Cryptocurrency has been the talk in the financial world for the past several years. It has recently taken up a lot of media space, particularly in India, where a measure to prohibit bitcoin is expected to be introduced soon.
Some people believe cryptocurrency is a fad, and some believe cryptocurrency is the future. Still, as is often the case with such divisive topics, the reality lies somewhere in the centre.
So, what does the future hold for the next several years? Cryptocurrency has piqued the interest of the media. In recent months, the press has been flooded with tales about Bitcoin achieving all-time highs, Ethereum driving Defi, the advent of NFTs, and the ascent of meme coins.
What is Cryptocurrency?
Cryptocurrency, or decentralized currency, is a digital asset meant to be used as a medium of exchange for conducting transactions in the same manner that actual cash is used, but there is a catch. For beginning a transaction and keeping the coins in the database, cryptocurrency made use of blockchain technology. This is accomplished through the use of a global ledger that is dispersed around the globe. When a transaction is completed, it is validated against all of the world’s chronicles using an advanced encryption technology known as cryptography. As a result, we can be confident that the transaction will be entirely safe because any modifications must be made across the whole distributed ledger, which is theoretically impossible.
Bitcoin, Litecoin, Etherum, Dogecoin, and various other cryptocurrencies are now accessible in work. Bitcoin is the most well-known of them. The total number of bitcoins globally is set, with just 21 million bitcoins available for mining. If we examine Bitcoin, 25 Bitcoins may be generated every 10 minutes through the mining process by powerful computers. The total number of Bitcoins is capped at 21 million, estimated to be achieved in 2140.
Role of Cryptocurrency in the past few years
In recent years, cryptocurrencies have been a hot topic in the financial industry. Cryptocurrency is a digital, virtual, or online currency that uses encryption to protect its value. Cryptocurrency has ushered in both positive and bad shifts in the banking industry.
Although cryptocurrency is a challenging concept to understand, it is very simple to use. It may seem a bit complicated at first because it’s fundamentally different from the currencies we’ve used for millennia. Bitcoin was created in the aftermath of the global financial crisis of 2008 to function independently of governments, central banks, and financial institutions.
Since then, the design of Bitcoin has been a source of consternation for many regulators, who have attempted to find methods to manage it. As a result, some nations have outright outlawed or declared it illegal, while others have stayed alert and created means to tax and regulate it. This conceptual paper will look at various aspects of cryptocurrencies, including their history, functions, advantages and disadvantages, challenges, and potential. In addition, the study investigates the legal position in India.
How does Cryptocurrency work?
Blockchain is the technology that allows Crypto to work. A blockchain is a distributed ledger that records all previous bitcoin transactions. Cryptographic validation is used to bind these data units or blocks together. The generation of native tokens through mining and the transfer of tickets/coins between users are monitored and verified across the whole network.
Miners are persons or companies who conduct mining operations using powerful computers. Mining is the process of verifying and adding transactions to the public ledger or blockchain and the method of releasing new coins. The mining process entails recent grouping transactions into blocks and solving a computationally challenging challenge. Successful miners who solve the challenge are rewarded with adding the following block to the blockchain. There is a double benefit. Miners are rewarded for their work with newly minted tokens/coins and fees paid by users making transactions.
The rise of Cryptocurrency
Due to its fundamental characteristic of decentralization, cryptocurrency has garnered a lot of momentum globally since its launch. Many investors, like Elon Musk, regard bitcoin as an investment-grade asset, and this inflow of cash has resulted in a rise in bitcoin’s value, which has just surpassed the $50,000 mark. Tesla, Microsoft, and Starbucks are just a handful of the large corporations that have begun to accept bitcoins as payment. Because of the popularity and growth of the cryptocurrency industry, major corporations such as Amazon, Microsoft, and Facebook are preparing to launch their cryptocurrency.
Cryptocurrencies are very volatile, and the price swings of these currencies may be extremely wild at times, making them unsuitable for use as a standard fiat currency. The opinions of a few investors heavily influence them; for example, anytime Elon Musk says something about these coins, the value of these coins fluctuates dramatically. Some of these currencies, which were just supposed to be used as a show of appreciation, have had their prices skyrocket for no apparent reason. The ideal example of this is Dogecoin, which was developed for fun and depicted a dog on its currency, and has experienced a massive increase in its value. This increase in value might be ascribed to a buying frenzy among investors who don’t want to lose out on the price hike.
The purpose and the manifestation
The goal was to build a decentralized, stable, and unaffected by price manipulation currency. However, based on the present trend in this domain, we can confidently conclude that, while government entities do not influence money through policies, it is highly volatile.
Let’s have a look at the historical volatility of several cryptocurrencies over the previous year:
- Bitcoin – 76.49%
- Ethereum – 91.08%
- Litecoin – 94.47%
They are not often utilized for day-to-day transactions for the reasons stated above. The central bank may simply issue money to improve market liquidity, but in the case of cryptocurrencies, the number of coins is fixed, making it harder to change liquidity. There have been instances when the anonymity feature of cryptocurrencies has been used for illegal purposes. The perpetrators behind the recent ransom attacks on several nations demanded ransom in Bitcoin since the currency is untraceable, making the authorities suspicious of it. Due to the distributed ledger structure, these transactions have a far higher environmental cost than ordinary digital transactions.
In India, the current government intends to outlaw these currencies and replace them with digital currency. However, this defeats the whole point of having decentralized money in the first place. The prospect of a blanket ban on bitcoin in India has many investors and entrepreneurs since they have significant financial and innovation stakes in this industry. Since India has made tremendous progress in terms of digitalization, this planned strategy should be reconsidered.
Advantages of Crypto
- As a decentralized currency, Crypto cannot be controlled by governments or central authorities in any jurisdiction. It is also resistant to inflation due to its decentralized structure.
- Crypto transactions, unlike bank transactions, are entirely anonymous. Only the crypto addresses to which the payment was delivered and received are known to a person. However, it is impossible to determine to whom these addresses belong. This feature of anonymity protects you against fraud and identity theft.
- It is getting widespread acceptability as a payment mechanism due to its spectacular surge in popularity among the general public.
- Compared to other digital transactions such as credit cards and different ways, the charge for crypto transactions is relatively cheap.
- The method that generates cryptocurrency is highly sophisticated, which precludes copying or the manufacturing of counterfeit money.
Disadvantages of Crypto
- Cryptocurrency is a highly volatile currency, with significant price swings in a short amount of time, raising fundamental doubts about its viability as a future currency.
- People who aren’t familiar with crypto currency’s process believe it’s a risky investment since governments worldwide have differing views on whether it should be considered legal cash.
- Crypto transactions’ anonymity makes them attractive for unlawful and criminal activities such as tax evasion, weapon acquisition, gambling, and so on.
- Crypto transactions are inherently irreversible. Funds sent to the incorrect address cannot be tracked, resulting in the loss of all transferred funds.
- If the storage device used to store cryptocurrency is destroyed or lost. Then there’s no way to get your hands on the Bitcoins you’ve lost.
The Future of Cryptocurrency
Some of the current restrictions of cryptocurrencies, such as that one’s digital wealth may be wiped by a computer crash, or a hacker might loot a virtual vault, may be addressed in the future thanks to technical advancements. What will be more challenging to overcome is the underlying paradox that bedevils cryptocurrencies: the more popular they grow, the more regulation and government scrutiny they will face, eroding the core assumption for their existence.
Even though the number of shops accepting cryptocurrency has continuously expanded, they remain in the minority. For cryptocurrencies to become more extensively utilized, they must first earn consumer approval. Except for the technologically savvy, their greater complexity compared to traditional currencies will likely repel most consumers.
A cryptocurrency that wants to join the mainstream financial system may have to meet a variety of requirements. It would have to be mathematically complex (to avoid fraud and hacker attacks) but simple to understand for consumers; decentralized but with adequate consumer safeguards and protection; and maintain user anonymity without serving as a conduit for tax evasion, money laundering, and other criminal activities.
Given how difficult these conditions are to meet, is it possible that the most popular cryptocurrency would have characteristics between severely controlled fiat currencies and today’s cryptocurrencies in a few years? While that likelihood is remote, there is little question that as the primary cryptocurrency at the moment, Bitcoin’s success (or lack thereof) in dealing with the problems it confronts will have a significant impact on the fortunes of other cryptocurrencies in the years to come.
Is it wise to invest in Cryptocurrency now?
If you’re thinking about investing in cryptocurrencies, you should approach your “investment” in the same manner you would any other extremely speculative business. In other words, accept the possibility of losing the majority, if not all, of your investment. A cryptocurrency, as previously established, has no fundamental worth other than what a buyer is prepared to pay for it at any given time. This makes it highly vulnerable to significant price movements, increasing the chance of a loss for an investment.
For example, on April 11, 2013, Bitcoin fell from $260 to around $130 in six hours. If you can’t handle that level of risk, search for assets that are more suited to your needs. While opinions on the merits of Bitcoin as an investment remain divided — advocates point to its limited quantity and expanding usage as value drivers, while sceptics view it as just another speculative bubble – a cautious investor would do well to shun this argument.
Cryptocurrency is definitely an appealing payment system model that is both practical and secure, and it can assist businesses in growing. They may also substitute for cash notes, allowing users to conduct financial activities such as transferring, exchanging, purchasing, and selling swiftly. The use of blockchain technology enhances the security of the transaction. Several factors may lead to positive changes in the e-commerce, e-business, and payment sectors, but there are also several drawbacks to this type of transaction. Cryptocurrency must be adequately controlled and monitored to gain more confidence.
Moreover, we progressed from the barter system to the metal coins and fiat currency that we use today over hundreds of years. Like any transaction, cryptocurrency will need time to mature as it is presently in its early stages. This industry has a lot of volatility, but it will grow over time as more investment and innovation are made. There is concern that it will be used for unlawful operations, but this is true of any medium of exchange, such as currency. On the other hand, this money cannot solve the problem that we have with actual cash. It can be used as an investment instrument in its current form, but it is still a long way from being a widespread means of transaction.