FAQs on cryptocurrencies, including Bitcoin
1) What is a cryptocurrency or a cryptoasset?
A cryptocurrency is a virtual or digital currency that is secured by blockchain technology. Cryptocurrencies are currently created outside the ambit of governments. This makes them less prone to manipulation or government interference. The term cryptocurrency is used interchangeably with the term cryptoasset.
2) What is blockchain technology?
Blockchain technology refers to a type of database, which involves the storage of information in a particular data structure. A blockchain collects information in groups (also called blocks) that holds a particular set of information. Each block has a storage capacity and when filled, is chained into the previously filled ‘block’ thereby, forming a chain of data called the ‘blockchain’.
3) Can cryptocurrencies be used as a medium of exchange?
As of February, there were 4,051 cryptocurrencies in existence, according to Statista. Among these cryptocurrencies, only a handful of them are traded more frequently in cryptocurrency exchanges. While there have been recent moves by prominent companies like Tesla to accept Bitcoin (currently the largest cryptocurrency) as a payment in near future, a necessary attribute of a currency is its relatively stable value over the short to medium-term. On this aspect, cryptocurrencies have a long way to go.
4) What is Bitcoin?
Bitcoin is the first implementation of the cryptocurrency concept. It was invented in 2009 by an anonymous person, who used the moniker, 'Satoshi Nakamoto’ and left Bitcoin project in 2010. It used blockchain technology and was created using computer processing power. This computer processing power uses high-end computational servers to solve complex puzzles and mines Bitcoin over time. There is a finite supply of Bitcoin i.e. it is set at 21 million and this will be completely mined only by 22nd century. The current market price of Bitcoin is over US$ 50,000 while its current market capitalisation is over US$ 1 trillion.
5) What are the other popular cryptocurrencies?
Other than Bitcoin, some of the other cryptocurrencies include Litecoin (invented in 2011), Ethereum (with a market cap of over US$ 120 billion), Binance Coin (invented in 2017), Tron (a decentralised, blockchain platform for sharing entertainment content) and Chainlink.
6) As it stands today, how can one own Bitcoin?
In order to own Bitcoin, one needs to download a wallet and then, purchase Bitcoins over a designated exchange and store it in this wallet. Some of the popular exchanges where Bitcoin can be purchased include CoinDcx, Unocoin, etc. The exchanges need you to be compliant with KYC requirements for setting up an account. Payment for Bitcoin can be settled with online transfer payments from your bank.
7) How should one look at cryptocurrencies as investments?
Cryptocurrencies or cryptoassets have become more acceptable as an investment lately. For investors outside India, and in countries that allow cryptocurrencies like the US, it may be considered for small investments. However, in India, there are moves to regulate cryptocurrencies via 'Cryptocurrency & Regulation of Official Digital Currency Bill, 2021', which will be taken up for discussion once Parliament resumes on March 8.
8) What am I supposed to do next if I want to consider investing in a cryptocurrency?
As there may be a move to ban private cryptocurrencies as per the discussion by the government, it is better to wait for the final announcement from the government regarding the purchase & ownership of cryptocurrencies before making any decisions in this regard.