Crypto Currencies
All of us have heard of the staggering returns from Bitcoin and numerous stories on how people turned into millionaires by investing a dollar in Bitcoin during its early stages. On the other hand, there are several cases where people have lost millions due to buying Bitcoin, the reason for the same varies from following the trend (buying it seeing the hype on Instagram or other social media) to not conducting due diligence before making the purchase.
Thus, one must not invest in any asset that they do not understand or have knowledge about. This will lead to multiple wrong decisions ultimately leading to losses. This is the reason we aim to educate you on the fundamentals of Cryptocurrency, to provide you with an extensive understanding of the fundamentals of Cryptocurrency.
So let's begin by getting to know what is Cryptocurrency ?
By definition, Cryptocurrency is a digital currency that uses a special form of cryptography called blockchain to allow for unbrokered, direct transactions between individuals or businesses.
The four key terms to understand crypto are-
1. Currency: This means that like you exchange 10$ to buy a meal at McDonalds similarly you can exchange Bitcoin or any other cryptocurrency to buy goods of your choice.
2. Digital: Cryptocurrency is not in forms of tangible coins or notes but are stored electronically in a Crypto-wallet.
3. Decentralized: This is the key factor that distinguishes Cryptocurrency from Fiat Money. Fiat money is nothing, but the various currencies printed by Governments across the world. For example- US Dollar, Great Britain Pound and Indian Rupee.
We have all heard of the term inflation. In simple terms, inflation can be defined as the decline in the value of a currency or the rise in prices of goods and services. For better understanding let us take the example of bread. You must have noticed that the prices of bread have been rising every year. Hypothetically, 1$ used to buy you a loaf of bread in 2020 but now you only get half a loaf for 1$. Thus, we can say that 1$ was worth more in 2020 than it is now.
This happens because the Governments are in total control of the supply, and they can increase the supply of money as and when they wish. Thus, when there is an increase of supply of money, people get more money, if people get more money, they tend to buy more goods, if demands for goods increases then the price of goods will increase as per the law of demand. Thus, as a result of the entire chain the value of your money decreases due to inflation.
This is where Cryptocurrency has an edge over FIAT Currency. If not all, many cryptocurrencies are not controlled by a single organization or a person and totally rely on the technology behind it. Cryptocurrencies such as Bitcoin are only limited in number, the total number of Bitcoins can be only 21 million. Thus, as Gold derives its value because it is scarce, similarly Bitcoin gains value because there are only a limited number of Bitcoins and can exist only to a certain level.
4. Blockchain: Suppose it is the last day of the month and you receive your pay of 10000$ in your bank account, this transaction will be saved on the servers of the bank and not anywhere else. Thus, if the servers of the bank have been hacked, the transaction can be completely deleted and eventually you will lose your hard-earned salary.
This is not the case of Cryptocurrencies such as Bitcoin because they rely on the technology of a Blockchain. Let us take the operations of Bitcoin to facilitate better explanation.
Similar to the bank, Bitcoin needs a database to store the transactions. The key factor is that these computers are not all under one roof, and each computer or group of computers is operated by a unique individual or group of individuals. Bitcoin consists of thousands of computers, but each computer or group of computers that hold its blockchain is in a different geographic location and they are all operated by separate parties. By this, even if a hacker is able to crack into 10 computers, he cannot make an impact because there are 9990 other computers that have the information saved.