being the most popular one followed by Ethereum, Z-Cash, Litecoin and so many more. Newer cryptocurrencies are emerging every day and its popularity is only increasing because people see these not just as currencies but also investments.

How does cryptocurrency work?

Cryptocurrency uses blockchain technology which is a collection of records linked to each other and protected using strong end-to-end encryption.

Let’s understand this transfer flow with a Bitcoin example.

Alisha needs to send 2 Bitcoins to Rahul. When she sends 2 Bitcoins, a permanent record is created in the form of a block which has the sender’s and receiver’s details and even the number of coins. These blocks are validated by specialists called “miners” who solve complex math problems to link these blocks to one another. Every time a miner adds a block, they earn 12.5 BTC! Even if a hacker tries, he will not be able to break into this system because of the complex algorithms.

Thus, a block chain is formed is visible to everyone in the network can access it like a distributed public ledger.

What is the future of cryptocurrency?

According to Deutsche Bank, the number of cryptocurrency users will grow 4x in the next ten years, reaching 200 million. This growth is almost same as that of Internet in its first 20 years. It could possibly replace the current cash transactions. The value of a cryptocurrency is not fixed and depends on market trends, making it extremely volatile.

However, the blockchain technology is here to stay.

With cryptocurrency being new, there are more and more developments that keep shaping up. The trick is to stay updated with the market trends. Fortunately, Varsity by Zerodha, has created an extensive resource hub on financial literacy, stock market modules and valuable lessons on cryptocurrency too which are accessible for free.

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