Introduction to Blockchain and Cryptocurrency
Financial Institutions use traditional money as the payment tool and we are dealing with the traditional financial system in electronic form in a virtual and new environment. This traditional financial system involves huge transactions cost and various difficulties and threats such as transactions that are possible to be reversed, security issues, internet robberies etc. Several IT companies have started offering blockchain application development services.
When the Economy is stepping towards E-Commerce, the present financial system fears to be a big hurdle does not support due to its limitations and problems. With the increase in concerns over Credit Card Fraud, many online merchants are turning away good business. With the increase in leakage of personal information due to the swipe of Credit or Debit cards and net banking, consumers are reluctant to go online shopping.
An alternative payment system is very much in need for fast, secure global transactions. Cryptocurrency, may in future, replace Credit cards and other traditional currencies.
Cryptocurrency is a Digital Currency that uses encryption, which in other term is cryptography, to generate money and to verify transactions. In a more technical term, it's just like any other medium of exchange which is also encrypted and peer to peer virtual currency made up of nodes.
But we need to find out whether it is advantageous to invest in Cryptocurrency and in particular, Bitcoin. Many scholars are doing research on this Cryptocurrency as it has recently occupied a permanent column in almost all financial newspapers and magazines. Investors are getting attracted because of its recent popularity and with the invention of Bitcoin and several other cryptocurrencies, Investments have been reaching into the millions. Bitcoin is one of the best investments because the market cap of Bitcoin and other currencies has reached around $100 billion.
We need to analyze the importance and need for Cryptocurrency for the future economy, its potential applications and limitations in the foreseeable future. Like any other investment, the fundamental and technical analysis for the security is required here. We have to analyze and recommend being cautious at entry and exit levels. Fundamentally Cryptocurrency has a strong base, however, we cannot predict how far this will survive.
Advantages of cryptocurrency:
1) Cryptocurrency, being as a decentralized network of the transaction. It is free from the eagle-eye of the third party server like banks, government, and other authority.
2) Since there are no third party servers involved in any kind of decentralized transactions, it saves you from double spending which in turn saves you huge extra bucks which you used to pay as taxes.
3) This technology completely eradicates the uncertainty of fraudulence, double-dealing, embezzlement, and smuggling.
4) It is highly secured and requires No documentation/paperwork.
5) Saves a lot of time and resource.
Cryptocurrency Vs. Traditional Money
Cryptocurrency transactions carry no personal information and this privacy decreases the chances of identity theft which is the highest threat in swiping Credit Card or Debit Card.
Traditional accounts can be frozen as it is controlled by the third party, wherein Cryptocurrency accounts cannot be accessed anybody else other than the user.
Unlike Traditional Money, Cryptocurrencies cannot be counterfeited or reversed back by the sender. Bank charges are more compared to cryptocurrency transaction costs.
How does Cryptocurrency and Blockchain work?
Cryptocurrency uses a technology, which makes all the transactions in a secured manner, even the experts say it's not hackable. This is nothing but Blockchain.
All the cryptocurrency transactions happen directly between individuals instead of the bank. If a person makes some transaction, that transaction is recorded on a digital ledger called Blockchain. Every Cryptocurrency has its own Blockchain.
They provide a decentralized, shared Ledger (e.g. Bitcoin's blockchain) that enables users to reconcile transactions remotely.
Blockchain Technology is invented by Satoshi Nakamoto who may be a person or group of persons which is still unknown. By allowing Digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet.
Companies like Logiticks have started investing a lot in Blockchain application development in India
The Blockchain network is with a state of consensus, one that automatically checks in with itself every ten minutes.
The main feature of Blockchain Technology is that
• It cannot be controlled by any single entity
• It has no single point of failure till date
• Someone requests a transaction
• The requested transaction is broadcast to a peer-to-peer network consisting of computers, known Nodes.
• Using some algorithms, the transaction and the user's status is validated by network nodes.
• Verified transactions can involve Cryptocurrency, Contracts, records, or other information.
• A new block of data for the ledger is created after verification where one transaction is combined with another.
• The new block is then added to the existing blockchain, in a way that is permanent and unalterable.
• The transaction is complete.
There are over 1500 at this point most likely. Currently, Coinmarketcap is following 1239 coins and 90% of them (or even more) will not be around in 5 years time. Some popular Cryptocurrencies are Bitcoin, Ethereum, Ripple, Litecoin etc.
The blockchain is the concept and Bitcoin is the implementation. Bitcoin is a unique currency which is also referred to as the cryptocurrency of the modern times. If the internet would have been one nation, Bitcoin would be its national currency.
No government, no financial institutions, and no economy have control over the Bitcoin concept. It's totally a free mode of transaction asset which comes in a form of certain computer codes developed by cryptographic algorithms.
Bitcoin is claimed to be 100% safe, because you can't erase the data from the internet which makes the process transparent and then there "Bitcoin miners" who have voluntary interests to keep a look upon the Bitcoin algorithms and transactions, in return of which they get some Bitcoins as their reward.
When a Bitcoin is sent to a receiver, the transaction is included in the blockchain and broadcast to the network. The blockchain ensures that the same Bitcoin is not spent more than once by the same user. A computer network validates the transaction using algorithms so that the transaction becomes unalterable. Once validated, the transaction becomes unalterable
Bitcoin in India
About Bitcoin Trading, Reserve Bank of India appraises Five major risks.
1. Since the digital currency is in electronic format, there may be a high chance of hacking, loss of password etc
2. There is a lack of any authorized central agency to regulate the payments or to turn to for redressal of grievances.
3. There is no underlying asset value for Virtual Currencies, making the value a matter of speculation.
4. Since the exchanges are located in various parts of the world it makes the law enforcement difficult for the multiple jurisdictions.
5. Trading may subject the user to illicit and illegal activities since the Virtual Currencies can easily be used for illegal activities anonymously.
Reserve Bank of India is continuously issuing warning notes for the Investors and Traders regarding the above-quoted risks associated with it.
In March 2018, the Finance Ministry had constituted an inter-disciplinary committee to take stock of the present status of Virtual Currency. Meanwhile, Income tax Departments are taxing the gains made by Bitcoin Traders and Investors.
As per the Statement issued by the Ministry of Finance, Virtual Currencies including Bitcoins are not Currencies, These are not legal tender. The Government of RBI has not authorized any Virtual Currency as a medium of exchange.
Investing in Cryptocurrency, especially Bitcoin is highly risky and speculative; just to grab a chance, we can invest a small portion out of our Savings and add it in our portfolio, considering the fundamental and technical analysis, as nobody truly knows whether it is about to rise or fall spectacularly.