Saturday, December 16, 2017

What On Earth Is Cryptocurrency?

There is a buzz around the term cryptocurrency these days and apparently the most popular kind of this strange new currency goes by another esoteric term- bitcoin! But what on earth is cryptocurrency and what the devil is a bitcoin? For all the news that is being generated about cryptocurrency and bitcoins, one would imagine that there would be many who would understand what the fuss was all about.

Here in India, there is even more confusion about the whole hoopla surrounding bitcoins. Ever glued in to news about newer ways of getting a fair return on their investments middle class India has begun to look at bitcoins with a fair amount of interest and curiosity This is largely on account of the fact that one hears so much about the fantastic returns that one makes by investing in this new age wonder.

But ask someone if they know what these terms signify, chances are you will draw a bank. For all they might know this could be currency that settlers on Mars might use. After all wasn't their talk of settling people on Mars?! This kind of abysmal ignorance about cryptocurrency is not restricted to India. An overwhelming majority of people around the world don't have a clue either.

So let us try and understand the nature of the beast over here and try and gather a basic understanding of what one means, when one says cryptocurrency. A lot of people think that cryptocurrency is a form of digital money and they are bang on. Add to it the fact that it is extremely secure and anonymous, you begin to understand its allure.

The way it works is that it leverages  the power of the Internet by using cryptography that helps transform legible information into a codified one, with which to track any purchases or transfers. As many would know cryptography has its origins in the secret method of communicating by code that was evolved during the Second World War. The digital era has seen it transform further into a foolproof method of online security that encompasses not just data, but communications and money as well.

Bitcoin was the very first cryptocurrency and was launched back in 2009. Being the first off the block it soared in value from zero value in January 2009 to more than $11,000 in November 2017! No wonder everybody wants to know more about cryptocurrencies. It is not surprising therefore to discover that there are more than a 1000 cryptocurrencies available on the Internet.

Understanding Cryptocurrency

 If one were to define or explain cryptocurrency you could call it a process which entails making limited entries in a database that cannot be altered by anyone unless certain specific conditions are fulfilled. If you think that there is nothing extraordinary about this, think again.

This is exactly how real money functions.  The money in one's bank account is represented by certain certain specific entries in the bank's database that can be altered only when certain basic conditions are met. Money is basically  a verified entry in some kind of an accounting database.

A similar principle operates in the case of  the databases of a cryptocurrency. Take the case of  bitcoin where every member network of peers keeps a record of the entire transaction  and balances pertaining to every account. There is a seven stage process that explains the entire cryptocurrency concept and how it functions.

1. Someone makes a transaction request which travels via a P2P (peer to peer) network of computers, which is called nodes.
2. The network of nodes validates both user status and the transaction.
3. The verified transaction now becomes part of all the other transactions, thereby  creating a new block of data in the ledger.
4. The new block becomes a permanent and unalterable part of the existing block chain
5. There is a complete transaction.

Cryptocurrency has certain unique characteristics that make it new and revolutionary-

1. It does not possess any intrinsic  value and as such cannot be redeemed against any commodity which has that kind of value.
2. Unlike conventional money cryptocurrency is entirely digital and does not have a physical form.
3. Unlike conventional money, the supply of cryptocurrency is not regulated by any central bank with its network being totally decentralized.

In India though there is heightened interest in cryptocurrencies, most people are extremely wary of investing in these till the time that the concept becomes better understood and more mainstream. Though the Reserve Bank of India has not banned cryptocurrences outright, it has cautioned people against trading and creating virtual currencies because of the inherent risks involved.

However more than cryptocurrency it is the block-chain technology that has the conventional banking sector interested as it can be used for functions other than creating cryptocurrency. These include tracking of ownership and origin of documents, physical and digital assets and so on. ICICI Bank actually went ahead and used block=chain technology to execute India's first banking transactions on block-chain.

As for cryptocurrencies, notwithstanding all the hype surrounding it, most Indian investors would likely steer clear of investing in it until such time the concept of cryptocurrency has official sanction. A more or less similar wait and watch approach has been taken by governments and investors worldwide.

There are some leading voices who herald the ushering in of the era of cryptocurrency as the dawn of a new world financial order, while many others think of it as an inflated bubble waiting to be burst. Clearly one will hear a lot about both cryptocurrencies and bitcoins till the debate is settled one way or the other.


  1. Very nice post... This post is complete guide on cryptocurrency. It explain every aspects of cryptocurrency. Thanks for sharing
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  2. Thanks for your feedback Aledra, and you are most welcome.