Launched in 2009 by Satoshi Nakamoto, Bitcoin became the world’s first cryptocurrency. Since then it has experienced a remarkable rise. By May of 2016, Bitcoin’s value was around USD 500, and by May 2024, it soared to USD 68,000. This staggering increase has launched the popularity of cryptocurrencies as an investment option into the stratosphere. But what exactly is cryptocurrency? How did it rise seemingly out of nowhere? Why is it generating so much buzz? And should you consider investing in it? Here’s everything you need to know.
Understanding Cryptocurrency Market
Cryptocurrency is a type of digital currency that uses cryptography to make sure the transactions are secure. This encryption is where cryptocurrencies, or simply crypto get their name. So how is cryptocurrency different from real-world currencies like the Rupee or the Dollar? Well firstly, they are not issued by any central regulatory body. They are decentralised and use blockchain technology to work. The blockchain keeps a record of all the transactions made across a huge network of computers. This peer-to-peer system ensures transparency, security, convenience, and efficiency. Secondly, cryptocurrencies exist only in digital form, unlike regular currencies.
Now that you know the cryptocurrency meaning, let’s take a look at some of the most popular ones and their unique features:
- Bitcoin – Bitcoin was the first-ever cryptocurrency, and certainly the most popular one today. It works on a decentralised peer-to-peer network.
- Ethereum – Ethereum was introduced in 2015. By 2016, its value was around $11, and by May 2024, it touched $ 3,905. It is the second most popular cryptocurrency after Bitcoin, and it introduced the concept of smart contracts, which are self-executing contracts with terms directly written into code.
- Litecoin – Launched in 2011 as one of the of the first ‘altcoins’, Litecoin is referred to as the silver to Bitcoin’s gold. It offers faster transactions and doesn’t require specialised mining hardware.
- Ripple – Ripple was founded in 2012, and it focuses on payments for financial institutions. It allows individuals to track other transactions and not just cryptocurrencies.
Other popular cryptocurrencies include Tether, Binance Coin, USDC, Solana, and Cardano. There are thousands of cryptocurrencies with their unique features and uses.
Factors Driving the Rise of Cryptocurrency
Here are some reasons why cryptocurrencies are so popular today:
- Cryptocurrencies are decentralised, meaning they work without a central authority. This limits the control a government might have over one’s funds and gives users more freedom and control over their financial transactions.
- Using cryptocurrencies is also usually cheaper than traditional money because there is no central authority involved. The blockchain verifies and records all transactions which reduces the fees charged by intermediaries such as banks.
- Some individuals believe that cryptocurrencies are more secure than traditional money. They use the blockchain technology which records transactions on a decentralised ledger which cannot be tampered with. This makes it difficult for fraudsters and hackers to steal your data.
- Of course, cryptocurrencies offer a very high potential for profit, which attracts investors. One Bitcoin was worth $500 in 2016 and in 2024, the value of one Bitcoin touched over $68 thousand. This dramatic increase in value has made cryptocurrencies an extremely appealing investment option for many.
- Earlier, not many companies and financial institutions accepted cryptocurrency as a valid form of payment. But this has changed and now a growing number of businesses and financial institutions are recognising the potential of cryptocurrencies and adopting them.
Also Read: Best Investment Options in India
Benefits of Investing in Cryptocurrency
Should you invest in cryptocurrency? Have a look at some of the benefits of doing so:
- One of the biggest and most apparent advantages of investing in cryptocurrency is the potential for high returns. Those who invested in Bitcoin and Ethereum at the right time have seen their money grow exponentially.
- One of the most important aspects of investment planning is diversification, which cryptocurrencies offer. They can provide an alternative option to traditional investments like stocks and bonds and help to spread risk and increase returns.
- They operate on blockchain technology, so every transaction is recorded in a transparent and chronological manner across a vast network of computers. And since the transaction history cannot be altered or manipulated, cryptocurrencies offer a secure way of conducting financial transactions.
- Cryptocurrency transactions are also often faster and cheaper than traditional transactions. For example, an international transaction can attract a bank fee and it could take several days to process. A similar transaction using cryptocurrencies could be completed within minutes and with a much lower fee.
- Cryptocurrencies can be easily bought, sold, and traded on different online platforms, so they are accessible to a wide range of investors.
- Another advantage of cryptocurrencies is that they can have a limited supply. For example, Bitcoin has a maximum supply cap of 21 million coins, which can create scarcity and can drive up its value over time. Traditional currencies can be printed by central banks, which can lead to inflation. Bitcoin’s scarcity can technically preserve its worth so it is a good hedge against inflation as well.
Risks and Challenges
Before you invest in cryptocurrency, you should be aware of the significant risks they pose.
- Even though blockchain and cryptography are considered secure, new investors can face difficulty in using and storing crypto, and be exposed to scams, hacks, and bugs.
- You can’t cancel a crypto transaction either. Once you’ve sent the units to another address, it cannot be reversed.
- The biggest risk is posed by market volatility. While the peaks of certain cryptocurrencies have been quite high, the lows are equally significant. Many investors have made a fortune by investing in crypto, but many have also lost huge amounts due to dramatic price swings.
- In India, there is no regulatory body that oversees the cryptocurrency market. Until a proper regulatory framework is established internationally, all crypto trading is done at the investor’s risk.
- While the international adoption of cryptocurrencies like Bitcoin and Ethereum has increased, their usage remains limited in India.
- The technology on which crypto operates is relatively new to investors, who do not fully understand how it works. This can lead to poor and uninformed investment decisions.
Considerations for Potential Investors
If you are thinking about investing in cryptocurrencies, here are some factors to consider:
- Just like any other investment, first, you must understand your risk tolerance, financial goals, and investment duration. If you have a low-risk tolerance, crypto is best avoided.
- If you are a new investor, you should start small and not go all in. Familiarise yourself with the workings of cryptocurrencies.
- There are thousands of cryptocurrencies in the market. Do your due diligence and make sure that the one you are investing in is secure and legitimate.
- Consider the market capitalisation of various cryptocurrencies. The higher the market capitalisation, the more established, reliable, and stable the cryptocurrency will be.
- If a particular cryptocurrency has more buyers and sellers in the market, that generally means it offers high liquidity. This high liquidity can make it easier to sell the cryptocurrency without seriously impacting its price.
- Cryptocurrencies are not regulated in India, so crypto trading is done at the investor’s risk.
- In the Union Budget 2022, the Finance Minister announced taxes on Virtual Digital Assets (VDAs) such as cryptocurrencies and Non-Fungible Tokens. Under Section 115 BBH, any gains made from trading cryptocurrencies are taxed at a rate of 30%, along with a 1% tax deducted at source.
Alternative Perspectives
Not all experts believe that cryptocurrency is a viable investment option. Some argue that the lack of regulation, high volatility, and susceptibility to hacking and scams make it too risky for adoption by big companies and institutions. There are also concerns about the environmental impact of cryptocurrencies. The crypto mining process consumes a lot of energy which results in carbon emissions. The hardware used for mining Bitcoin also has a short lifespan, which results in vast amounts of e-waste.
According to some, cryptocurrencies can also facilitate illegal activities such as money laundering and tax evasion due to the fact that the transactions are often anonymous which makes it difficult to trace the identity of the involved parties. Also, the lack of regulation poses many risks. The decentralised nature of cryptocurrencies can make it hard to regulate and monitor illegal activities conducted using these digital assets.
Conclusion
Cryptocurrencies offer incredible potential for high returns, but investing in them also comes with significant risks. Before investing, it’s important to understand your financial situation, risk tolerance, and financial goals, along with the technology and market dynamics of crypto. Research different cryptocurrencies and their unique features, and start small.
Cryptocurrencies are not proven assets due to their highly volatile nature. If you are investing for a long-term goal like building a retirement fund, it would be wise to prioritise traditional investment vehicles like mutual funds as they have a longer track record of stability and can provide more reliable returns over time.
