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What is a Cryptocurrency?

By July 8, 2020March 28th, 20224 minute read

If you have been following the news, you must have come across the term – cryptocurrency.

Ever since the price of bitcoin hit $20,000 in 2017, cryptocurrencies have become the talk of the town. You must have come across folks vouching vehemently for virtual currencies (used synonymously with cryptocurrencies).

But what are they exactly? What makes them so different from traditional and legacy financial systems?

Two words make up the word cryptocurrency – ‘crypto’ and ‘currency’. Crypto stands for cryptography. A cryptocurrency uses cryptography to successfully secure, conduct, and validate monetary transactions.

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No individual or organization controls the creation and issuance of cryptocurrencies as they exist on distributed, decentralized networks called blockchains. Now you must be thinking, oh wait! Blockchain? Yes.

Cryptocurrencies exist on blockchains
Cryptocurrencies exist on blockchains, Source: Pixabay

What is Blockchain?

Blockchains basically consist of information packets called ‘blocks’ that are interconnected in a ‘chain’ type arrangement. Contrary to centralized ledgers maintained by banks or data repositories ‘controlled’ by software and networking behemoths, blockchain is a decentralized ‘peer-to-peer’ digital ledger. For a detailed understanding check out the video below:

How does a blockchain work

Modern cryptocurrencies employ blockchains but early cryptocurrency prototypes were a bit different. Let’s look at what they were like.

History of Cryptocurrencies

Cryptocurrency systems are not entirely new. Research and development on programmable money has been happening since the 1980s and early 1990s. In 1989, American cryptographer, David Chaum attempted a breakthrough with Digicash.

It was a cryptographic electronic money system through which users could withdraw money from a bank and designate specific encrypted keys to that money.

Users could also conduct monetary transactions through Digicash. Unfortunately, the cryptocurrency system didn’t survive for long and the parent company filed for bankruptcy in 1998.

Few more notable names like Wei Dai and cryptography pioneer Nick Szabo also tried introducing cryptocurrencies through “B-Money”, and BitGold but didn’t find much success.

The workable concept of a cryptocurrency finally took tangible shape with the inception of Bitcoin in 2009. Anonymous inventor Satoshi Nakamoto introduced its idea in the whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System.

Bitcoin’s peer-to-peer network is very similar to the file-sharing system like BitTorrent. No centralized authority controls the system.

Post bitcoin, many digital currencies have emerged. They follow different blockchain protocols that serve a variety of use cases. Some of them are:

  • Proof-of-Work (PoW)
  • Proof-of-Stake (PoS)
  • Delegated Proof-of-Stake (DPoS)
  • Proof-of-Weight (PoW)

Bitcoin, Ethereum, Bitcoin Cash, Litecoin, Monero, Dash, ZCash, Dogecoin, and 500 more cryptocurrencies follow proof-of-work protocols. Therefore, it makes sense to know how they work.

How do Proof-of-Work Cryptocurrencies Work?

As mentioned earlier, cryptocurrencies or digital currencies run on blockchain networks. Satoshi introduced blockchain as a distributed ledger concept that powers Bitcoin.

Blockchain ensures that all cryptocurrencies issued on the decentralized network are accounted for. And how? Senders and receivers are required to sign off on transactions through their own public and private keys.

Apart from this, transactions undergo strict verification. Cryptocurrency miners play a significant role in this regard. They use powerful computers to solve complex mathematical algorithms. This is the key to the entire verification process. The miner who solves the problem first gets to add the transaction to the blockchain.

In the process, the miner earns a set number of cryptocurrencies as a reward for the work done.

Miners sell these cryptocurrencies to cover their operations costs. That’s how these crypto-assets become active contributors in a proof-of-work blockchain-based economy. To understand the mechanism visually check out the video below:

The entire system is transparent right from the start till the end as every miner/ network participant has access to a copy of the blockchain ledger. All transactions are publicly visible which means that forging transactions through ‘double spending‘ is out of the question.

How to Buy Cryptocurrencies and from Where?

Cryptocurrency exchanges can serve as the most appropriate place to buy cryptocurrencies. At WazirX we offer a plethora of digital currency options for you to explore according to your portfolio budget.

In order to get started, you will need to provide your bank account details. It takes a few hours to verify the information shared from your end, after which you are all set.

You can go ahead and directly and buy any cryptocurrency using the funds from your bank account.

Knowing about cryptocurrencies can open doors to a whole new world of opportunities. You can explore options in cryptocurrency investment as well as blockchain development. If you think you want to dig deeper into the blockchain space, we got just the right thing for you here:

We hope this primer will give you a solid headstart in your cryptocurrency journey!

Further Reading:

How to Buy Cryptocurrencies in India?

How to Open a Crypto Trading Account in India?

4 Things to Consider Before Investing in Cryptocurrencies

What are the Business Benefits of Cryptocurrencies?

5 Cryptocurrency Scams and How to Deal With Them

4 Advantages of Blockchain Technology in the Cryptocurrency Domain

How to Select a Cryptocurrency Mining Pool?

What Is Cold Storage For Cryptocurrency?

Impact Of Covid-19 On Cryptocurrencies

What Is Cryptocurrency Market Cap? Why Is It Important?

How to Spot a Cryptocurrency Scam?

Cryptocurrency Benefits for Developing Countries

How To Select A Secure Cryptocurrency Wallet?

How to trade in cryptocurrency in INR?

Indian Cryptocurrency Market – What to expect in 2021?

What is Cryptocurrency Index Funds 2021? What does it mean in the Cryptocurrency Domain?

7 Important uses of Crypto Stablecoins you should know

Frequently Asked Questions

How Safe Are Cryptocurrencies?

Cryptocurrencies can be safe, but your crypto wallets can be hacked if proper security steps are not performed.There are also dangers and uncertainties associated with investments, and we cannot declare any virtual currency investment risk-free. Buying and selling cryptocurrencies does not have to be dangerous if the trader is well-versed in the market and treats his coins with care.

How To Invest In Cryptocurrency?

There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is considered the procedure of verifying and adding transactions to the blockchain public ledger. Another option is via cryptocurrency exchanges. Exchanges generate money by collecting transaction fees, but there are alternative websites where you can interact directly with other users who want to trade cryptocurrencies.

How To Invest In Cryptocurrency In India?

There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is the process of verifying and adding transactions between users to the blockchain public ledger. Purchasing cryptocurrency in India is a straightforward procedure where investors simply participate by registering with a crypto exchange such as WazirX. After registering for an account, citizens can trade multiple cryptocurrencies, store cryptocurrency in wallets, and more.

Is Cryptocurrency Safe To Invest In?

Cryptocurrency investments are subject to market risks, but if sufficient security measures are not taken, trading accounts can be maliciously accessed. Investments come with risks and uncertainties, and we cannot claim that any digital currency investment is risk-free. Buying and selling cryptocurrencies can be risky even if the trader is knowledgeable about the market and treats their coins carefully.

Is Cryptocurrency Banned In India?

No, cryptocurrency is not banned in India. India has seen its ups and downs in the crypto sector concerning its legal status. The Reserve Bank of India (RBI) issued a circular in April 2018 advising all organizations under its jurisdiction not to trade in virtual currencies or provide services to assist anyone in dealing with or settling them. A government committee proposed outlawing all private cryptocurrencies in mid-2019, with up to ten years in prison and severe penalties for anyone dealing in digital currency. The Supreme Court overruled the RBI's circular in March 2020, allowing banks to undertake cryptocurrency transactions from dealers and exchanges.

What Is Cryptocurrency?

A cryptocurrency is a digital currency secured by encryption, due to which chances of activities such as counterfeiting and double-spending taking place get close to impossible. Cryptocurrencies get created on blockchain technology ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are unique in that they do not get issued by any central authority. The term "cryptocurrency" comes from the encryption techniques used to keep digital currencies and the network safe.

Is Mining Cryptocurrency Legal?

Cryptocurrency mining can be time-consuming, expensive, and sporadically profitable. Mining has an appeal for many cryptocurrency enthusiasts as miners are paid directly with crypto tokens for their efforts. The legality of cryptocurrency mining is dependent on where you live. In India, there is no restriction on crypto mining.

What Is The Safest Cryptocurrency To Invest In?

Bitcoin has had the highest market capitalization, has been around the longest, has the most experienced development team, and has enormous network impact and brand recognition. As a result, while trading cryptocurrencies, the rate of return on Bitcoin is commonly used as a benchmark. However, the risks associated with cryptocurrencies remain, and the safest cryptocurrency for you depends on your analysis.

What Is The Meaning Of Crypto?

A cryptocurrency is a digital currency that is secured by the process of cryptography, making counterfeiting and double-spending almost impossible to happen. Blockchain technology is used to produce cryptocurrencies ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are distinct in that a centralized authority does not issue them.

Are Cryptocurrencies Legal In India?

In India, cryptocurrency is legal, and anyone can buy, sell, and trade it. Because India lacks a regulatory system to regulate its operations, it is presently uncontrolled. According to the Ministry of Corporate Affairs, companies must now document their crypto trading/investments inside the financial year.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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