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What are crypto currencies and how are they relevant to you?

Though India was not a very active nation on the cryptocurrency map, the recent demonetization of Rs. 500 and Rs. 1000 notes have led people in the direction of acquiring Bitcoins to avoid dependence on the government-regulated currency. Even though Bitcoins are not legal tender in India, it is not illegal to own Bitcoins in the country. With increased government interest in Bitcoins, they may even come under the purview of income tax soon.

Cryptocurrency is a kind of decentralized digital money that utilizes encryption for making transactions secure and preventing duplication of currency units.

The first implemented cryptocurrency, Bitcoin, was developed in 2009 by an individual or a group called Satashi Nakamoto. The currency uses open source platforms and hence, anyone with access to the internet can use as well as develop them. Most of the current cryptocurrency is pseudonymous.

Cryptocurrency is not supported by any federal government and does not possess the status of a legal tender. However, the use of cryptocurrency is on the rise among netizens who want to carry out payments and transfers in a secure way without disclosing the actual identity. The security of payments is maintained through public ledgers, also known as the blockchain. The blockchain consists of miners who have extremely powerful computers for crunching transactions. The blockchain is generally considered to be a group of honest individuals who get rewarded in Bitcoins or other cryptocurrencies for maintaining honest records.

 

How is cryptocurrency relevant to you?

Investment tool: Cryptocurrency has found increased relevance because countries like Japan, South Korea and Russia are moving towards legalizing it as an accepted form of making payments. Even the ESMA, European Securities and Markets Authority had commissioned an investigation into the working and relevance of cryptocurrency and its impact on the overall economy. This is also a reason for the currency gaining close to 300 per cent increase in value in a single year. Hence, it is a great investment for those looking for instant returns. This also makes it of interest to those engaged in financial management studies. However, caution must be exercised while investing in cryptocurrency, as it is extremely volatile.

Secure transaction: Cryptocurrency utilizes blockchain technology which means the transaction data is saved simultaneously at millions of locations. Any changes in a previous entry are therefore not virtually possible. The transaction can neither be reversed nor be counterfeited.

Safe identity: Cryptocurrency uses a “push” system, whereby, the currency holder sends the exact amount they wish to send without providing any further information. This is unlike the “pull” mechanism of credit cards whereby the merchant gets access to the entire credit line when initiating the payment.

Low fees: Since several layers of bureaucracy are avoided and government and other financial institutions are not involved, the transaction fees are hugely reduced. In most cases there are no transaction fees, however, most users tend to use third-party services, such as a Bitcoin wallet service, which charge fees.

High accessibility: With approximately 2.2 billion users of the Internet not having access to traditional banking or financial systems, cryptocurrency provides an alternative financial ecosystem. Whereas banks and other traditional exchange systems decide whom to grant access, cryptocurrency is open for all. It may, therefore, hold importance from a corporate finance perspective for futuristic firms.

Overall, even though cryptocurrency is not accepted the legal tender, it is here to stay as the number of users interested in it increases.

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