What is Cryptocurrency and How does it work ?

Cryptocurrency – meaning and definition

Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units.

What is Cryptocurrency

What is cryptocurrency ?

Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.

Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.

The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.

Understanding Cryptocurrencies

Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.

Blockchain

Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, blockchain is essentially a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.1 The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.

blockchain technology

Experts say that blockchain technology can serve multiple industries, such as supply chain, and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.

What is blockchain technology ?

A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority. Potential applications can include fund transfers, settling trades, voting, and many other issues.

Types of Cryptocurrency

Bitcoin is the most popular and valuable cryptocurrency. An anonymous person called Satoshi Nakamoto invented it and introduced it to the world via a white paper in 2008. There are thousands of cryptocurrencies present in the market today.

Each cryptocurrency claims to have a different function and specification. For example, Ethereum's ether markets itself as gas for the underlying smart contract platform. Ripple's XRP is used by banks to facilitate transfers between different geographies.

Bitcoin, which was made available to the public in 2009, remains the most widely traded and covered cryptocurrency. As of May 2022, there were over 19 million bitcoins in circulation with a total market cap of around $576 billion. Only 21 million bitcoins will ever exist.3

In the wake of Bitcoin's success, many other cryptocurrencies, known as "altcoins," have been launched. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch. They include Solana, Litecoin, Ethereum, Cardano, and EOS. By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over $2.1 trillion—Bitcoin represented approximately 41% of that total value.

What is the future of cryptocurrency ?

Cryptocurrency has come a long way over the last decade, advancing at a lightspeed pace. Value can be stored, transferred and spent in different ways through various assets and solutions, while DeFi has pioneered the way for new borrowing and lending avenues. 

Some mainstream companies also view blockchain technology itself with interest, evaluating various uses such as supply chain. The future of cryptocurrency and its associated technology appears bright, judging by the growth and adoption that has been seen since 2008 when Nakamoto published the framework for a little asset called Bitcoin. 

Features of the Bitcoin System

The most well known cryptocurrency is Bitcoin. Bitcoin was launched in 2009, a year after a report that described the Bitcoin system was released under the name Satoshi Nakamoto. The system was designed to electronically mimic features of a cash transaction. It was designed to allow peer-to-peer (or person-to-person) transactions, without the need to know or trust the other person in the transaction, and to occur without the need for a central party (such as a bank). Unlike conventional national currencies such as Australian dollars, which get part of their value from being legislated as legal tender, Bitcoin and other cryptocurrencies do not have any legislated or intrinsic value. Instead, the value of Bitcoin is determined by what people are willing to pay for it in the market (and, in theory, its value could fall to zero at any time).

One feature of the Bitcoin system is that the supply of Bitcoins increases at a pre-determined rate and is capped at around 21 million (with each bitcoin able to be subdivided into 100 million satoshis or 0.00000001 bitcoins). Because of this, the supply of Bitcoins has been commonly compared to the supply of a scarce commodity, such as gold.

The Bitcoin system allows transactions to occur directly from person to person without requiring a central party (such as a bank) to verify or record the transactions. This is unlike most conventional payment methods, such as electronic bank transfers, which rely on a central party to keep and update records of transactions. For example, commercial banks maintain a record of their customers' account balances, deposits and withdrawals.

Instead, the Bitcoin system uses ‘blockchain’ technology to record transactions and the ownership of bitcoins. This is essentially technology that connects groups of transactions (‘blocks’) together over time (in a ‘chain’). Each time a transaction occurs, it forms part of a new block that is added to the chain. As a result, the blockchain provides a record (or database) of every bitcoin transaction that has ever occurred, and it is available for anyone to access and update on a public network (this is often referred to as a ‘distributed ledger’). The integrity of the Bitcoin system is protected by ‘cryptography’, which is a method of verifying and securing data using complex mathematical algorithms (or codes). This makes the system very difficult to corrupt.

Bitcoin transactions are verified by other users of the network, and the process of compiling, verifying and confirming transactions is often referred to as ‘mining’. In particular, complex codes need to be solved to confirm transactions and make sure the system is not corrupted. The Bitcoin system increases the complexity of these codes as more computing power is used to solve them. A new block of transactions is compiled approximately every ten minutes. ‘Miners’ want to solve the codes and process transactions because they are rewarded with new bitcoins (currently 6.25 new Bitcoins per block).

The increase in competition between miners for new Bitcoins has seen large increases in the amount of computing power and electricity required (which is often used for air conditioning to cool computer systems). While it is difficult to calculate with precision, some estimates suggest that the annual energy consumption of the Bitcoin system is roughly equal to the country of Thailand.

This explainer is provided to facilitate the conceptual understanding of cryptocurrencies. It does not constitute advice, or a recommendation, to buy, trade or invest in Bitcoin or any other cryptocurrency. If you decide to trade or use cryptocurrencies you may be taking on risk for which there is no recourse.

Are Cryptocurrencies Legal ?

Fiat currencies derive their authority as mediums of transaction from the government or monetary authorities. For example, each dollar bill is backstopped by the Federal Reserve.

But cryptocurrencies are not backed by any public or private entities. Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world. It doesn't help matters that cryptocurrencies have largely functioned outside most existing financial infrastructure. The legal status of cryptocurrencies has implications for their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should be subject to the requirements of its Travel Rule, which requires AML compliance.5

As of December 2021, El Salvador was the only country in the world to allow Bitcoin as legal tender for monetary transactions. In the rest of the world, cryptocurrency regulation varies by jurisdiction.

Japan's Payment Services Act defines Bitcoin as legal property.6 Cryptocurrency exchanges operating in the country are subject to collect information about the customer and details relating to the wire transfer. China has banned cryptocurrency exchanges and mining within its borders. India was reported to be formulating a framework for cryptocurrencies in December.

Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies will need to qualify as "financial instruments." In June 2021, the European Commission released the Markets in Crypto-Assets (MiCA) regulation that sets safeguards for regulation and establishes rules for companies or vendors providing financial services using cryptocurrencies.8 Within the United States, the biggest and most sophisticated financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange. The Securities and Exchange Commission (SEC) has said that Bitcoin and Ethereum are not securities.

Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Not all ecommerce sites allow purchases using cryptocurrencies. In fact, cryptocurrencies, even popular ones like Bitcoin, are hardly used for retail transactions. However, the skyrocketing value of cryptocurrencies has made them popular as trading instruments. To a limited extent, they are also used for cross-border transfers.

How does cryptocurrency work ?

Cryptocurrencies are not controlled by the government or central regulatory authorities. As a concept, cryptocurrency works outside of the banking system using different brands or types of coins – Bitcoin being the major player. 

1. Mining

Cryptocurrencies (which are completely digital) are generated through a process called “mining”. This is a complex process. Basically, miners are required to solve certain mathematical puzzles over specially equipped computer systems to be rewarded with bitcoins in exchange. 

In an ideal world, it would take a person just 10 minutes to mine one bitcoin, but in reality, the process takes an estimated 30 days.

2. Buying, selling, and storing

Users today can buy cryptocurrencies from central exchanges, brokers, and individual currency owners or sell it to them. Exchanges or platforms like Coinbase are the easiest ways to buy or sell cryptocurrencies. 

Once bought, cryptocurrencies can be stored in digital wallets. Digital wallets can be “hot” or “cold”. Hot means the wallet is connected to the internet, which makes it easy to transact, but vulnerable to thefts and frauds. Cold storage, on the other hand, is safer but makes it harder to transact. 

3. Transacting or investing

Cryptocurrencies like Bitcoins can be easily transferred from one digital wallet to another, using only a smartphone. Once you own them, your choices are to: 

• (a) use them to buy goods or services 
• (b) trade in them 
• (c) exchange them for cash

If you are using Bitcoin for purchases, the easiest way to do that is through debit-card-type transactions. You can also use these debit cards to withdraw cash, just like at an ATM. Converting cryptocurrency to cash is also possible using banking accounts or peer-to-peer transactions. 

Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.

Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.

If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.

Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.

Cryptocurrency examples

There are thousands of cryptocurrencies. Some of the best known include:

Bitcoin:

Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.

Ethereum:

Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:

This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.

Ripple:

Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.

Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.

How to buy cryptocurrency ?

You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:

Step 1: Choosing a platform

The first step is deciding which platform to use. Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:

Traditional brokers.

These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.

Cryptocurrency exchanges.

There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.

When comparing different platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.

Step 2: Funding your account

Once you have chosen your platform, the next step is to fund your account so you can begin trading. Most crypto exchanges allow users to purchase crypto using fiat (i.e., government-issued) currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards – although this varies by platform.

Crypto purchases with credit cards are considered risky, and some exchanges don't support them. Some credit card companies don't allow crypto transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.

Some platforms will also accept ACH transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ per platform. Equally, the time taken for deposits to clear varies by payment method.

An important factor to consider is fees. These include potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which is something to research at the outset.

Step 3: Placing an order

You can place an order via your broker's or exchange's web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting "buy," choosing the order type, entering the amount of cryptocurrencies you want to purchase, and confirming the order. The same process applies to "sell" orders.

There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:

Bitcoin trusts:

 You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market. 

Bitcoin mutual funds: 

There are Bitcoin ETFs and Bitcoin mutual funds to choose from. 

Blockchain stocks or ETFs: 

You can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.

The best option for you will depend on your investment goals and risk appetite.

How to store cryptocurrency ?

Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy for you to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for you.

There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:

Hot wallet storage: 

"hot wallets" refer to crypto storage that uses online software to protect the private keys to your assets.

Cold wallet storage: 

Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.

What can you buy with cryptocurrency ?

When it was first launched, Bitcoin was intended to be a medium for daily transactions, making it possible to buy everything from a cup of coffee to a computer or even big-ticket items like real estate. That hasn’t quite materialized and, while the number of institutions accepting cryptocurrencies is growing, large transactions involving it are rare. Even so, it is possible to buy a wide variety of products from e-commerce websites using crypto. Here are some examples:

Technology and e-commerce sites:

Several companies that sell tech products accept crypto on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.

Luxury goods:

Some luxury retailers accept crypto as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other high-end watches in return for Bitcoin.

Cars:

Some car dealers – from mass-market brands to high-end luxury dealers – already accept cryptocurrency as payment.

Insurance:

In April 2021, Swiss insurer AXA announced that it had begun accepting Bitcoin as a mode of payment for all its lines of insurance except life insurance (due to regulatory issues). Premier Shield Insurance, which sells home and auto insurance policies in the US, also accepts Bitcoin for premium payments.

If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card, such as BitPay in the US.

Cryptocurrency fraud and cryptocurrency scams 

Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include:

Fake websites: 

Bogus sites which feature fake testimonials and crypto jargon promising massive, guaranteed returns, provided you keep investing.

Virtual Ponzi schemes: 

Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying off old investors with new investors’ money. One scam operation, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.

"Celebrity" endorsements: 

Scammers pose online as billionaires or well-known names who promise to multiply your investment in a virtual currency but instead steal what you send. They may also use messaging apps or chat rooms to start rumours that a famous businessperson is backing a specific cryptocurrency. Once they have encouraged investors to buy and driven up the price, the scammers sell their stake, and the currency reduces in value.

Romance scams: 

The FBI warns of a trend in online dating scams, where tricksters persuade people they meet on dating apps or social media to invest or trade in virtual currencies. The FBI’s Internet Crime Complaint Centre fielded more than 1,800 reports of crypto-focused romance scams in the first seven months of 2021, with losses reaching $133 million.

Otherwise, fraudsters may pose as legitimate virtual currency traders or set up bogus exchanges to trick people into giving them money. Another crypto scam involves fraudulent sales pitches for individual retirement accounts in cryptocurrencies. Then there is straightforward cryptocurrency hacking, where criminals break into the digital wallets where people store their virtual currency to steal it.

Is cryptocurrency safe ?

Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into "blocks" and time stamped. It's a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that's hard for hackers to tamper with.

In addition, transactions require a two-factor authentication process. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code sent via text to your personal cell phone.

While securities are in place, that does not mean cryptocurrencies are un-hackable. Several high-dollar hacks have cost cryptocurrency start-ups heavily. Hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.

Unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. This can create wild swings that produce significant gains for investors or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds, and mutual funds.

Four tips to invest in cryptocurrency safely

According to Consumer Reports, all investments carry risk, but some experts consider cryptocurrency to be one of the riskier investment choices out there. If you are planning to invest in cryptocurrencies, these tips can help you make educated choices.

Research exchanges:

Before you invest, learn about cryptocurrency exchanges. It’s estimated that there are over 500 exchanges to choose from. Do your research, read reviews, and talk with more experienced investors before moving forward.

Know how to store your digital currency:

If you buy cryptocurrency, you have to store it. You can keep it on an exchange or in a digital wallet. While there are different kinds of wallets, each has its benefits, technical requirements, and security. As with exchanges, you should investigate your storage choices before investing.

Diversify your investments:

Diversification is key to any good investment strategy, and this holds true when you are investing in cryptocurrency. Don't put all your money in Bitcoin, for example, just because that's the name you know. There are thousands of options, and it's better to spread your investment across several currencies.

Prepare for volatility:

The cryptocurrency market is highly volatile, so be prepared for ups and downs. You will see dramatic swings in prices. If your investment portfolio or mental wellbeing can't handle that, cryptocurrency might not be a wise choice for you.

Cryptocurrency is all the rage right now, but remember, it is still in its relative infancy and is considered highly speculative. Investing in something new comes with challenges, so be prepared. If you plan to participate, do your research, and invest conservatively to start.

One of the best ways you can stay safe online is by using a comprehensive antivirus. Kaspersky Internet Security defends you from malware infections, spyware, data theft and protects your online payments using bank-grade encryption.

Should You Invest In Cryptocurrency ? 

There are many advantages to dealing in cryptocurrencies, and a fair share of disadvantages as well. Here are the top three reasons that work in favor of and against cryptocurrencies.

Advantages:

They are private and secure: The blockchain technology that fuels cryptocurrencies ensures user anonymity. It also assures high levels of security through cryptography, which we discussed before. 

They are decentralized, immutable, and transparent: The entire system functions on shared ownership, where data is available to all permissioned members and is tamper-proof.

They are a hedge against inflation: Cryptocurrency makes for a great investment in times of inflation. For example, investors often compare cryptocurrency to gold. One of the reasons behind this is that, just like gold, they are in limited supply, as there is a cap on mining any type of cryptocurrency. 

Disadvantages:

• They are not widely understood: They are a relatively new concept and the long-term sustainability of cryptocurrencies remains to be seen.
• They are prone to high risks: Needless to say, cryptocurrencies bring in as many rewards as risks. Their highly volatile and speculative nature makes them prone to sharp downward spirals. Investing in cryptocurrency can be risky for many reasons. 

A major deterrent could be the fact that digital currency seems to have no inherent or underlying value. There is a supply-demand type of equation that is used to determine the value of cryptos like bitcoins. 

Plus, it is easy to see how simple speculations over the internet can result in a substantial rise or loss of value of these coins. 

Also the fact that cryptocurrencies are banned or their usage restricted in a lot of countries plays out as a significant risk. Their legality is debatable in countries like India. 

Scalability is a problem: This is a complex issue, which has more to do with the technology side of the blockchain. Simply put, the sluggish nature of the blockchain makes it prone to transactional delays. This has the tendency to make crypto payments inefficient when compared to modern-day electronic payment techniques.

Cryptocurrency in India

Until the 2022 Union Budget announcement, the fate of cryptocurrency in India was largely undecided. 

In the Budget, the Indian Finance Minister’s announcement on levying a 30% tax on gains on the transfer of virtual digital assets, which includes cryptocurrency, was initially seen as an endorsement of cryptocurrencies. It set off the debate on whether or not the tax on cryptocurrency indicates the government has recognized it as a legitimate form of currency. 

However, this isn’t true and there have also been speculations that a ban on private cryptocurrencies would follow the launch of the RBI’s own official digital currency. Something to this effect was openly stated by RBI Deputy Governor T Rabi Sankar in February 2022, when he said it was advisable for India to ban cryptocurrency. Will this turn out to be similar to the government’s ban on cryptocurrency in 2018 (which was overturned by India’s Supreme Court in 2020) remains to be seen.

Cryptocurrency legal and tax issues

There’s no question that cryptocurrencies are legal in the U.S., though China has essentially banned their use, and ultimately whether they’re legal depends on each individual country.

The question of whether cryptocurrencies are legally allowed, however, is only one part of the legal question. Other things to consider include how crypto is taxed and what you can buy with cryptocurrency.

Legal tender: 

You might call them cryptocurrencies, but they differ from traditional currencies in one important way: there's no requirement in most places that they be accepted as "legal tender." The U.S. dollar, by contrast, must be accepted for "all debts, public and private." Countries around the world are taking various approaches to cryptocurrency. El Salvador in 2021 became the first country to adopt Bitcoin as legal tender. Meanwhile, China is developing its own digital currency. For now, in the U.S., what you can buy with cryptocurrency depends on the preferences of the seller.

Crypto taxes: 

Again, the term "currency" is a bit of a red herring when it comes to taxes in the U.S. Cryptocurrencies are taxed as property, rather than currency. That means that when you sell them, you'll pay tax on the capital gains, or the difference between the price of the purchase and sale. And if you're given crypto as payment — or as a reward for an activity such as mining — you'll be taxed on the value at the time you received them.

How is a crypto transaction done ?

"When a person buys a cryptocurrency, the transaction is recorded on a distributed ledger known as the blockchain. However, the process is only complete when a miner confirms that the transaction is valid. After that, the transaction is permanently recorded in the blockchain for all to see, and the transaction is complete," said Purohit.

What is the technology behind cryptos ?

The technology behind cryptos is blockchain. In a blockchain network, the ledger – collection of transaction records - is distributed. On initiation of transfer request (e.g.: transfer of a bitcoin), a new block with the transaction details (e.g.: payer and payee details, transaction amount, account balance etc.) is created and broadcast to all the network participants.

How is it mined ?

Cryptocurrency mining is the process of bringing new crypto coins into circulation by solving complex mathematical equations. Miners race against each other using powerful computers to solve the cryptographic problems.

"It is called mining because once these problems are solved, new coins enter into circulation. Miners are paid a fraction of the transaction fee for their effort," said Patel.

Each time a user solves one of the problems they are rewarded with a coin. These coins are then stored in a digital wallet on their computer so that they can spend or trade the currency any time they like. The value of cryptocurrency is determined by supply and demand as indicated by what people are willing to pay and sell it for. If more people are buying cryptocurrency then it will go up in value, however if more people wish to sell it off than buy it that way then its monetary value will drop until things equal out again. The price is set by the market rather than being managed directly from an exchange meaning that you can instantly check the market yourself anywhere you like since there is less chance of manipulation occurring, explains Mayer.

Lot of energy is wasted in mining

Some Cryptocurrencies like GRIN, ZCash, Monero, Etc are easy to mine, while the likes of Bitcoin requires a lot of energy and effort. "0.20% of all of the world’s electricity goes to powering Bitcoin farms. Do you know that many Bitcoin miners end up using 60% to 80% of what they earn from mining to cover electricity costs," says Siddharth Jaiswal Founder and Chief Executive Officer, SportZchain.

Estimates suggest one bitcoin transfer has a carbon footprint equivalent to 2.02m Visa transactions or 152,000 hours of watching YouTube.

What is cryptocurrency used for ?

Currently, the main purpose of cryptocurrency is for it to used as an asset, like stocks or precious metals. Currently, Bitcoin is one of the most lucrative investment options. "Its value appreciation is identified as supremely dynamic and can prove to be an excellent avenue for capital expansion. However, one should be mindful while investing in cryptocurrency because of its volatile nature," cautions Dahake.

Apart from being an asset, cryptos can also be used to buy regular goods and services. Several restaurants, flights, and apps accept it as a viable payment medium. "Currently people are using crypto projects for Minting NFTs (non fungible tokens). It is also being used in DeFi (decentralized finance) basically a bank which gives loan, insurance and other banking related tasks in a decentralized peer to peer lending system," says Varun Mayya, Founder and CEO, Scenes by Avalon.

"In a few countries, cryptocurrencies are legal, and users can buy and sell them on exchanges where their company accepts them as payment for services. In countries where cryptocurrencies are illegal, they are also used for funding terrorism, money laundering, and more. Many countries have banned bitcoins and similar currencies due to their use in black market transactions," says Mayer.

The higher volatility in prices compared to a traditional currency makes it less likely to be used as a “store of value”. "Bitcoin is 10X more volatile compared to major currencies and hence it is becoming a speculative asset class with increasing interest from people," according to HDFC.