How Cryptocurrency Works? Know About Bitcoin, Mining, Law, Types & Exchanges
- Profile Traders
- Feb 9, 2021
- 7 min read
Updated: Nov 6, 2021
The first economic transaction in Bitcoin took place on 22nd May 2010, when a Florida man bought two Papa John’s pizzas, valued at $25, by paying 10,000 bitcoins.
Today, the same transaction “would have a value of over $625 million.”
It indicates in which direction cryptos are heading and how they play a significant role in the future.
Bitcoin made a new record high above $66,999 on 20th Oct 2021 after many companies started accepting bitcoin.
A few months back, Elon Musk's Tesla Inc declared a $1.5 billion investment in the world's largest Cryptocurrency. Tesla also said that it would start accepting payments in digital coins for its electric cars.
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What is Cryptocurrency?
Cryptocurrency is a digital currency with no physical presence like a coin or note. Satoshi Nakamoto has developed the first cryptocurrency' bitcoin' in 2009, and many such currencies were born in the last few years.
One can transfer Cryptocurrency to another person without involving an authorized third party like a bank or financial institution. Cryptos are similar to tokens or casino chips, which can be used online to make payments to get goods or services.
These currencies are stored in a digital wallet and backed by Blockchain technology. Blockchain is a method of storing information so that it cannot be changed or hacked from any system.
History of Cryptocurrency
The footprints of Cryptocurrency started in 2008 when a paper titled "Bitcoin: A Peer to Peer Electronic Cash System" was published by Satoshi Nakamoto.
Bitcoin was created during the 2008 economic crisis, where some of the big American banks were bailed out by the government for their reckless financial planning/spending.
Hence a team of developers led by Satoshi created a digital currency that is decentralized (decentralized means there is no single admin, but rather the system maintains a public ledger of transactions that anyone can store on their computer) without the involvement of any banks.
Later many such currencies start to emerge, such as Litecoin, Namecoin, etc. Simultaneously, these currencies also received a lot of criticism as some people used them for illegal transactions and didn't come under any sovereign authority.
Many cryptocurrency exchanges have been formed across the world to facilitate the transaction of these cryptocurrencies.
Bitcoin value started increasing against US Dollar (BTCUSD) in Dec 2017. Its values increased tremendously (from 11K to 41K) when the pandemic situation started impacting the world and currently it is trading above 65K.
List of Cryptocurrencies (by market capitalization)
There are many cryptocurrencies present for trading, and the area of Cryptocurrency is always exploding. There is no wonder if someone releases new digital token tomorrow, and it can become one of the top Cryptocurrency.
As of today (9-Feb-2021), below is the list of top-10 cryptocurrencies in the world.
Bitcoin (BTC)
BTC is the game changer and owns 72% of the market share (market cap is $868 Billion). It also leads the pack in terms of popularity and user base.
Ethereum (ETH)
ETH is the second largest Cryptocurrency and owns 16.4% of the market share (market cap is $198 Billion). The primary purpose of creating Ethereum is to provide decentralized financial instruments to the entire world.
Tether (USDT)
USDT is the third-largest Cryptocurrency and owns 2.5% of the market share (market cap is $30 Billion). It was launched in 2014, and Tether describes itself as "a blockchain-enabled platform designed to facilitate the use of fiat currencies in a digital manner."
Tether is the first stablecoins, and its price is directly tied to the US dollar. This coin has been built to avoid significant fluctuations in cryptocurrencies.
Cardano (ADA)
ADA is the fourth largest Cryptocurrency and owns 1.7% of the market share (market cap is $21 Billion).
ADA is recognized as "Ethereum Killer" as people believe its blockchain technology is more advanced as compared to Ethereum and also co-founded by Charles Hoskinson, who is one of the founding members of Etherum.
Polkadot (DOT)
DOT is the fourth largest Cryptocurrency and owns 1.7% of the market share (market cap is $21 Billion).
It was created by Gavin Wood, who is also another founding member of Ethereum, and it was famous for its shared security. It allows developers to create new blockchains along with their own security measures.
XRP
XRP is the Fifth largest Cryptocurrency and owns 1.6% of the market share (market cap is $19 Billion).
As per Ripple's definition, 'XRP is a native digital asset on the ledger, an open-source, permissionless, decentralized blockchain technology that can settle transactions in 3-5 seconds'.
BNB, LTC, DOGE, LINK
All these cryptocurrencies own a market share between 0.86-1% of the crypto market.
BNB is the payment method for fees in Binance Exchange, which is one of the famous exchanges in Crypto.
LTC is founded by Charlie Lee, referred to as 'Silver to Bitcoin's gold' as it was started immediately after the bitcoin.
DOGE rose to fame when the world's richest person Elon Musk tweeted, 'who let the DOGE out.' It was started by Billy Markus and Jackson Palmer.
Sergey Nazarov introduced LINK along with Steve Ellis. It is a decentralized oracle network that fills the gap between smart contracts and outside data.
Cryptocurrency Charts
Tradingview is the #1 platform that attractively provides crypto charts. It gained many users when it signed up with Nasdaq and Bitfinex - a cryptocurrency exchange. It also signed with other Crypto exchanges such as Bitstamp, Binance, Coinbase, etc.
Tradestation crypto has integrated with Tradingview a few months back, and it allowed the traders to trade, invest directly in cryptocurrencies without leaving the Tradingview platform. It is a great luxury and comfort to all crypto traders.
Whether Cryptocurrency is a Good Investment?
There are many debates regarding investing in Cryptocurrency. World's most significant investor Warren Buffet compared Cryptocurrency to paper checks and raised an important question – "It's a very effective way of transmitting money, and you can do it anonymously and all that. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?" According to him, investing in Cryptocurrency is risky and worthless.
However, the world's richest person Elon Musk takes the opposite view, and he thinks these cryptocurrencies are the future universal currency of the world.
Recently his company Tesla Inc has invested $1.5 billion in Bitcoin, and it will start accepting the digital tokens as payment for its electric cars.
Besides, the CEO of Twitter, Jack Dorsey also invested $50 million into Bitcoin a few years back.
However, when it comes to investing personal money, one has to note three important things:
Cryptocurrencies don't have an underlying asset as security
Cryptos are not authorized by any sovereign bodies (reserve banks or government)
Cryptocurrency is a digital currency; hence there is a risk of hacking or losing your investment if the digital wallet company goes out of business
Any crypto coin can show a correction up to 50-75% during a downswing. Hence, investors should be prepared to face such deep corrections.
Hence, only a small portion of your capital can be deployed if anyone is serious about investing in crypto.
Always remember the below quote by the world's famous investor Mr. Warren Buffett:
“Be fearful when others are greedy, and greedy when others are fearful.” — Warren Buffet
Whether Crypto Trading is Legal?
There are no legal issues to trade/pay in Cryptocurrency in the US. However, their legality depends on each individual country.
For example, it is completely banned in China. In India, there are many crypto exchanges which are already acquired many users. Besides, the daily volume is increasing for cryptocurrency transactions on all Indian exchanges.
Both the Reserve Bank of India (RBI) and the Central Government have cautioned the public about the potential risks associated with cryptocurrencies.
RBI has explicit instructions to banks, financial institutions that not to deal in these virtual currencies and also stop providing services to all companies which deal with virtual currencies.
Important Resources related to Cryptocurrency
Below are the useful resources related to the crypto world:
Bitbns
It is one of the famous cryptocurrency exchanges in India. It has tons of study material related to Cryptocurrency on its site.
WorldCoinIndex
It is a useful website that lists A-to-Z information related to all the cryptocurrencies. Its homepage itself displays over 100 crypto coins information.
Onecoin
It was initially designed to sell education material for trading. However, it turned into a Ponzi scheme, and a British Daily newspaper described it as "one of the biggest scams in history." Over 90 people who are associated with one coin have been prosecuted in China.
Libracoin
It is a new cryptocurrency launched by Facebook. It is said that it is backed by low-volatility financial assets to avoid drastic fluctuations.
Pi coin (PI)
It is a brand new coin in the world of Cryptocurrency. Pi network is currently at Phase 2 with over 7 million members worldwide.
Please refer to the below link to study top crypto categories by market capitalization:
It is better to study the real-world use cases before picking an unknown coin for the investment. Hence, it is good to conduct some research on Dapps (Decentralized Apps) on coins.
Dapps are digital apps/programs which are designed to run on a blockchain or Peer-to-Peer (P2P) network of computers instead of a single computer. Some of the top Dapps for major ecosystems are Ethereum, Polygon, and Binance.
Some useful resources are below:
Good reports of DappRadar - https://dappradar.com/reports
Glassnode Newsletters - https://insights.glassnode.com/
Trading & Investing Cryptos - https://medium.com/crypto-zen-monk/when-to-sell-some-bitcoin-ethereum-and-altcoins-in-this-bull-run-8740b2342c2d
Risks associated with Cryptocurrency
As mentioned in the earlier part of the article, Cryptocurrency carries three critical risks:
Cryptocurrencies don't have an underlying asset as security
Cryptos are not authorized by any sovereign bodies (reserve banks or government)
Cryptocurrency is a digital currency; hence there is a risk of hacking or losing your investment if the digital wallet company goes out of business
Cryptojacking
Hackers send out a malicious link to get access to your computer or smartphone to "mine" Cryptocurrency for their personal benefit.
They can put some malicious code onto your device through many methods. Then they can help themselves to grab your cryptos.
If you store cryptos, it is better to use a good antivirus, close any application that consumes more power, and don't click on any unknown links.
Future of Cryptocurrency
There is no guarantee that the top cryptos (like bitcoin, ethereum) will progress at the same speed.
But it is quite sure that many more coins will be formed in the future and they take over some part of gold/forex investing.
Besides, Cryptos are changing the game of currency.
It is important to recall one statement from Square - “Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company’s purpose.”
Many investors think BTC-USD could be valued at $100,000 by the end of 2022.
I want to highlight one ambitious statement by Satoshi Nakamoto, creator of Bitcoin:
“If you don’t believe it or don’t get it, I don’t have the time to try to convince you, sorry.”
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