What is Crypto Currency?
Crypto currencies are similar to regular physical currencies exists in the market like INR, USD, EUR etc. Crypto currencies are in the Digital form.
How it works
Before explaining how Crypto currency works, let's understand how physical currency works.
How Physical Currencies works
I will explain here with an example. Assume one account holder name "Prashant" wanted to transfer money to another account holder "Deepak" ( who has an account in another Bank), below steps to be performed.
- Prashant will deposit money to his Bank
- Prashant's bank will transfer money to central bank ( Clearing system)
- Central bank will transfer money to Deepak's Bank ( through clearing system)
- Deepak's bank will transfer money to Deepak's account
Advantages
- Central bank regulates all transactions and hence there is very limited scope for any one to break rules and do
transactions ( e.g. Terrorist financing or anti money laundering)
Disadvantages
In above process, both Prashant and Deepak are exposed to their bank and central bank. You don't have privacy for
your balances or transactions. It is easy to hack as all bank account details stored on one server ( central server)It is easy to hack as all bank account details stored on one server ( central server)
How Crypto Currencies works
Under Crypto network, as per below flow diagram, sender ( in our example -Prashant) can directly transfer money to Recipient ( Deepak) without any central authority in between.
Advantages
- No Central regulatory involved, and hence full power is in account holder hand. You can be your bank. You don't need
bank to define policies, you can work as a bank. - It is very strong in terms of security, as if some one wants to heck or change transactions, they need to updated
transactions in all computers exists in the network.
Disadvantages
- There is no central regulatory, hence it could be possible that bad actors could leverage crypto for terrorist financing or Hawala money transfer.
- It require a huge computational power as every transaction to be updated in all computers exists in network.
Why Crypto has a future
Earlier days, usually Gold Prices changes with Inflation, however, in recent time, when Inflation went high, Gold
prices went down or stable. Hence slowly Gold Investor are losing faith in Gold.Long back, Government to pledge Gold to print Physical Currencies. However, from late 19th Century, Governments
started printing based on the economical parameter of their countries. Many a times government prints currencies to
get a political gains ( e.g. In Pandemic, US government started printing huge money). This could be resulted in record
level inflation, over consumptions and huge impact on Environment.Crypto Currencies are valued based on what they do. E.g. Bit Coin (BTC) which is running on decentralized network
where it is close to impossible to change any transaction.Many Investors want to keep their investments & transactions private which can only possible through Crypto.
Why Crypto Currencies have huge Volatility
Many people Investing in Crypto doesn't have thorough knowledge about how Crypto Currencies & Underlying
Technology works. Hence many a time, they rely on market news or roomers and take decisions which some time
results into market crash.Still Crypto investment are in very initial phase. Once many people starts learning and investing into Crypto, Market
would be stable.
Which Crypto to buy
As we have many Currencies & Stocks in the market, similar way, many crypto currencies are exists in the market.
Before Investing in any crypto currency, it require thorough research. In my next blog, will share details on different
crypto currencies and their back ground.If you are new to the crypto, take top 200 crypto currencies by market cap and choose from that.
If you are new and don't want to take big Risk, than Invest and hold for some time instead of actively trading