What is Crypto Currency and How Do I Buy Crypto

All about Crypto Currency

Cryptocurrency apps and advertisements featuring leading Indian personalities might have amused you. That is something people do not know much about, yet is capable of surely raising some concern. With more and more indulgence by Indians in Crypto, naturally a layman wants to understand what it is, how it works, who are the service providers and since cryptocurrency is not regulated-are there risks associated with investing in them? Here are answers to all these questions.

What is cryptocurrency and its few firsts

Cryptocurrency is a form of payment that can be exchanged online for goods and services. It is a digital or virtual currency secured by cryptography. This makes it almost impossible to counterfeit or double spend. Thus, it is a digital asset based on a network which is distributed across a large number of computers. The word “ Cryptocurrency” is derived from the encryption techniques which are used to secure the network. The decentralised structure allows them to exist outside the control of governments and central authorities. They work using a technology called blockchain.

American cryptographer David Chaum conceptualised it in 1983. It was implemented by him as Digicash. The cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. Its ledger started functioning on 3rd January 2009. Bitcoin was the first cryptocurrency. They are fiat currencies and are not backed by or convertible into a commodity. EI Salvador was the first country to accept Bitcoin as legal tender in June 2021 followed by Cuba in August. The government of China being the single largest market for cryptocurrency declared all cryptocurrency transactions illegal.

The technology backed currency: Blockchain is the core technology behind bitcoin and thousands of cryptocurrencies which has promising potential beyond digital currencies. Blockchains are public digital ledgers of transactions and they are difficult to hack or alter. Popular also for legal contracts, property sales, medical records and any other industry that needs to authorize and record a series of actions or transactions. Each such transaction is verified independently by peer-to-peer computer networks, time-stamped and added to a chain of data. They cannot be altered after they get recorded.

The reasons behind popularity of cryptocurrencies:

• Particularly a few speculators like it a lot because of their value going up. They have no interest in the currencies’ long term behaviour.
• Central banks are not involved in regulation of cryptocurrencies. Usually these banks are looked at as a medium to reduce the value of money via inflation. Thus it attracts those supporters who do not like any intervention by central banks like the RBI.
• There is a speculation that cryptocurrencies are going to be the future and before they become more expensive, it is better to buy them now. In a race to follow this pattern, there is a rush to grab them.
• Blockchain is a very secured network, even more than the traditional payment systems. Cryptocurrencies use blockchain, making them look trustworthy.

How does cryptocurrency work?

You must have seen pictures colourful and shining coins as cryptocurrencies. Actually it is a symbolic presentation of a technology that works behind them. It is just a set of protocols and processes-a completely digital phenomenon. The decentralised system records transactions in a distributed ledger. For example, bitcoin miners run complex computer rigs to solve complicated puzzles in an effort to confirm groups of transactions known as blocks. These blocks are added to the blockchain upon success and it is added to the records. Miners get a reward with a small number of bitcoins. The participants in the market buy or sell tokens through cryptocurrency exchanges or peer-to-peer. Thus, there is no physical coin or bill unless you use a service that allows you to cash in cryptocurrency for a physical token. You have to exchange it with someone online, with your phone or computer. They are used for quick payments avoiding the fees that usually banks charge. Few others hold them for the sake of gaining profits if the value goes up.

Which are the popular cryptocurrencies by market capitalization?

The ten largest trading cryptocurrencies by market capitalization:

Bitcoin, Ethereum, Bianance Coin, Cardano, Tether, Solana, XRP, Polkadot, USD Coin, Dogecoin. Buying is possible through an online exchange platform. “Mining” is a process to earn cryptocurrencies and that requires advanced computer equipment to solve highly complicated math puzzles.

The most active ones are-Ethereum, Ripple(XRP),Polygon, Dogecoin etc.

How to buy cryptocurrency?

Bitcoin is one of the leading cryptocurrency holding a market cap of more than $700 billion. There are 384 exchanges and more than ten thousand cryptocurrencies are traded.

Buying and selling cryptocurrencies is possible through these exchanges. They operate just like other exchanges. Trading of cryptocurrencies with other assets takes place through the exchanges. Crypto exchanges have an easy to use interface and there is a very low to no maintenance charges and a lower trading fee.

Tips before buying cryptocurrency for the first time-

1. Wallet security: The purchased cryptocurrencies need safe storage. They can be defined as light and heavy purses. The light purse is something available from your phone. It should allow you to transfer the account wallet to another device. The input and output of the currency should be easy. But for the selected heavy wallet, you need to have a hard drive having enough space for it. Crypto exchanges are most vulnerable to hacker attacks so you better not keep them with exchanges.
2. Buy them but control yourself: Cryptocurrencies might give you sudden jolts as it is a very volatile product. You need not lose your peace of mind over it. Rational understanding of the situation may land you in trouble. Just calm down after you buy it. Do not overreact to any changes taking place.
3. Stay invested while you trade: You can hold upto 50% percent of your cryptocurrencies as there are many speculations and we don’t know what will happen to it in the coming days.

How to make payments using cryptocurrency?

It is not the same as using a credit card or other traditional payment methods.

The transactions are irreversible-If you make a payment using cryptocurrency, you cannot get it back unless the person you paid sends it back. While buying something with cryptocurrency, know the seller’s reputation, his location, and whom to contact in case there is a problem. You have to do some research for this.

Likelihood of some of your transaction related information going public-The receipts as well as payments are recorded using the blockchain. The amount of transaction, the receiver’s and the seller’s wallet addresses are included therein. Shipping address and identity of people can be traced despite the entire thing being considered to be anonymous.

No legal protection:Credit card companies can get your money back in case of a dispute while purchasing an item. No such legal protection is assured in case of cryptocurrencies.

Where and how to store cryptocurrency?

Cryptocurrency gets stored in a digital wallet. It could be on your computer or an external hard drive. Since the entire system is not supported by any banks or other regulations, if your online exchange platform loses business, you might end up paying to the wrong person. Digital wallet as well as password can be stolen. Recovery of your funds in such a case is something impossible. A blockchain stores your coins. It is just like any other wallet used to pay or receive money. Store all your cryptocurrencies on a hard drive, keeping only the needed amount on your phone.

Cryptocurrencies as an investment and related challenges

The value of cryptocurrencies goes up but gets driven by speculations and no generation of cash flow is involved. So investors think that they are not real investments. In order to earn profit, someone has to pay for it more than you did. This currency needs to be regulated and calls for stability. Clearly smart investors do not look at cryptocurrency as a good or safe option to park their money. Merchants and consumers should be able to make out the fair price for goods while using cryptocurrency. But people are in favour of holding such currencies, thinking that if the future is going to pay them more in exchange for that currency, it is foolish to spend it now. People are curious and still learning about it. We find advertisements of various apps launched to make it lucrative by offering an initial investment of just Rs.100.

However, those who are involved with running the structure of this new asset class are very sure that even if the government wants to regulate it, they will come out clean as everything is well managed and there is no alarming situation. These currencies were meant to be used as money.

Bitcoin was created in 2009. The popularity of the asset is skyrocketing undoubtedly as more and more investors are taking a plunge. The mechanism looks neat as the supply of coins is controlled to prevent any hyperinflation. It is in the best interest of the investors if cryptocurrency is regulated and clear cut guidelines are issued to prevent any fraudulent activities or overnight blackout.

The investments in cryptocurrencies have increased as high as 20,000% in the last one year alone. Real estate is seeing a boom, gold and silver attract tax liabilities, no wonder this new asset class is gaining popularity. These are flat currencies and are not impacted much by inflation. But the growth is just a fraction of traditional assets like equities. Cryptocurrency is yet to prove itself to be reliable like mutual funds and commodities.

Investments can be made very easily using few of the popular platforms/apps. You have to download the app, open an account in your name with your email address and password. After getting a verification mail, you can get registered. Country details and KYC are also required to be given. Once the details are verified, deposits can be made. Using your bank account or UPI you have to transfer funds first.

It is advisable to do research about DeFi projects and token based currencies in absence of regulatory bodies in this field. This market too is more volatile than the stock market hence all the risks need to be understood. There shall be no support if you face any trouble. One needs to have a big risk appetite in order to gain more by taking more risks.

The Reserve Bank of India had come up with a circular in 2018 to warn its users, holders and traders. But the Supreme Court set aside the ruling in March,2020. Now banks are able to deal with cryptocurrency exchanges since RBI had to issue a clarification following the Supreme Court’s direction.

There are countries which have banned cryptocurrencies. There is always a fear of it getting banned even in India. Of Course those who have invested in cryptocurrencies will incur huge losses. The fear of hacking is always there, after all it works on a digital wallet concept. There could be scams and malware. Loss of password can put one into trouble.

Just like many other things like the internet, cryptocurrency is not owned by anybody but is widely popular. There are no laws to prohibit or control it. In a conventional way it is not accepted. Currency of any country is tender backed by a sovereign guarantee. You can trade it online as digital currencies considering them as a new asset class.

So if you are dealing in, investing, trading in cryptocurrencies you are not doing any illegal activity. But regulations are called for and waiting for a legislative proposal to be introduced in Parliament followed by other processes.

Initial Coin Offering (ICO)

It is just like initial public offering in the cryptocurrency’s industry. A company raising funds to create a new coin, app or service launches an ICO. Interested investors can buy into the offering and receive a new cryptocurrency token issued by the company. They sometimes have utility for a software service or product offered. Few generate huge returns for investors and many others have failed or have turned out to be fraudulent.

You should know the following before you invest in cryptocurrency:

If you want to invest via in an ICO, first of all read the company’s prospectus to know-

1. Name of the owner of the company. If the owner is a reputed person, reliability increases.
2. Similarly if well known investors are investing then it is a good sign. Look for such investors.
3. There are two types of stakes. You own currency or you own both the currency and the stake. If you own a stake, you get a part of the company’s earnings too.
4. If the currency is already developed, it adds to its sustainability. A well known product is less risky.
5. Try to do some more research. If the prospectus has more information, it will be good for you. However the success of any cryptocurrency is not dependent on it, it is altogether a different matter.
6. While using an exchange look for features like security, transaction fee and credibility of the exchange.

The various providers of cryptocurrency in India

Worldwide a few entities are known for their role in the network of cryptocurrencies. In India the following are quite popular-

1. WazirX– WazirX is India’s largest cryptocurrency exchange. WRX token plays a pivotal role in the WazirX ecosystem. It has built the world’s first auto-order matching fiat P2P exchange. It is expanding by bringing P2P solutions for on-ramp and off-ramp of fiat. It was acquired by Bianance Holdings, world’s largest cryptocurrency exchange by trading volume. The system of depositing and withdrawing flat currency is done with safety and speed.
2. UnoCoin-It was launched in 2013 being one of the first such exchanges in our country. It allows a few features like-the users Recharge and TopUp wallets.Traders can auto sell Bitcoin by using a special bitcoin address. Cell phones and DTH too can be recharged using Bitcoins. It offers traders the buying and selling activities in Bitcoin with INR. It has over 1.2 million users. It supports a Merchant Gateway system allowing online businesses to accept Bitcoins as a mode of payment.
3. CoinDCX-This is another popular site with Indian investors. The Mumbai based exchange offers more than 200 cryptocurrencies and is said to have over one lakh active users. Those who trade from INR to BTC find it convenient. The platform offers free deposits and withdrawal. The trading fee is minimal.
4. CoinSwitch Kuber-It is easier to start with by depositing Rs.100 and that is what CoinSwitch Kuber does by letting you enter the exchange. It was founded in 2017 and started its Indian exchange in June 2020 backed by investors like Ribbit Capital, Sequoia and Paradigm.It offers more than 100 cryptocurrencies and has over 3 million users.
5. Zebpay-Zebpay offers the ‘Disable Outgoing Transactions’ feature to disable all outgoing transactions. Thus it offers better security controls. The interface is user-friendly allowing faster payments. By using this exchange you can trade across six EUR-Crypto pairs and five Crypto-Crypto pairs across Bitcoin, Ether, Litecoin, Ripple, Bitcoin Cash and EOS.

Cryptocurrencies are able to drive many people crazy who are dealing with them. Beware of a few myths and keep yourself stable even if you have invested in Cryptocurrencies. Anything can become an addiction if it looks like giving you more returns.

You should be aware of a few thing listed below:

• It is better to understand which cryptocurrency is good for you before investing and to what extent. It is the computer programs that manage the supply of most of them. The maximum supply that computers can handle is 21 million bitcoin and the limit is about to get exhausted. There needs to be a demand to push the values to reach new highs. Creating scarcity of an unacceptable thing will not serve any purpose. They are not acceptable to make most payments. Just because many people think they are good investments, the value is going up. They lack intrinsic uses. Once this realisation comes, the value could go down remarkably. The whole theory is based on finding a better fool so that you can profit.
• Cryptocurrency is not real money. It is an electronic payment system allowing any two willing parties to transact directly with each other without the need for a trusted third party. Banks and governments are kept away from the whole thing. It is very expensive and slow to carry out a transaction using a cryptocurrency. There are highly volatile movements in their values making them an unreliable mode of payment. Companies like Tesla have decided to move away from accepting them.
• Bitcoin was the pioneer in establishing itself as a major cryptocurrency. There are rumours other cryptocurrencies are going to override it. These currencies can get a boost or a crack down merely by a sensitive speculative comment by somebody on social media. Bitcoin still rules nearly half of the total value of all cryptocurrencies.
• There have been quotes by reputed persons like Warren Buffett and others warning people. Cryptocurrencies may or may not be the future. But it surely holds all the magic and power to bring transformative changes to money and finance. It has made the central banks all over the world to think about having digital money to erode the likely competition from private currencies. Software has the capability to replace everything abolishing interference from many authorised institutions and established bodies. The entire thing could prove itself to be like a bubble, so when it bursts, nothing will be left. It is not at all compulsory to possess cryptocurrencies in order to survive. It cannot in any way replace-forget about overriding, the currency circulated and controlled by the government of any country.

“A rising price does create more buyers and people think ‘I’ve gotta get in on this’ and it’s better if they don’t understand it. If you don’t understand it you get much more excited than if you understand it.” -Warren Buffett- CNBC, May 2018.

It’s apparent from the above discussion that despite not being illegal, cryptocurrencies are something to be dealt with by exercising caution. Putting everything at stake for the sake of this new and sensational kind of asset class could prove to be harmful to the entire economy and financial grid.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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