All about cryptocurrency: Part 2
Types of cryptocurrencies-
Cryptocurrencies can be broadly classified into a) crypto coins & b) crypto tokens. The basic difference between the two is that crypto coin is created on its own (new) blockchain whereas crypto tokens are created on an existing blockchain.
These comprise bitcoins and altcoins. The first and the most popular crypto coin is bitcoin, which is often synonymously used with cryptocurrency. These coins are finite in supply and this is another reason why they are considered valuable. The first altcoin (shortened form of alternate coins) to be created was Namecoin. The basic framework of both bitcoins and altcoins is the same. Some popular crypto coins are- Ethereum, Ripple, Omni, Nxt, and Waves.
Tokens are created and offered via initial coin offering (ICO) just like the way stocks of a company are offered via initial public offering (IPO). These can be further classified into- Value tokens, Security tokens, and Utility tokens.
How to buy-
In order to buy cryptocurrency, an investor need to have a wallet, an online app that will help you to store the currency. An interested investor will have to create an account on an exchange, after which, real money is to be transferred into the account. Post this, he can purchase the cryptocurrency of his choice. Some of the popular crypto exchanges are Coinbase, Gemini, Binance.US, and eToro.
Crypto mining involves solving cryptographic equations to verify transactions and adding them to the blockchain (the public ledger). Here, miners cross-verify data blocks and add this record to the blockchain. This is done to ensure that no currency is double spent. In this process, miners have to solve complex mathematical puzzles corresponding to a group of transactions, referred to as a block. The one to verify a block first is the winner and is rewarded with the respective cryptocurrency. Thus, miners do the work of auditors and acquire cryptocurrency without paying for it.
However, it is not an easy process. Crypto mining requires lots of resources such as electricity, computing power, a special type of computer and hence, is not very feasible.
Should you invest?
Some refer to cryptocurrency as the future of money or the next big thing. However, it should be noted that the value of a currency is not based on anything. It is solely derived from what the investors are willing to pay for it, which is based on demand & supply dynamics. As per the estimates of upmyinterest.com, considering the last five years' returns data of bitcoin, the minimum annual return stands at -72.6 per cent whereas the maximum annual return stands at 1,318 per cent. This range denotes huge volatility in this asset class. Therefore, individual investors should assess their risk tolerance capacity and take their own decisions regarding investment.