The world is fast-changing and so is the world of finance. The banking system evolved to the digital payment system, online transfers. The demonetization was a boon to digital wallets. We had just got accustomed to these new emerging payment trends. The boom came the Cryptocurrency wave. The new cryptocurrency came along with a lot of curiosity, confusion belief, and disbelief.
Fear and Greed are two strong emotions that play an important role while investing. The recent rapid rise in cryptocurrency prices activated the greed behavior with many early adopters wanting a share of the pie. It also triggered the FOMO (Fear Of Missing Out), making people know more about the new kid on the block. We will keep it simple in the first article.
What is Cryptocurrency?
A cryptocurrency is a digital currency that can be exchanged online for goods and services. It is derived from two words ‘crypto’ which came from the Greek word ‘Kryptos that means ‘hidden or secret’ and ‘currency’ which came from a Latin word ‘currere’ that means ‘to run’.
It is secured by cryptography which creates an impossible way to counterfeit it. These cryptocurrencies are built on blockchain technology. You must be wondering what a blockchain is.
Well, a blockchain is a digital ledger of transactions. It consists of several blocks, in which each block stores a record of the transactions. Blockchain aims to allow digital transactions to be recorded and distributed but not edited.
Coming back to cryptocurrency, then here the most important defining feature is that they don’t entertain any kind of intermediary or central authority. For example, while making a fund transfer from A to B, banks become the mediator through which our payment debits or credits. Thus, we also get to know that from whom we are receiving money or transferring it. Cryptocurrencies allow secure online transactions which are denominated as virtual “tokens”.
There are various types of cryptocurrencies in the market, that you must have heard about them. For instance-
- Bitcoin
- Litecoin
- Etherum
- Dogecoin
- Ripple
- Tether etc.
How do Cryptocurrencies work?
As stated above, cryptocurrencies are decentralized markets that are not backed up by a mediator or a central authority like the government. They can be sold and bought via exchanges and are stored in digital wallets. So, when a user wishes to send cryptocurrency to another user, they will be sending it to that user’s wallet.
This process does not complete here. The transaction will not be considered final until and unless it has been verified. Once it is added to the blockchain through the process called mining, then only the transaction seems to be final. This process is also how cryptocurrency tokens are created.
The money transferred from A to B does not require any intermediary. Person A and B are not named but are identified with digital numbers. The crypto transferred from A to B has in an encrypted form, the code can only be accessed by the intended receiver. The transactions are irreversible, one does not know the identity of the sender or receiver. So, even by mistake you type in the wrong numbers and the transfer happens, your crypto is lost, as it cannot be reversed.
The anonymity of these transactions caught the fancy of the underworld, they became the early adopters and got used extensively on the dark web. One could buy almost anything from the dark web without any identification being revealed. The anonymity in cryptocurrencies can potentially encourage money laundering and terror funding. As per some latest news, many websites of large companies have been held hostage as there have been many ransomware (virus) attacks.
Crypto coins are not regulated which leaves no scope for any grievance settlement mechanism. The main important thing is that, if you forget your Bitcoin password then there is no way to recover it. You forget and you lose your bitcoin value forever! Thus, you face the flipside of anonymity.
The Legality – Is it legal in India? Is it legal tender?
The Indian Government banned Cryptocurrency but the same was overruled by a Supreme Court ruling. Hence, it is not illegal to own or transact in Cryptocurrency. However, RBI has not given a clean chit and it is not a legal tender in India. It means that one cannot buy any goods or services in exchange for Cryptocurrencies in India.
Bottom Line
Investing where there is anonymity is risky. You don’t know who you are sending money to or from whom are you receiving money. Investment is always better when there is no anonymity between the buyer and seller. Transparency is what matters the most!
To us, investment is about risk management and not blindly chasing returns. We prefer to invest in those asset classes where the risk can be measured, managed, or mitigated.
Secondly, there is a rationale or method to value the Net Asset Value of that investment or the fair market price of the investments that we generally invest or recommend.
Kindly pardon our views, they may be biased or may sound conventional. We prefer to play safe, after all, we are custodians of your hard-earned money.
