CRYPTO-CURRENCY

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A crypto-currency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many crypto-currencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of crypto-currencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

Today crypto-currencies have become a global phenomenon known to most people.

Types of Crypto currency

The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.

Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto.”1 As of Nov. 2019, there were over 18 million bitcoins in circulation with a total market value of around $146 billion.

Some of the competing cryptocurrencies spawned by Bitcoin’s success, known as “altcoins,” include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS. Today, the aggregate value of all the cryptocurrencies in existence is around $214 billion—Bitcoin currently represents more than 68% of the total value.

Some important crypto-currencies

  • Bitcoins
  • Litecoin
  • Namecoin
  • Swiftcoin
  • Bytecoin
  • Gridcoin

India’s stand on crypto-currencies :

In India the creation, trading or usage of crypto-currencies including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority.

On December 5, 2017, the RBI reiterated its warnings in wake of significant spurt in valuation of bitcoins. RBI stated that “Attention of members of public is drawn cautioning users, holders and traders of Virtual Currencies including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such currencies”.

 

Risks associated with the use of crypto-currencies

  • Digital currencies, being in electronic format, are prone to losses arising out of hacking, loss of password etc.
  • lack of any authorized central agency to regulate the payments or to turn to for redressal of grievances.
  • There is no underlying of asset for Crypto-currencies, making the value a matter of speculation.
  • The exchanges are located in various parts of the world, making the law enforcement a tricky thing for the multiple jurisdictions available.
  • Trading may subject the user to illicit and illegal activities since the crypto-currencies, can easily be used for illegal activities anonymously.

Advantages and Disadvantages of Crypto-currency

Advantages

Crypto-currencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake.

In modern crypto-currency systems, a user’s “wallet,” or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers.

Disadvantages

The semi-anonymous nature of crypto-currency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion. However, crypto-currency advocates often highly value their anonymity, citing benefits of privacy like protection for whistleblowers or activists living under repressive governments. Some crypto-currencies are more private than others.

Bitcoin, for instance, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities to arrest and prosecute criminals. More privacy-oriented coins do exist, however, such as Dash, Monero, or ZCash, which are far more difficult to trace.

Criticism of Cryptocurrency

Since market prices for cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely, since the design of many cryptocurrencies ensures a high degree of scarcity.

Bitcoin has experienced some rapid surges and collapses in value, climbing as high as $19,000 per Bitcoin in Dec. of 2017 before dropping to around $7,000 in the following months.Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble.

There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods. Some research, however, has identified that the cost of producing a Bitcoin, which requires an increasingly large amount of energy, is directly related to its market price.

Cryptocurrency blockchains are highly secure, but other aspects of a cryptocurrency ecosystem, including exchanges and wallets, are not immune to the threat of hacking. In Bitcoin’s 10-year history, several online exchanges have been the subject of hacking and theft, sometimes with millions of dollars worth of “coins” stolen.

Nonetheless, many observers see potential advantages in cryptocurrencies, like the possibility of preserving value against inflation and facilitating exchange while being more easy to transport and divide than precious metals and existing outside the influence of central banks and governments.

Associated Terms

Blockchain Technology

Blockchain, which began to emerge as a real-world tech option in 2016 and 2017, is poised to change IT in much the same way open-source software did a quarter century ago.

Based on a peer-to-peer (P2P) topology, blockchain is a distributed ledger technology (DLT) that allows data to be stored globally on thousands of servers – while letting anyone on the network see everyone else’s entries in near real-time. That makes it difficult for one user to gain control of the network.It  creates an unchangeable record of transactions, each time-stamped and linked to the previous one. Every time a set of transactions is added, that data becomes another block in the chain (hence, the name).

Blockchain can only be updated by consensus between participants in the system, and once new data is entered it can never be erased. It is a write-once, append-many technology, making it a verifiable and auditable record of each and every transaction.

Public Ledgers

All confirmed transactions from the start of a cryptocurrency’s creation are stored in a public ledger. The identities of the coin owners are encrypted, and the system uses other cryptographic techniques to ensure the legitimacy of record keeping. The ledger ensures that corresponding digital wallets can calculate an accurate spendable balance.

Bitcoin Mining

Bitcoin mining is the process of creating, or rather discovering, bitcoin currency. Unlike real-world money that is printed when more is needed, bitcoin cannot simply be willed into existence, but has to be mined through mathematical processes. Bitcoin maintains a public ledger that contains past transactions, and mining is the process of adding new transactions to this ledger.

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