A cryptocurrency is a type of virtual or digital currency. They are secured by cryptographic systems and can be used to make safe online transactions without any mediators.
The word “crypto” refers to cryptographic techniques and several encryption algorithms that help secure these records, such as hashing functions, elliptical curve encryption and public-private key pairs. Investors must know cryptocurrencies are private digital currencies not endorsed by the Government of India.
The Indian government is piloting its own digital currency and does not endorse the existing cryptocurrencies.
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What is Cryptocurrency?
Cryptocurrencies are not regulated by any central government authorities, which makes them immune to any government interventions. Based on blockchain technology, many cryptocurrencies are decentralized networks.
A cryptocurrency is a digital currency based on a network that is scattered across a huge number of computers. The decentralized system of cryptocurrency makes it faster and cheaper to transfer money. It does not crumble at a single point of failure. The price volatility, alleged use in criminal activities that may not be easy to map and high energy consumption for mining of the coins are considered some of the key challenges to the acceptance of cryptocurrencies besides these coins not having any sovereign guarantee or approval.
Cryptocurrencies act as a medium for value storage or exchange. All this depends on a public ledger technology type that is called, “blockchain”. It records the data and keeps track of the transactions sent via the network. Blockchain is a virtual chain of blocks each of which contains a set of transactions and other information. The block becomes immutable, i.e. the data stored inside the block cannot be removed or replaced once it is added to the chain.
Nodes are a network of contributors by which cryptocurrencies are managed. On the network, the nodes perform a diversity of roles, from storing to validating transactional data. They overall manage the database and validation of the new transaction entries. The best part is that there is no single point of failure which means if one node breaks down it will have no impact on the blockchain ledger.
What Are The Advantages of Cryptocurrency?
Cryptocurrency has gained popularity among investors globally. With technological involvement and industrialization, digital currencies are obtaining a satisfactory position over others, for example, Bitcoin. By using Cryptocurrency it gets easy to transfer money without any involvement of banks and other financial institutions.
Let us see a few more advantages of it:
Due to inflation, the value of many currencies decline. Many folks see cryptocurrency as offering protection against inflation. Bitcoin has a hard cap on the whole number of coins that will ever be minted. For example, as the growth of the money supply overtakes the growth in the supply of Bitcoin, the price of Bitcoin shall increase. Many other cryptocurrencies use the same mechanism to cap supply as well as can act as a safeguard against inflation. In terms of quantity, there are only 21 million Bitcoins released as specified by the ASCII computer file. Therefore, because of an increase in demand, the value will rise which might keep up with the market and prevent inflation in the long run.
If you wish to transfer money to your loved ones for example, in the United States, there are a few ways to move assets or funds from one account to another very quickly. Cryptocurrency transactions are done in a matter of minutes and that is appealing to many. Within U.S. financial institutions, most of the transactions are settled in three to five days and wire transfers take at least 24 hours.
Cost Effective Transactions
Cryptocurrencies can help transfer funds globally. The transactional cost with the help of cryptocurrency can be minimal or zero. It is negligible as it eliminates the need for third parties like VISA to confirm transactions.
Cryptocurrencies are a portrayal of a brand-new decentralization model for money. They also help to combat the monopoly of a currency and free money from control. No government organizations can set the worthiness of the coin or flow, and that crypto enthusiasts think makes cryptocurrencies secure and safe.
Investments in cryptocurrency can generate profits. The market has extended immensely over the past decade. There is a limited history of the price activity of the cryptocurrency markets, so far they appear unrelated to other markets like stocks or bonds. That makes cryptocurrencies a fine source of portfolio diversification. If you combine assets with less price correlation, you can have more stable returns. For example, if your stock collection goes down, your crypto asset might go high and vice versa. However, cryptocurrency is normally very volatile and in the end, might increase your portfolio’s volatility if your asset allocation is heavy on cryptocurrency.
Investors just need a computer or a smartphone with an internet connection to use cryptocurrency. There’s no identification verification, credit check, or background to open a cryptocurrency wallet. It is way faster and easier compared to old financial institutions. It also allows individuals to effortlessly make internet transactions or send funds to someone.
Safe And Secure
No one can access your funds unless they gain access to your crypto wallet’s private key. In case you forget or lose your key then you cannot recover your funds. Further, the transactions are secured by the blockchain system along with the scattered network of computers that verify the transactions. It’s more secure if investors keep crypto assets in their own wallets. The transactions are secured by the usage of public and private keys, proof of work or proof of stake and other various forms of incentive systems.
With the decentralized nature of blockchains, one can view the money transfer transactions by simply using blockchain explorer on the platform to track live transfers. This open and transparent system is a relief among investors and is corruption-free.
There is no third-party intervention due to which your account has a level of privacy. On the blockchain, investors have an identifier and your wallet address as the transactions are pseudonymous and nothing personal about you. There are even many coins that focus on privacy to enhance the cryptocurrency nature of privacy.
Currency Exchanges Are Done Effortlessly
Investors can purchase cryptocurrency using currencies like the U.S. dollar, Indian rupee or European euro. Various cryptocurrency exchanges and wallets help investors to trade in crypto and convert currencies with minimum transaction charges across different wallets.
What Are The Disadvantages of Cryptocurrency?
Investing in cryptocurrency might look appealing and profitable but investors should also consider a few downsides to it.
- Cryptocurrency claims to be an anonymous form of transaction, but they are actually pseudonymous which means they leave a digital trail that the Federal Bureau of Investigation can decode. So, there’s a possibility of interference from federal or government authorities to track the financial transactions of normal people.
- On a blockchain, there is a constant risk of a 51% attack which means It is a situation when a miner or group of them gets more than 50% of the network’s mining hash rate control. While in control, an ill-natured group can reverse the transaction that is completed, pause the transaction in process, double spend coins, prevent new transactions from getting validation and much more. Nevertheless, this attack is only a risk to recently hard-forked networks and new blockchains.
- The majority of blockchains work on the proof-of-work consensus mechanism. Network participants are required to use powerful ASIC computers and the right hash to make a block added to the network. Due to this, there is excessive power consumption and countries are taking majors to lower its impact on the environment.
- The lack of key policies related to transactions serves as a major drawback of cryptocurrencies. The no refund or cancellation policy can be considered the default stance for transactions wrongly made across crypto wallets and each crypto stock exchange or app has its own rules.
Are Cryptocurrencies Legal In India?
Cryptocurrencies as a payment medium are not regulated or issued by any central authority in India. There are no guidelines laid down for sorting disagreements while dealing with cryptocurrency. So, if you wish to trade in crypto, do it at your own risk.
Nirmala Sitharaman, the Finance Minister of India, initiated a tax on digital assets that has increased the discussion on the cryptocurrency legality in the country.
Given the stance of the Reserve Bank Of India (RBI) Governor and other key ministers from time to time, it can be safe to state cryptocurrency is not banned in India. Till 2022, cryptocurrency was unregulated in the country. This changed after the government set forth a 30% and 1% tax on profits from cryptocurrencies and tax deducted at source respectively in the Union Budget of 2022. This event marked the Indian government’s official regulation of cryptocurrency in the country.
While many supported the decision as it marks the very start of the road to getting cryptocurrency recognition, the Government of India still has to issue an official note for cryptocurrencies to be considered legal in India.
Tax on Cryptocurrency in India
Tax on cryptocurrency is one of the most confusing investment aspects in India. In the beginning years, there was no income tax or goods and services tax (GST) on cryptocurrencies in India but in the recent Union Budget 2022, a tax regime for digital or virtual assets that include cryptocurrency has been introduced.
- Crypto investors are required to keep a well-calculated record of losses and gains as a part of their income.
- On the earnings from the transfer of virtual or digital assets, a 30% tax will be charged. The tax includes cryptocurrencies, NFTs, etc.
- Cost of acquisition along with no deduction will be permitted while reporting gains from the transfer of virtual or digital assets.
- A tax of 1% on tax deducted at source (TDS) on the buyer’s payment if it crosses the threshold limit.
- If someone receives cryptocurrency as a gift or it is transferred then it is subjected to tax at the beneficiary’s end.
- If investors face any loss from the virtual or digital asset investment, it cannot be recovered against other income.
Cryptocurrencies can be bought via crypto exchanges in India. All electronic commerce websites do not allow the trading of cryptocurrencies. Believe it or not, popular cryptos like Bitcoin and Ethereum are barely used for retail transactions in India. They are used for cross-border transfers mostly outside of India.
Crypto investors should have proper knowledge and understanding of the risks that are involved before investing in cryptocurrencies. Considering all the advantages mentioned earlier it is hard to debate that investing in crypto has no value. The benefits are of great value for investors who treasure safe and fast transactions.